Deficit Financing in India - Fiscal Policy, Public Finance | Public Finance - B Com PDF Download

Deficit Financing in India : its Purpose, Advantages and Defects!

Deficit financing is a method of meeting government deficits through the creation of new money. The deficit is the gap caused by the excess of government expenditure over its receipts. The expenditure includes disbursement on revenue as well as on capital account

The receipts similarly comprise revenues on current account as well as capital account. Creation of new money to meet the deficit in use for a long time. But it has now being given up. Instead a new scheme called ways and Means Advances is being ushered in with effect from April 1997. Under this system the government can get only temporary loans to overcome the mismatch between its receipts and expenditures.

Purpose of Deficit Financing:

In India, the deficit financing resorted mainly to enable the government to obtain the necessary resources for the plans. The levels of outlay laid down are of an order which cannot be met only by taxation and borrowing from the public.

The gap in resources is made up partly through external assistance, but when external assistance is not enough to fill the gap; deficit financing has to be resorted to. The targets of production and employment in the plans are fixed primarily with reference to what is considered as the desirable rate of growth for the economy.

When these targets cannot be achieved by levels of expenditure possible with resources obtained from taxation and borrowing, additional resources have to be found.

Advantages of Deficit Financing:

When the Government resorts to deficit financing, it usually borrows from the Reserve Bank. The interest paid to the Reserve Bank actually comes back to the Government in the form of profits.

Through deficit financing, resources are used much earlier than they can be otherwise. The development is accelerated. This technique enables the Government to get resources without much opposition.

Defects of Deficit Financing:

The defects of deficit financing are:

(i) It leads to increase in inflationary rise of prices of goods and services in the country.

(ii) Inflationary forces created by deficit financing are reinforced by increased credit credition by banks.

(iii) Investment caused by inflation may not be of the pattern sought under the plan. It normally changed.

(iv) If as a result of deficit financing inflation goes too far, it becomes self-defeating.