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💥 What is Fiscal Trap ?

A fiscal trap is a situation where a government’s high debt and persistent fiscal deficits make it increasingly difficult to reduce borrowing or stimulate growth — leading to a vicious cycle of debt and interest payments.

☑️How a Fiscal Trap Works :
1.Government runs a high fiscal deficit (spending > revenue).
2.It borrows more to finance the deficit.
3.As borrowing rises, interest payments increase.
4.A large portion of government revenue goes only to service past debt.
5.This reduces space for productive expenditure (education, health, infra).
6.To cover the gap, the government borrows again, worsening the debt burden.

👉This cycle repeats — trapping the government fiscally.

☑️ Indicators of Fiscal Drag :
1. High Fiscal Deficit
2. Rising Debt-to-GDP Ratio
3. High Interest Payments
4. Low Capital Expenditure

☑️Example: India’s Context :
• India’s Fiscal Deficit (2024–25 BE): Around 5.1% of GDP.
Interest payments consume nearly 40–45% of revenue receipts.
• States also face fiscal stress due to subsidies, populist schemes, and limited tax buoyancy.

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2025/10/19 20:40:12
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