Concepts – Fiscal deficit, deflation and devaluation


What is Fiscal Deficit?

A government has many expenditures like salaries & payments of staff, funds for various schemes, loans and grants that it makes, contingency expenditures like those of disasters and compensation etc.

Similarly it has many revenue sources like – interests it receives on loans given, revenues from disinvestment, revenues generated from selling resources like spectrum, oil, minerals etc. These type of revenues do not create any debt as government do not have to payback anything to anyone. For eg. revenues from spectrum auction belong to governemnt, it does not have to pay it back to anyone. These revenues then are called NON-DEBT Creating revenues.

There are some other type of revenues  that are debt creating . For eg Рthe loans which the government takes from World bank or other countries. Th government has to pay it back in a stipulated time period with interests.

Fiscal Deficit(FD) = Total Expenditure – ( all non-debt creating revenues )

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What is the difference between deflation and devaluation?

These are two very different terms. Deflation is related to price level while devaluation is related to the value of a particular currency.

When there is a decrease in the general price level in an economy, its called deflation. Its the opposite of inflation.

When a country (say India) tries to deliberately lower the value of its currency (i.e rupee) with respect to other currencies (say dollars) its called devaluation.

 
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