2026 · Q45
India's fiscal deficit widens significantly due to increased Government spending on subsidies while tax revenue remains unchanged. Which one of the following is the most likely consequence?
General KnowledgeIndian Economy
- AInflation will rise, interest rates will fall, and private investment will increase
- BInflation will rise, interest rates may rise, and private investment may slow down
- CInflation will fall, interest rates will rise, and private investment will increase
- DInflation will fall, interest rates will fall, and GDP growth will accelerate
Explanation
A wider fiscal deficit financed by higher subsidies means larger government borrowing, which tends to push up interest rates and inflationary expectations, crowding out private investment. Of the given options, only (B) captures this standard macroeconomic chain: inflation rises, interest rates may rise, and private investment may slow down.