India: Vision 2020: Fixing the fiscal deficit.

Fiscal deficit is no problem when it is accompanied by low inflation and high rate of infrastructure development. But this is generally not so, especially in a poor country like India where it is often misused to fund populism. Fiscal deficit becomes a dangerous addiction for politicians. P. V. Indiresan suggests how some degree of accountability and fiscal responsibility can be inculcated among politicians vis-a-vis fiscal deficit.

DEFICIT FINANCING is the way governments fund themselves without the support of any collateral. In that respect, deficit financing is similar to venture capital where too there is no physical collateral. Then, if inventors can be pampered with no collateral other than their brains, there is no reason why governments should not have the same benefit, and print money without collateral - provided they too have profitable ideas. After all, it is possible for fiscal deficit to promote economic development that would not occur otherwise.

However, deficit financing can be misused to finance populism. For instance, fiscal deficit is being used in India to meet current expenses.

That way of printing money leads to (a) vicious spiral of paper money producing inflation without complementary growth; (b) retarded growth leading to higher deficits, and (c) higher deficits leading to more printing of money. So far, the Centre has managed to block such a disaster by cutting down the much-needed maintenance and asset renewal.

In …