India's fiscal deficit widens significantly due to increased Government spending on subsidies while tax revenue remains unchanged. Which one of the following is the most likely consequence?
- A.Inflation will rise, interest rates will fall, and private investment will increase
- B.Inflation will rise, interest rates may rise, and private investment may slow down
- C.Inflation will fall, interest rates will rise, and private investment will increase
- D.Inflation will fall, interest rates will fall, and GDP growth will accelerate
Correct answer
Explanation
The correct answer is B, Inflation will rise, interest rates may rise, and private investment may slow down. A wider deficit financed by borrowing tends to push up inflation and interest rates, and higher interest rates can slow private investment.
Fiscal deficit is the gap between the government's total spending and its receipts other than borrowing. When subsidies rise and taxes do not, the government must borrow more. Extra subsidy spending raises demand for goods without adding to supply, which puts upward pressure on prices. Heavy government borrowing also competes with businesses for the same pool of savings, so interest rates tend to rise. Costlier loans can slow private investment. Economists call this the crowding-out effect.
A is wrong because more government borrowing tends to raise, not lower, interest rates. C is wrong because higher demand from subsidies is unlikely to bring inflation down, and costlier credit does not raise private investment. D is wrong because a deficit-driven rise in spending does not make both inflation and interest rates fall.
Exam tip: Bigger fiscal deficit → more borrowing → higher interest rates → crowding-out of private investment.
Practice Questions
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- A.Achieving universal household electrification
- B.Providing clean cooking fuel to poor households
- C.Rationalizing subsidies on LPG
- D.Stopping female foeticide
Show answer
Saubhagya, the Pradhan Mantri Sahaj Bijli Har Ghar Yojana, was launched in 2017 to give an electricity connection to every household in India.
Read the full explanation →India's reliance on imported energy exposes it to geopolitical supply shocks. In this context, what is the most likely short-term impact of a major disruption in crude oil imports?
- A.Decrease in inflation
- B.Strengthening of the rupee
- C.Higher input costs and inflation pressure
- D.Increase in exports
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- A.1 and 2 only
- B.2 and 3 only
- C.1 and 3 only
- D.1,2 and 3
Show answer
All three statements about the Digital India Land Records Modernisation Programme are correct.
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- A.2 only
- B.2 and 3
- C.1,3 and 4
- D.2 and 4
Show answer
All details are right only in rows 2 and 4. The L.C.
Read the full explanation →In India, which one of the following compiles information on industrial disputes, closures, retrenchments and lay-offs in factories employing workers ?
- A.Central Statistics Office
- B.Department for Promotion of Industry and Internal Trade
- C.Labour Bureau
- D.National Technical Manpower Information System
Show answer
The Labour Bureau, an attached office of the Ministry of Labour and Employment, collects and publishes statistics on industrial disputes, closures, retrenchments and lay-offs.
Read the full explanation →