ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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And Now, the Primary Deficit

IN search of ways to both 'explain' and defend its fiscal strategy, the government has at various points in time chosen to focus on specific forms of the deficit in its budget. Before the late 1980s, budget discussions focused on the 'budgetary deficit1 of the government of India, which was defined as that part of total expenditures which was financed by recourse to the Reserve Bank of India through running down cash balances or issuing ad hoc treasury bills. The ostensible concern at that time was with the monetised deficit, which was seen to result in an increase in money supply and, in monetarist fashion, in inflation. The implicit objective, then, was to keep the budget deficit under control. By making price control 'ensured' in this fashion the fundamental concern of policy, attention was sought to be deflected from two other crucial components of the fiscal strategy, viz, taxation and the pattern of expenditures. Even if budget deficits as officially defined are controlled, but tax revenues are inadequate to finance current and capital expenditures, the deficit financed through 'open market borrowing* would have to increase. To the extent that such borrowing is not a draft on private sector savings, it too could result in an increase in money supply, through the mechanism of a refinancing facility on government securities offered by the central bank for example. Further, to the extent that budget deficits finance productive capacity in industry and productivity enhancing infrastructure in agriculture, and thereby relax supply constraints in the system, they should result in output increases rather than in inflation.

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