deficit financing – Meaning – Concepts – Safe Limit

Deficit Financing

The various sources of fund raising to finance economic development in modern states are: (i) taxation, (ii) borrowings from the public, (iii) government savings (iv) surplus of public establishments, (v) deficit. finance management, and (vi) foreign aid. When the government is not able to mobilize sufficient resources due to taxation and public borrowing etc., then it resorts to deficit financing to meet its development related expenses takes.


Generally, deficit financing refers to the public expenditure that exceeds the current public revenue. In Western countries and America, the term ‘deficit financing’ is used in a more broad sense while in India in a narrower sense. Public borrowings to fund government spending in the West and the United States; That is, it is raised from the public, commercial banks and the central bank and is included in deficit financing.

On the other hand, expenditure in India is financed by borrowing from the public and commercial banks are kept out of deficit financing. This is called market borrowing.

J According to the Planning Commission, the following things come in India’s deficit finance management

(i) Withdrawal by the Government of the last balance accumulated cash

(ii) loans from the Central Bank, that is, the Reserve Bank of India; And

(iii) Issuance of new currency.

Mishra and Puri say – “When the government takes loan from the Reserve Bank, it simply transfers its securities to the bank. On the basis of these securities, the bank issues new notes to the government and brings them into circulation and its As a result money is created.In short, some of the consequences of Pate’s finances in the Indian context is that the new money issued by the government to meet the budget deficit is called money supply.


The Government of India recognizes the following five concepts of deficit finance

1. Revenue Deficit

When the revenue expenditure of the government exceeds its revenue receipts, it is called revenue deficit. Government revenue expenditure 1 includes resources spent on items that do not constitute assets; Such as expenditure on civil administration, defence, law and order, justice, interest payment and grants etc. Tax revenue and non-tax revenue are included in the revenue receipts of the government.

2. Budget deficit

When the total expenditure of the government is more than its total receipts, then it is called budget deficit. The budget deficit of the government includes both revenue expenditure and capital expenditure. Similarly, both revenue receipts and capital receipts are included in the total receipts of the government.

3. Fiscal deficit

Since 1950, the government has recognized the above two concepts of deficit. A third concept was recognized in 1986. This is called fiscal deficit. It was recommended by the Sukhmoy Chakraborty Committee (1982-85). This committee was formed to review the working of the monetary system in India. Fiscal deficit refers to the sum total of the budget deficit and the government’s market borrowings and other liabilities. It measures the total borrowing needs by the government from both internal and external sources.

4. Primary Deficit

It refers to the fiscal deficit less the interest paid by the government. It is also called interest-free loss. This notion was recently implemented.

5. Monetized Deficit

The budget deficit can be met in two ways; That is, by taking a loan from the public or by taking a loan from the Reserve Bank of India. When it is met or financed by the Reserve Bank of India, it is called monetized deficit. In other words, it increases the Reserve Bank of India’s net debt to the government.


In modern states, deficit financing has been resorted to in three different situations:

1. Recession

The developed countries of Europe and America had resorted to part finance to deal with the problem of general employment during the Mahanadi of the third decade of the nineteenth century. To fight the recurrent recession in the country and to eliminate the common employment, the suggestion of deficit financing was given by J. Delivered in M.Cos. was. He was of the view that the main cause of unemployment in a developed country is the lack of effective demand (of goods) and it depends on the propensity to use. To overcome this problem, according to Kos, the government should ask people to ‘fertilize wells and fill wells’. This increases the purchasing power of the people and as a result the demand for things increases. Later on this improves the employment situation. Then the demand for seeds increases further and hence the employment increases and this cycle continues, Kos called it the Muhniplier effect. By this measure the economy can be revived and it can be pulled out of the swamp.

2. Economic development

Developing countries like India have resorted to part finance to raise funds for economic development. This is because those countries do not have sufficient resources to finance public investment to accelerate the development process. Deficit financing helps in rapid capital formation for economic development. It breaks the barriers and structural inflexibility of the economy and thus increases productivity. It therefore accelerates economic growth by funding investment, employment and production in the economy; But its negative effect on the economy is manifested in the form of increase in the prices of goods and services. This is because deficit financing increases the money supply in the economy but the supply of goods and services does not increase accordingly. Due to the nature of deficit financing, the investment pattern of the people changes as a result of which people are compelled to save. This adversely affects the balance of payments, increasing economic inequalities. More loans are given by banks.

3. War

Modern states have resorted to deficit financing for wars. The resources raised by the government from taxes and borrowings do not cover the cost of the war. Therefore, the governments have no other way than to create new currency by printing more notes. The financing of this war deficit brings a huge amount of money in the market, due to which the income of the people increases in money and also the demand for things. As a result, since the supply of things does not increase accordingly, inflation increases.

Safe Limit

Deficit finance management is an inevitable evil. On the one hand it is necessary for economic development and on the other hand it is inflationary by its very nature. Therefore, it is necessary to keep it within safe limits so that it may lead to capital formation but does not increase the prices too much. The various factors that determine the safe limits of wharf finances (or the various measures to keep deficit finances within safe limits) are as follows:

1. Effective efforts should be made to accumulate surplus wealth by raising high taxation and debt.

2. The amount of money to be entered into the economy

The growth rate in the economy should be within the limits.

3. The newly created money should be used for productive purposes like irrigation, industrial development etc.

4. Use of funds flowing through deficit financing Projects should be done to promote Whose results are obtained quickly. supply of things The increase will happen quickly and inflation will stop.

5. Efforts should be made to bring the non-monetised sector of the economy (exchange sector) into the monetized sector.

6. Through rationing the prices of things should be effectively controlled and things distributed.

7. Import of capital equipment, industrial raw materials and food grains should be encouraged and import of luxury and allied things should be discouraged.

8. People should have the spirit of sacrifice. They should assist in implementing policies aimed at reducing the effect on prices of deficit financing for capital formation.

9. The government should give more incentives to increase production in the private sector.

10. Credit creation policies should be integrated with deficit financing to regulate growth in credit creation by banks.

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