deficit financing.pdf

When the revenue of the government is shorter than its expenditure then this situation is dealt by printing more currency, buying from public and foreign institution. This temporary arrangement of the money is known as the deficit financing.

Meaning of Deficit Financing:
Former Planning Commission of India has defined deficit financing as; “The direct addition to gross national expenditure through budget deficits, whether the deficits are on capital or on revenue account.”
So whenever the expenditure of the government exceeds its revenue then government
envisage the process of deficit financing. So the temporary arrangement of the funds through various methods is known as deficit financing.

Sources of Deficit Financing:
The deficit financing is done in three ways;
1. Printing new currency notes
2. Borrowing from internal sources (RBI, General Public, Ad-hoc Treasury Bills & government bonds etc.)
3. Borrowing from External Sources (like borrowing from developed countries and International institutions like World Bank, IMF, etc).

Deficit Financing in India
In India, when the total income of the government (revenue account + capital account) falls below its total expenditure, then;
1. Government withdraws money from its cash deposited in the Reserve Bank or
2. Borrows loan from the central bank and commercial banks and even state
governments through Ad-hoc Treasury Bills.
3. Borrows from the general public in the form of Bonds and other securities or
4. Orders the RBI to print new currency notes.

Purposes of Deficit Financing:

1. To overcome the problem of lack of funds for speeding up the country’s development.
2. Promote additional investment in the country to side away the adverse impacts of depression period of the country.
3. To arrange fund for ensuring the holistic development of the country.
4. To arrange fund for the unforeseen events and arrange resources for wartime expenditure.
5. To upgrade the infrastructure of the country so that the taxpayers of the country are convinced that the tax paid by them is spent on the right things.

Impacts of the Deficit financing on the country:

1. Deficitfinancing
Whentherevenueofthegovernmentisshorterthanitsexpenditurethenthis
situationisdealtbyprintingmorecurrency,buyingfrompublicandforeign
institution.Thistemporaryarrangementofthemoneyisknownasthedeficit
financing.
MeaningofDeficitFinancing:
FormerPlanningCommissionofIndiahasdefined deficitfinancingas;“Thedirect
additiontogrossnationalexpenditurethroughbudgetdeficits,whetherthedeficits
areoncapitaloronrevenueaccount.”
Sowhenevertheexpenditureofthegovernmentexceedsitsrevenuethen
government
envisagetheprocessofdeficitfinancing.Sothetemporaryarrangementofthefunds
throughvariousmethodsisknownasdeficitfinancing.
SourcesofDeficitFinancing:
Thedeficitfinancingisdoneinthreeways;
1.Printingnewcurrencynotes
2.Borrowingfrominternalsources(RBI,GeneralPublic,Ad-hocTreasuryBills&
governmentbondsetc.)
3.BorrowingfromExternalSources(likeborrowingfromdevelopedcountriesand
InternationalinstitutionslikeWorldBank,IMF,etc).
DeficitFinancinginIndia
InIndia,whenthetotalincomeofthegovernment(revenueaccount+capital

2. account)fallsbelowitstotalexpenditure,then;
1.GovernmentwithdrawsmoneyfromitscashdepositedintheReserveBankor
2.Borrowsloanfromthecentralbankandcommercialbanksandevenstate
governmentsthroughAd-hocTreasuryBills.
3.BorrowsfromthegeneralpublicintheformofBondsandothersecuritiesor
4.OrderstheRBItoprintnewcurrencynotes.
PurposesofDeficitFinancing:
1.Toovercometheproblemoflackoffundsforspeedingupthecountry’s
development.
2.Promoteadditionalinvestmentinthecountrytosideawaytheadverseimpactsof
depressionperiodofthecountry.
3.Toarrangefundforensuringtheholisticdevelopmentofthecountry.
4.Toarrangefundfortheunforeseeneventsandarrangeresourcesforwartime
expenditure.
5.Toupgradetheinfrastructureofthecountrysothatthetaxpayersofthecountry
areconvincedthatthetaxpaidbythemisspentontherightthings.
ImpactsoftheDeficitfinancingonthecountry:
1.Increaseininflationduetotheincreaseinthesupplyofmoneyintheeconomy.
2.Decreaseinaverageconsumptionlevelduetohigherinflation.
3.Increaseinincomedisparities,becauserichgetmoreopportunitiesduetohigher
supplyofmoneyintheeconomy.
4.AdverseImpactonsaving:–Deficitfinancingleadstoinflationandinflation
affectsthehabitofvoluntarysavingadversely.
Infactitisnotpossibleforthepeopletomaintainthepreviousrateofsavingdueto
risingprices.
5.AdverseImpactonInvestment:–Deficitfinancingeffectsinvestmentadversely.
Whenthereisinflationintheeconomytradeunions/employeesdemandhigher
wagestosurvive.
Iftheirdemandsareaccepteditincreasesthecostofproductionwhichde-motivates
theinvestors.
FamouseconomistKeyneswasthestrongsupporterofthedeficitfinancinginthe
developingcountriessothatthesecountriescanbepulledoutfromtheviciouscircle
ofpoverty,unemploymentandunderproduction.
Inessenceitcanbesaidthatthedeficitinthecountryisnotasbadasitlookslike.
Perhapsthisisthereasonthatthedeficitfinancesystemisusedineveryrich
countryoftheworld.

3. Checkoutmoreat-
https://uplevelway.com/