What is Fiscal Deficit?
The fiscal deficit can be financed by borrowing from the Reserve Bank of India (which is also called deficit financing or money creation) and market borrowing (from the money market, that is mainly from banks). But uncontrolled borrowing is not good for the economy, as a greater portion of the governments revenue will in future be used to pay back the interest of loans and the money available for social sector initiatives will reduce. Besides the fiscal deficits accumulate over years resulting in a big debts and debt traps.
While steps taken by the government to bring the fiscal deficit within a targeted manageable portion of GDP have reduced near term risks, cuts in politically sensitive subsidies were needed for sustainable fiscal consolidation. RBI expects government to control its unproductive expenditure to bridge the gap.
What is Current Account Deficit (CAD)?
Current Account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid).
How should the gap in dollar supply be filled?
The right way to fill the gap is by increasing the exports and decreasing the imports, which is a step easier said than done. At present India is depending more on FIIs to fill the gap, but since these investments are volatile and risky, this is not healthy. We need urgent steps to boost FDI and exports.
India’s current account deficit (CAD) is expected to widen to 1.6 per cent of GDP this year from 0.5 per cent in 2016, owing to higher commodity prices and an expected strong domestic recovery.