DEFICIT FINANCING

INTRODUCTION|MEANING|IMPORTANCE|EFFECTS

By,
Prathyusha Suresh T,
JKA22T62
INTRODUCTION
 Deficit financing is the budgetary situation where expenditure is higher than
the revenue. It is a practice adopted for financing the excess expenditure with
outside resources.
 Various indicators of deficit in the budget are:
  Budget deficit = total expenditure – total receipts
  Revenue deficit = revenue expenditure – revenue receipts
  Fiscal Deficit = total expenditure – total receipts except borrowings
  Primary Deficit = Fiscal deficit- interest payments
  Effective revenue Deficit-= Revenue Deficit – grants for the creation of
capital assets
  Monetized Fiscal Deficit = that part of the fiscal deficit covered by
borrowing from the RBI
MEANING

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.
IMPORTANCE
Remedy for depression - In developed countries deficit financing is used as an
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.
 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 plans.
 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.
 To overcome low tax receipts.
 To overcome the losses of public sector enterprises
 For implementing anti-poverty programmes.
EFFECTS OF DEFICIT
FINANCING
ECONOMIC EFFECTS OF DEFICIT FINANCING

Deficit financing has several economic effects which are

interrelated in many ways:
 Deficit financing and inflation
 Deficit financing and capital formation and economic
development
 Deficit financing and income distribution.
EFFECTS OF DEFICIT
FINANCING
ADVERSE EFFECTS OF DEFICIT FINANCING

Deficit financing has several adverse effects on economy. Important evil effects
of deficit financing are given below.
 Leads to inflation
 Adverse effect on saving
 Adverse effect on investment
 Inequality
 Problem of balance of payment
 Change in pattern of investment
CONCLUSION
 Deficit financing is inevitable in Least Development Countries. Much success
of it depends on how anti inflationary measures are employed to combat
inflation. Most of the disadvantages of deficit financing can be minimized if
inflation is kept within limit.
 And to keep inflation within a reasonable and tolerable level, deficit financing
must be kept within safe limit.
 It is an evil but a necessary one. Considering the needs of the economy, its
use cannot be discouraged. But considering the effects of deficit financing on
the economy, its use must be made limited. So, a compromise has to be
made so that the benefits of deficit financing are reaped too