Fiscal deficit and its implications on macroeconomic indicators in India

Abstract

The fiscal deficit on selected five macroeconomic indicators (variables such as interest rate, exchange rate, trade deficit, private consumption and saving), mode of financing it and its influences on the macroeconomic performance of a country is projected in this study. In India, there has been a problem of persistent increase in fiscal deficit, that was largely financed by borrowing from internal and external sources adding to the public debt, even after the adoption of Fiscal Responsibility and Budget Management Act(FRBMA), posing a serious danger to macroeconomic stability in the country. For the purpose, study utilized both quarterly and annual data of GDP. It is also found that, the theory of Ricardian Equivalence Hypothesis(REH) predicts in general, an increase in saving when fiscal deficit increases, are not valid for Indian economy, during the study period from April 1996 to June 2015. It also shows that a high level of fiscal deficit, leads to a high level of trade deficit which proves that fiscal deficit does not influence on interest rate but on the exchange rate and trade deficit. The study also suggest that increase in fiscal policies keeps up the growth momentum of the Indian economy. newline