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li inan e in ndia 18.11
not justified and not based on sound fundamentals impacts of the higher fiscal deficit than
of economics. Finally, India headed for a slow the suggested levels (4.5 per cent).
but confident process of fiscal reforms that is also External Grants are even better elements
known as the process of fiscal consolidation (to be in this case (which comes free—neither
discussed in the coming pages). interest nor any repayments) but it either
did not come to India (since 1975, the
meAns of Deficit finAncing year of the first Pokhran testings) or
Once deficit financing became an established part India did not accept it (as happened post-
of public finance around the world, the means Tsunami, arguing grants/aids coming
of going for it were also evolved by that time. with a tag/condition). That is why here
These means, basically are the ways in which the this segment has not been discussed as a
government may utilise the amount of money means to manage deficit.
created as the deficit to sustain its budget for (ii) External Borrowings17 are the next best
developmental or political needs. These means are way to manage fiscal deficit with the
given below in order of their suggested and tried condition that the external loans are
preferences. comparatively cheaper and long-term.
Though external loans are considered
(i) External Aids16 are the best money as
an erosion in the nation’s sovereign
a means to fulfil a government’s deficit
decision making process, this has its own
requirements even if it is coming with
benefit and is considered better than the
soft interest. If they are coming without
internal borrowings due to two reasons:
interest nothing could be better.
(a) External borrowing bring in foreign
When India went to borrow from the currency/hard currency which gives
IMF in the wake of the financial crisis extra edge to the government spending
of 1990–91, the body advised India to as by this the government may fulfil
keep its fiscal deficit to the tune of 4.5 its developmental requirements inside
per cent of its GDP and noted it to be the country as well as from outside
sustainable for the economy. What was the country.
the rationale behind this data? Basically, (b) It is prefered over the internal
in those times with the foreign aids (soft borrowings due to ‘crowding out
loans either from the WB or from the Aid effect’. If the government itself goes
India Forum) India was able to manage its on borrowing from the banks of
budget to the tune of 4.5 per cent of its the country, from where will others
GDP. In 2002, when India’s fiscal deficit borrow for investment purposes?
was around 6 per cent (5.7 per cent to (iii) Internal Borrowings18 come as the
be precise) the IMF validated it to be third preferred route of fiscal deficit
sustainable, the reasons were two—first, management. But going for it in a huge
India was able to show a check on fiscal way hampers the investment prospects
deficit and secondly, at the same time of the public and the corporate sector. It
the forex reserves of the country were has the same impact on the expenditure
suitably higher to neutralise the negative
16. Ibid. 18. Ibid.