 The budget is coming tomorrow and one word that you will hear a lot is fiscal deficit. Now, I know most of you dread that word. It sounds difficult, but it is actually very simple and it is important because there are a lot of myths surrounding the idea of a fiscal deficit. Now, whether we know anything about it or don't, we've all been convinced by years of propaganda that fiscal deficit is inherently bad and that the job of every government is to keep it under control. This has been drilled into our heads by years of propaganda by pundits on TV and successive governments have accepted it as an inviolable mantra. But before I tell you why this is a myth, let's just understand what fiscal deficit is. A deficit occurs, understandably, when a government spends more than it earns. Normally the government earns, the government's earnings come from taxes, from fees that it takes and also from the dividends it earns from the companies that it owns, the public sector units. The government can also earn by selling these public sector units. We have come to call this process disinvestment. The gap between the government's total earnings including from disinvestment and the government's total expenditure is called the fiscal deficit. Now we're told that a high fiscal deficit is bad. This means the government has to borrow more because it is living beyond its means. If the government borrows from the central bank and monetizes this fiscal deficit then the bank will have to print more money which will cause inflation. If it borrows from the private sector then it will use up the corpus of savings in the economy and the private sector will actually be not left behind with any funds to invest on its own. This is what mainstream economists call crowding out the private sector. Both these arguments are fundamentally wrong. Let us take the first one first that a high fiscal deficit always causes inflation. Now this argument is an old one and it is typically taught in our high school textbooks. You might have studied it too. If more money is printed in an economy I hand it over to people but the amount of goods and services remain the same. All that will happen is more money will chase the same amount of goods and services and that will push up prices in the market and that will cause high inflation. On the face of it this seems reasonable but only in an economy where all productive resources are operating at full capacity which means all factories are producing as much as they can and everyone who wants work is employed. In such a situation output cannot be increased and if people have more money in their hands it will only cause higher inflation. But what happens in a country where the opposite is the case where capacity utilization in industries low and there's high unemployment. After all this is exactly what is the reality in India. If higher government spending can put more money in people's hands then the overall level of demand in the economy will go up. If only 7 out of 10 machines were running in a factory now 9 might be put into service. If 7 workers had been hired now 10 will be hired to run these machines and this is what is called economies of scale kicking in as output goes up. The average machine cost per unit of output will actually fall which means the cost per unit will drop instead of rising. In other words higher capacity utilization will bring down average costs and the average price even if the owners of these factories actually increase their profits marginally. So instead of causing inflation higher demand induced by high fiscal deficit might actually result in a fall in the inflation rate. If some of the additional spending goes into providing subsidized food and others and goods and services to the working people to the poor then that will even help keep wage inflation down because workers would be able to sustain themselves without a rise in wages. Even this will help reduce inflation so instead of raising it that means a higher fiscal deficit if used to fund the right economic policies can actually lower inflation rates instead of causing them to go up. Let's now come to the second part which says that if the government borrows from the public to finance its fiscal deficit then it will crowd out the private sector and not leave anything for them to invest. Again this is a complete misconception of the nature of savings. A high fiscal deficit can lead to a rise in the overall demand for goods and services in the economy and if spent on subsidies to the poor can even keep wages in check. Who gains from this? Obviously the private sector who profit from higher sales and lower costs so by lending to the government they effectively increase their own profits and savings. In fact government borrowing from the private sector creates a commensurate amount of savings in the hands of the private individuals because one person's loan is another person's saving. The most ridiculous argument here that mainstream neoliberal economists make is that the way the government can avoid a high fiscal deficit is by selling public assets to the private sector. In other words by disinvesting this is nothing but an accounting exercise a trick because after all if instead of borrowing assets assets are sold to the private sector it would still remove savings from the hands of the private sector right and it put it in the hands of the government. So no new productive assets would be created existing productive assets and resources would simply change hands. This is no different from a fiscal deficit that should be treated as the same thing but it is not because disinvestment is used as a ruse to transfer public assets the people's property into the hands of capitalists. If the government borrowed instead of selling assets then it would continue to control crucial parts of the economy but if it sells its productive assets the private sector gets to take control over all aspects of the economy. That is what neoliberal economics has been pushing for for over three decades now and even though these policies have failed 90% of Indians they continue to rule policy making in this country. Okay that's the show today if you have liked this video please press the like button leave your comment share it with your friends and family also don't forget to subscribe to our channel press the bell icon so that you get to know every time we upload a new video. Until next time good bye