Read the following statements - Assertion (A) and Reason (R)carefully and choose the correct alternative given below:
Assertion (A) :Fiscal deficit can be met by borrowings from the domestic sources or external sources.
Reason (R):Fiscal Deficit is always inflationary.

 Assertion (A) is true but Reason (R ) is false

The correct answer is Option 3:  Assertion (A) is true but Reason (R ) is false

Assertion (A) :Fiscal deficit can be met by borrowings from the domestic sources or external sources. This statement is true. Fiscal deficit occurs when the government's expenditures exceed its revenues. To cover this deficit, the government can borrow funds either from domestic sources (such as issuing bonds to individuals and institutions within the country) or external sources (such as borrowing from foreign governments or international financial institutions).
Reason (R):Fiscal Deficit is always inflationary. This statement is not true. While fiscal deficit can contribute to inflation under certain conditions, it is not always inflationary. The impact of fiscal deficit on inflation depends on various factors such as the state of the economy, monetary policy measures, the effectiveness of government spending, and the response of other economic agents. In some cases, fiscal deficit may lead to inflation if the government resorts to excessive borrowing, which increases demand without a corresponding increase in productive capacity. However, fiscal deficit can also be non-inflationary or even deflationary if the economy is operating below its full capacity and the government borrowing is used for productive investment.

Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing . The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources.
One of the main criticisms of deficits is that they are inflationary. This is because when government increases spending or cuts taxes, aggregate demand increases. Firms may not be able to produce higher quantities that are being demanded at the ongoing prices. Prices will, therefore, have to rise. However, if there are unutilised resources, output is held back by lack of demand. A high fiscal deficit is accompanied by higher demand and greater output and, therefore, need not be inflationary.