Deficit financing refers to the practice of a government borrowing money in order to finance its expenses, particularly when its revenues are insufficient to cover its expenses. In other words, deficit financing involves the government running a budget deficit, which is the difference between its total expenditures and its total revenues.
In India, deficit financing has played a significant role in the country's economic development and growth. It has been used as a tool to stimulate economic growth, particularly during times of economic downturn or recession. For instance, during the global financial crisis of 2008, the government of India used deficit financing to stimulate the economy by increasing public spending on infrastructure and other development projects.
Deficit financing has also been used by the government of India to finance various social welfare schemes, such as the National Rural Employment Guarantee Act (NREGA) and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS). These schemes provide employment and financial assistance to the poor and disadvantaged sections of society, and have helped to reduce poverty and inequality in India.
However, deficit financing also has its drawbacks and limitations. One major limitation is that it increases the government's debt burden, which can have negative consequences in the long run. When the government borrows money, it has to pay interest on the borrowed amount, which adds to its debt burden. If the government continues to borrow money over an extended period of time, it can lead to a situation known as "debt trap," where the government finds it increasingly difficult to pay off its debts. This can have negative consequences on the country's economic growth and stability.
Another limitation of deficit financing is that it can lead to inflation if not managed properly. When the government increases its spending through deficit financing, it can lead to an increase in the demand for goods and services, which can in turn lead to an increase in prices. If the government does not take measures to control inflation, it can have negative consequences on the economy and on the general public.
In conclusion, deficit financing has played a significant role in India's economic development and growth, particularly in times of economic downturn or recession. However, it also has its limitations, and it is important for the government to carefully manage its deficit financing in order to avoid negative consequences such as an increase in debt burden and inflation.
Role of deficit financing in the context of Indian planning
Impacts of the Deficit Financing on the country 1. It fell to 2. Governments usually resort to this technique since public hardly opposes it. To lift the economy out of depression so that incomes, employment, investment, etc. A revenue shortfall necessitates borrowing. Rao 1953 : 2-14,32-35 argues that the purpose as well as the effect of deficit financing undertaken in developed countries is different from that in less developed countries. Reuters provides business, financial, national and international news to professionals via desktop terminals, the world's media organizations, industry events and directly to consumers.
What is the Meaning and Purposes of Deficit Financing?
Deficit financing and income distribution. Above all, a mild dose of inflation is necessary for economic development. These means basically are the ways in which the government may utilise the amount of money created as the deficit to sustain its budget for developmental or political needs. If deficit financing encourages mild inflation or functional price rise, or slow but steady rise in price level, it can contribute to economic growth. Again, a sick firm might need to follow deficit financing route for many years to come as required by the firm to make it come out of the red i. Any hurried or hasty action could completely pull down the economy, at a time when the revival is nascent and hesitant," he said. It was only when the World Bank, the IMF and other international institutions insisted on reducing fiscal deficit as the prior condition of giving loans, the Government was compelled to take stringent measures to control non-plan expenditure.
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ADVERTISEMENTS: In this article we will discuss about:- 1. Then, what should be the size of deficit financing? In other words, income inequality increases. There are some situations when deficit financing becomes absolutely essential. In India, and in other developing countries, the term deficit financing is interpreted in a restricted sense. Had there been some means to go for more expenditure with less income and receipts, socio-political goals could have been realised as per the aspirations of the public policy! Among these costs, most important are: ADVERTISEMENTS: Among the possible benefits are the stimulus to profitability and investment, greater utilisation of capacity because of increased demand and consequent lowering of the costs of production should there be excess capacity, and a larger investment provided that private investment was not forthcoming in any case.
Deficit Financing in India
What is important is that low incomes coupled with the rising expenditures of the government have forced the authorities to rely on this method of financing for various purposes. In fact it is not possible for the people to maintain the previous rate of saving due to rising prices. As a result, the government finds this measure handy. Chelliah 1992 argues that deficit financing to counter or cure recession and unemployment of a cyclical nature has not been quite successful in the industrial countries. In case a LDC, economy is in the grip of a combination of high multiplier, low elasticity of supply and immobility of resources, deficit financing of public investment is particularly dangerous, at least until these characteristics have been modified prior to, or simultaneous with, the deficit financed expenditure. In other words, there are various purposes of deficit financing. But its price rises due to the inelasticity in supply.
