How does fiscal deficit affect the economy?
When fiscal deficit goes up, we need to finance the fiscal deficit. One has to go for additional money creation which is inflationary or one needs to go for better expenditure planning. We are happy with an increase in foreign exchange reserves. But that causes inflation. . . The question is how much foreign exchange do we need. We need a foreign exchange reserve to last us at least six to seven months. Funds’ inflows continue and if we do not find a way to utilize them, that leads to inflation. If we sign the civilian nuclear deal with the United States, we will have an alternate source of cheap power. We will become less dependent on oil, will that curb inflation? If the power cost comes down, all the industries will benefit. Is controlling prices interfering with free market? Is it a sign of anti-liberalisation? Controlling prices leads to re-allocation of resources. If you control the price of cement, who will invest in the cement industry? Cement industry will then start looking f
