Deficit FinancingNeed, Objectives and Adverse EffectsPublic Finance Notes
Meaning of Deficit Financing
Deficit financing is defined as financing the budgetary
deficit through public loans and creation of new money. Deficit financing in
India means the expenditure which in excess of current revenue and public
borrowing, the government may cover the deficit in the following ways:
1) By
running down its accumulated cash reserve from RBI.
2) Issue
of new currency by government it self.
3) Borrowing
from reserve bank of India and RBI gives the loans by printing more currency
notes.
Need and Objectives of deficit
financing:
1. To finance war: Deficit financing has generally being used
as a method of financing war expenditure. During the war time through normal
methods of raising resources. It becomes difficult to mobilize adequate
resources. Therefore government has to adopt deficit financing.
2. Remedy for depression: In developed countries deficit
financing is used as on instrument of economic policy for removing the
conditions of depression. Prof. Keynes has also advocated for deficit financing
as a remedy for depression and unemployment.
3. Economic development:- The main objective of deficit
financing in an under developed country like India is to promote economic
development. The use of deficit financing in fact becomes essential for
financing the development plan especially in underdeveloped countries.
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4. Mobilization of Resources: Deficit financing is also used
for the mobilization of surplus, ideal and unutilized resources in the country.
5. For granting subsidies: In a country like India government
grants subsidies to the producers to encourage them to produce a particular
type of commodity, granting subsidies is a very costly affair which we cannot
meet with the regular income this deficit financing becomes must for it.
6. Increase in aggregate demand: Deficit financing loads to
increase in aggregate demand through increased public expenditure. This
increase the income and purchasing power of the people as a consequence there
is an increase availability of goods and services and the production and
employment level also increase.
7. For payment of interest:- Loan which are taken by the govt.
are supposed to be repaid with their interest for that government needs money
deficit financing is an important tool to get the income for the repayment of
loan along with the interest.
8. To overcome low tax receipts.
9. To overcome the losses of public sector enterprises
10. For implementing anti poverty programme.
ADVERSE EFFECTS OF DEFICIT
FINANCING
Deficit financing is not free from its defects. It has its
adverse effect on economy. Important evil effects of deficit financing are
given below:
1. Leads to inflation: Deficit financing may lead to
inflation. Due to deficit financing money supply increases & the purchasing
power of the people also increase which increases the aggregate demand and the
prices also increase.
2. Adverse effect on saving: Deficit financing leads to
inflation and inflation affects the habit of voluntary saving adversely. Infect
it is not possible for the people to maintain the previous rate of saving in
the state of rising prices.
3. Adverse effect on Investment: Deficit financing effects
investment adversely when there is inflation in the economy trade unions make
demand for higher wages for that they go for strikes and lock outs which
decreases the efficiency of Labour and creates uncertainty in the business
which a decreases the level of investment of the country.
4. Inequality: In case of deficit financing income
distribution becomes unequal. During deficit financing deflationary pressure
can be seen on the economy which make the rich richer and the poor, poorer. The
fix wage earners are badly effected and their standard of living reduced thus gap
between rich & poor increases.
5. Problem of balance of payment: Deficit financing leads to
inflation. A high price level as compared to other countries will make the
exports more expensive and thus they start declining. On the other hand rise in
domestic income and price may encourage people to import more commodities from
abroad. This will create a deficit in balance of payment and the balance of payment
will become unfavorable.
6. Increase in the cost of production: When deficit financing
leads to the rise in the price level the cost of development projects also
rises this means a larger dose of deficit financing is required on the port of
government for completion of these projects.
7. Change in the pattern of investment: Deficit financing
leads to inflation. During inflation prices rise and reach to a very high level
in that case people instead of indulging into productive activities they start
doing speculative activities.
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