Deficit Financing – Meaning, Objectives, Techniques

Meaning of Deficit Financing

Deficit Financing may be simply defined as the excess of expenditure over and above the total income of the Government.

The term “Budgetary deficit” can be defined in two ways. –

  1. One from the perspective of advanced countries like USA – Budgetary deficit is the loan financing of all excess government expenditure over its revenue.

  2. Developing countries like India – Budgetary deficit is the net increase in the treasuring bills and withdrawal of cash balances.

In western countries any expenditure of the government over and above its current income is a deficit and is financed through deficit financing.  Even when the budget gap is covered through loans, from the public and commercial banks, there is deficit financing as loans from public and commercial banks are not considered as income of the government.  Hence there is no difference between Deficit Financing and Budgetary deficit.

However, In developing countries where banking infrastructure is not fully developed, deficits in the budget are financed through borrowings from the Central bank (RBI in India) on creation of new money.  The government sells securities to the central bank on behalf of which the central bank prints paper currency.  Hence deficit financing results in increase of total money supply in an economy.

According to V.K.R.V. Rao, “The financing of a deliberately created gap between public expenditure and public borrowings is of a type that results in a net addition to national outlay or aggregate expenditure.”

According to planning commission – The term deficit financing is used to devote the direct addition to gross national expenditure through the budget deficits in revenue and capital accounts.  The overall budgetary deficit comprises of deficits in revenue and capital accounts of the government.

Revenue Account – It shows the result of current operations of the government.  If there is a deficit in the revenue receipts by way on tax and non tax revenue and expenditure of the government it is said to be a deficit which is carried to the capital account.

Capital Account – The deficit on capital account is the excess of receipts from public borrowings, external loans, savings, P.F. over expenditure such as capital outlay, loans and advances, repayment of debt etc.

The deficit or surplus in both the accounts is combined to express the overall position either surplus or deficit i.e. budgetary deficit. The method of financing this deficit is know as deficit financing.

Objectives of Deficit Financing

  1. To finance expenditure on war

  2. To remove depression by raising the level of output and employment

  3. To mobilize adequate resources for financing development plans

  4. To mobilize idle or surplus cash and underutilized resources of the country.

Techniques Deficit Financing

Deficit Financing in western countries

It is done through market borrowings(public and commercial banks).

Deficit Financing in India 

It is done through:

  1. Creation of money i.e. borrowing from central bank

  2. Running down the cash balances of the government

  3. Issuing new currency

  4. Raise receipts by additional tax revenue

  5. Raising net returns from government services

  6. Raising domestic loans

  7. Increasing the volume of foreign loans for securing additional domes receipts.

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