the deliberate excess of expenditure over income through printing of currency notes or through borrowings
Western Approach - Financing of a
deliberately created gap between public revenue and expenditure or a budgetary deficit. This gap is filled up by government borrowings which include all the sources of public borrowings Deficit financing in Indian context occurs when there are budgetary deficits.
Budgetary deficit refers to the excess of total
expenditure (both revenue and capital) over total receipts (both revenue and capital). According to Indian budgetary documents government resorting to borrowing from the public and the commercial banks does not come under deficit financing
In the Indian context, public expenditure,
which is financed by borrowing from the public, commercial banks are excluded from deficit financing. While borrowing from the central bank of the country, withdrawal of accumulated cash balances and issue of new currency are included within its purview Deficit financing during war Deficit financing has its historical origin in war finance. At the time of war, almost every government has to spend more than its revenue receipts from taxes and borrowings. Government has to create new money in order to meet the requirements of war finance. Deficit financing during depression The use of deficit financing during times of depression to boost the economy got impetus during the great depression of the thirties During depression, government should resort to construction of public works wherein purchasing power would go into the hands of people and thereby demand would be stimulated. Deficit financing and economic development Deficit financing for development, like depression deficit financing, provides stimulus to economic growth by financing investment, employment and output in the economy. Govt. uses borrowed money for increase in social and economic infrastructure such as schools, hospitals, power projects, dams, canals and a host of other development programs, This helps in the improvement and productivity of various sectors of economy. This expenditure of Govt. increases money supply, which increases price level in the economy. Increases in prices, increases profit margins of industrialists, who in order to gain profit further accelerate their investment. New factories are established and capital formation increases. Govt. expenditure and private capital formation creates more jobs opportunities in the economy. Increase in employment increases demand for goods and services and on the other side it fosters saving as well, which again is utilized for further investment. Thus cycle of progress and prosperity keeps on moving ahead. Deficit financing has to be tolerated, at least in the developing economies, only to the extent it can promote capital formation and economic development. This extent of tolerance is called the safe limit of deficit financing.
Factors that affect deficit financing, can be
put under two categories : (a) factors related to demand for money and (b) factors related to supply of money. If the demand for money is low in the economy, the safe limit of deficit financing will be low. On the supply side of money, if due to some factors the supply of money or purchasing power with the public increases, other things being equal, it will have an inflationary tendency and the safe limit of deficit financing will be low. Safe limit depends on the nature of government expenditure for which new money is created, i.e., the purpose of deficit financing. If the newly created money is used for unproductive purposes, the use of deficit financing will be inflationary and the safe limit of deficit financing will be lower than if the newly created money is to be used for industrial development or for intensive farming. Time lag between the initial investment and the flow of final products also determines the safe limit of deficit financing.
If the rate of growth of population is high
then low deficit financing is good and vice versa.
The safe limit of deficit financing depends on
the supply elasticity of consumption goods in the country. The policy of deficit financing should be adopted as a last resort, after exhausting all other possible sources of development finance.
Investment should be channeled into those
areas where capital output ratio is low so that returns are quick and price rise is not provoked. Along with deficit financing, government should adopt policies of physical controls like price control and rationing etc.
Import policy should allow import of
necessary capital equipment for economic development and consumer goods required by the masses alone. Import of luxury and semi-luxury goods should be discouraged. Deficit financing and credit creation policies should be integrated in such a way that neither of the two sectors (public or private) is handicapped due to shortage of financial resources and, at the same time, inflation is also kept in check in the economy. Deficit Financing is the amount by which a government, private company, or individual's spending exceeds income over a particular period of time income through printing of currency notes or through borrowing, also called simply "deficit," or "budget deficit.
It Provides stimulus to economic growth by financing
investment, thereby generates income and employment in the economy through multiplier effects. ◦ Multiplier effect : The doctrine of multiplier states that any given increase in investment (private or government) will result in an increase in national income as a. multiple of the increase in investment. Deficit financing has proved to be conducive to economic development, especially in countries with acute shortage of Capital in breaking the vicious circle of poverty and uplifting the economic conditions.
It is not limited to government use.
Businesses of all sizes may choose to spend more money up front in hopes of generating funds to pay off the investment at a later date. It can be good or bad. ◦ If the government borrows (runs a deficit) to deal with a severe recession (or depression), to help self- defense, or spends on public investment (in infrastructure, education, basic research, or public health), the vast majority of economists would agree that the deficit is bearable, beneficial, and even necessary. ◦ If, on the other hand, the deficit finances wasteful expenditure or current consumption, most would recommend tax cuts to stimulate private investment, transfer cuts, and/or cuts in government purchases to balance the budget. The idea of resorting to deficit financing for economic development has remained very controversial. There are no two opinions regarding the evil consequences of deficit financing, when adopted carelessly for capital formation for economic development. But the problem is to chose between the two evils ◦ to adopt deficit financing for capital formation and face inflation or ◦ to go without development programmes due to insufficient of funds http:// www.google.com http://en.wikipedia.org http://www.investorwords.com Deficit financing and economic development in India By Manorma Hukku, Unit-14