How is fiscal deficit met? When drastic cut in public expenditure and revenue expenditure fail to solve this problem, fiscal deficit is met by the following measures. Let it be noted that safe level of fiscal deficit is considered to be 5% of GDP.
(i)    Borrowing from domestic sources. Fiscal deficit can be met by borrowing from domestic sources. Borrowing from public is considered better than deficit financing because it does not increase money supply which is regarded as main cause of rising prices. It also includes tapping of money deposits in Provident Fund, Small Saving Schemes.
(ii)    Borrowing from external sources like world bank, foreign banks, IMF, etc.
(iii)    Deficit financing (printing of extra currency-notes). Another measure to meet fiscal deficit is by borrowing from Reserve Bank of India. Government issues treasury bills which RBI buys in return for cash to the government. This cash is created by printing new currency-notes against government securities. Thus it is an easy way to raise funds but it carries with it adverse effects also. Its implication is that money supply increases in the economy creating inflationary trends and other ills that result from deficit financing. Therefore, deficit financing, if at all unavoidable, should be kept within safe limits.
Measures to reduce fiscal deficit. (a) Measures to reduce public expenditure are: (i) A drastic reduction in expenditure on major subsidies, (ii) Reduction in expenditure on LTC, bonus, leave encashment, etc. (iii) Austerity measures to curtail non-plan expenditure.
(b)    Measures to increase revenue are: (i) Tax base should be broadened, (ii) Tax evasion should be effectively checked, (iii) More emphasis on direct tax to increase revenue, and
(iv) Sale of shares in public sector units.