Simulator test 2 doubts

ishitatrisaid

@Neyawn thanks so much for clarifying. My doubt was around the 1st statement only. 

In fact if you observe the govt policy since past 20 years, you will see that govt went for a lot of Public Private model initially for infrastructure development. 

Why? Because it's super costly and government doesn't have the money! So it thought that private player will bring in some money.

Private players thought that government will "allow" it to recover money by way if service charges like tolls etc.

The private sector had a poor experience with the government to some extent.  Lot of companies saw that once the investment was made by private company, when the recovery / earning time came, govt ( including judiciary ) ruled that you can't make so much money. Or you are hurting the environment.

Now unless companies have money they can't take risks or make investment commitments. 

Now if you see PPP models, no private player is willing to get into it.

Right now, the govt says we don't have money and private sector also says we dont have money!

ishitatrisaid

Q4. Which of the following is a likely outcome of a widening fiscal deficit in a country

1. Slowdown in economic growth rate.

2. Decrease in capital expenditure.

While the discussion video also says that the pain point in this Q is the 2nd statement, whether we will see a decrease in capital expenditure or not– I don't believe a high fiscal deficit necessarily leads to slowdown in economy (Statement 1), because both crowding in (high expenditure leading to FD) and crowding out effects (huge borrowing from market) will balance each other out.

Why is it assumed that there will be a slowdown in growth? Is it because the Q nudges us to consider long term effects ("widening" fiscal deficit)? 

@ishitatri When govt have 50 rupees in revenue and 100 rupees in expenses, and it borrows 50 rupees or more from market, what happens is that

1. money left for borrowing by private sector is less
2. money borrowing rate increases due to demand

Therefore a widening fiscal deficit is likely to cause a slowdown.

In second point, you are expecting that govt will use this 50 rupees for capex, like building roads, bridges etc, thus stimulating the economy. However, this is not necessary. For example, govt of India is already using this moneynot for capex, but for revenue expenditure. It may give away the money in salaries and pensions!

Hope this clears.