Role of deficit financing in india. Role of Deficit Financing in LDCs like India 2022-12-11
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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.
India cbank chief warns of downsides to direct financing of gov't deficit
Public Revenue : Its Classification and Sources , 10. External Borrowings are the last resort for the government to manage fiscal deficit with the condition that the external loans are comparatively cheaper and long-term. This would enhance the circulation of money. IAS Prelims 2017- GS Economy complete Study Material. Creation of additional employment is usually hampered in backward countries due to lack of raw materials and machineries even if adequate finance is available.
But it has the biggest handicap that with it the government cannot go for the expenditures which are to be made in the foreign currency. However, recession-induced deficit finance might be advocated if full employment revenues are shown to result in a balance or surplus. Above all, a mild dose of inflation following deficit financing is conducive to the whole process of development. It would be instructive if we now consider the magnitude of bank financing of fiscal deficits. The real income of the wage-earning class declines and rising prices lead to the distribution of wealth in favor of profiteer class. Following inflationary rise in prices, export declines while import bill rises, and resources get transferred from export industries to import- competing industries. Important Facts to Know about Deficit Financing for UPSC The budgetary shortages measure how successfully the government manages its finances.
Effects of Deficit Financing : Deficit financing has several economic effects which are interrelated in many ways: i. Thus a vicious circle of rising price level and increased cost sets in. Fourthly, deficit financing has certain multiplier effects on the economy. ADVERTISEMENTS: In the early years of planning, deficit financing in certain cases had been described as the financing of a deliberately created budgetary deficit, the method of financing usually being borrowing of a type that resulted in a net addition to aggregate public expenditure. Thirdly, financial resources required for financing economic plans that a government can mobilize through deficit financing are certain and known beforehand.
Role of deficit financing in the context of Indian planning
Anyway, additional money thus created fuels the inflationary fire. A rise in aggregate demand raises the price level from P 1 to P 2 in quadrant II. ADVERTISEMENTS: Deficit financing may by analysed in the form of revenue deficit and budgetary deficit. On the horizontal axis the volume of deficit financing and on the vertical axis price level is measured. ADVERTISEMENTS: In recent years, the monetized deficit as defined by the Chakraborty Committee, and the monetized deficit as traditionally measured in India have been fairly close as percentage of GDP.
What is Deficit Financing in India? Let’s Understand the Objective and Types for UPSC Exam
In other words, whereas budgetary shortage refers to borrowing requirements that include interest payments, primary shortage refers to borrowing requirements that do not include interest payments i. Now that we have discussed what this means, let us look at the objectives. The deficit is the gap caused by the excess of government expenditure over its receipts. Remedial Measures A large revenue shortfall warns the government to either cut spending or raise tax and non-tax collections. The concept of deficit financing prevailing prior to 1997-98 fiscal year reflected only the amount of or the changes in the level of treasury bills lying outstanding with the RBI.
Deficit Financing in India : It's Purpose, Advantages and Defects
In order to bring the economy to the right track the government of India has become successful to reduce these deficits in 2007-2008 budget proposals. This book focuses on the issues of India's economic development within the wider context of the nation's human and natural resources. Need of Deficit Financing: It was in late 1920s that the idea and need of deficit financing was felt. When there is an increase in aggregate demand consequent upon deficit financing, demand for food grains rise. Inflation may, however, be self-destroying even in a situation of monetary expansion induced by deficit financing when the completion of deficit-financed investment projects would, after a time gap, lead to a rise in the output and supply of wage-goods. In essence it can be said that the deficit in the country is not as bad as it looks like. But although revenue deficit may be eliminated by legislation and on paper, the fact remains that the fiscal deficit cannot be wiped out, and the excess of expenditure over revenue simply adds to fiscal deficit.
Deficit Financing: Meaning, Effects and Advantages
Fourteen and Fifteen Finance Commission , 23. The definition of deficit financing as suggested by the Chakraborty Committee was accepted and the traditional concept of deficit financing was modified. An IAS aspirant must have well understanding of the various concepts of the Economy to score better marks in both the levels of IAS Exam. If deficit financing can bring the un-utilised resources into use for raising the supply elasticity of exportable goods in the event of a deficit in the balance of trade, and if the investment trend in both the public and the private sector is conducive to the promotion of investment in the export sector, the situation would act as a cushion against an increased money supply. But things may also move otherwise. Ultimately, excess dose of deficit financing leading to inflationary rise in prices will exacerbate income inequality. However, it is not an unmixed blessing.
Role of Deficit Financing in the Context of Indian Planning
The interest on outstanding internal liabilities stood at Rs. His arguments are as follows: a In India, the proportion of currency to money supply is higher than that in developed countries and as such, the money-supply augmenting effect is not of that magnitude as in industrialized countries; b The demand-boost effect of deficit financing in India is not of that magnitude as in developed countries since currency has a lower income velocity; c The liquidity effect of deficit financing in a country like India is of less importance than in a developed economy because of the relative underdevelopment of diverse financial intermediaries; d As the Indian economy prior to the introduction of economic reforms with a switchover to liberalisation and market economy had a planned pattern of investment and as the pace of private investment in fixed assets had been subject to regulatory measures like industrial licensing, exchange allocation and capital issues control, India was in a better position to put a brake on accelerating investments in undesirable channels, than in a developed economy; e As the Indian economy has a surplus of unskilled labour and as the country has also not been suffering from a dearth of trained and professional manpower, it would not be difficult to carry through productive investment without facing labour and skill shortages; and f Prevalence of wage rigidity in the country would also be an aid to the same. Brahmananda 1980 : 231-36 argues that conditions are more conducive to the use of deficit financing as an instrument of development in a country like India than in industrialized countries. In certain cases, as has been pointed out by Rao 1953 and Brahmananda 1980 , deficit financing in a country like India can, no doubt, be a useful instrument for better utilizing the unused and underutilised resources in the economy. The total money of the deficit might go to fulfil revenue expenditure, which could be the worst form of it. At the initial stages of such investment long gestation period appears and this may not generate savings immediately, and there may be a gap between voluntary saving and investment. Secondly, if income distribution becomes more unequal because of deficit financing, then a rise in profit share will stimulate investment.
