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 ?

A widening fiscal deficit due to increased subsidy spending increases aggregate demand and the money supply in the economy, which typically leads to inflationary pressures. To finance this deficit, the government must borrow more from the market. This increased demand for loanable funds puts upward pressure on interest rates. Additionally, the central bank may raise rates to control inflation.

Higher interest rates increase the cost of borrowing for the private sector, leading to a phenomenon known as the "crowding out" effect. This results in a potential slowdown in private investment. Options A, C, and D are incorrect because they suggest either falling inflation or falling interest rates, which are unlikely outcomes when a deficit is driven by consumption-oriented spending like subsidies without a corresponding increase in revenue.