Question

Write the relationship between the revenue deficit and the fiscal deficit. Are fiscal deficits inflationary?

Hint:

Revenue deficit is a part of fiscal deficit; deficits financed by money creation tend to be inflationary.

Answer 1

Step 1: Define both deficits:
Revenue deficit = Revenue Expenditure − Revenue Receipts (the shortfall on the government's current/day-to-day account). Fiscal deficit = Total Expenditure − (Revenue Receipts + Non-debt Capital Receipts) (the government's total borrowing requirement).

Step 2: Relate them:
Revenue deficit is always a part of (a subset of) fiscal deficit, since revenue expenditure is one component of total expenditure. The portion of fiscal deficit left after subtracting revenue deficit represents borrowing used to finance capital expenditure (asset creation), whereas the revenue-deficit portion represents borrowing used merely to cover current/consumption spending — which does not create any productive asset. A high revenue deficit as a share of fiscal deficit is therefore a sign of poor-quality government borrowing.

Step 3: Are fiscal deficits inflationary?
Yes, generally. A fiscal deficit is financed either by (a) borrowing from the public/market, which can raise interest rates and, if it also raises overall purchasing power and demand, can push up prices, or (b) borrowing from the RBI (deficit financing/monetisation), which directly injects new money into the economy, increasing money supply and aggregate demand — this is the more directly inflationary channel, especially if the extra spending does not match a matching increase in output.

Final Answer:
Revenue deficit is a component of the (larger) fiscal deficit; and fiscal deficits are generally inflationary, particularly when financed through central bank borrowing/deficit financing that expands the money supply faster than output.