Q. In India, deficit financing is used for raising resources for

  • Economic development
  • Redemption of public debt
  • Adjusting the balance of payments
  • Reducing the foreign debt

Answer: (a) Economic development

Deficit financing:
  • Deficit financing is nothing but financing the budget deficit incurred due to excess government expenditures. 
    • It means generating funds to finance the deficit which results from excess expenditure over revenue. The gap is being covered by borrowing from the public by the sale of bonds or by printing new money.
  • Deficit financing is a necessary evil in a welfare state as the states often fail to generate tax revenue which is sufficient enough to take care of the expenditure of the state.
    • The basic intention behind deficit financing is to provide the necessary impetus to economic growth by artificial means.
  • Means of Deficit Financing:
    • External Aid: This is the best way to finance the deficit even if they are coming with soft interest rates.
    • External Borrowings: This is the next best way to manage the fiscal deficit with the condition that they are coming with a cheap rate of interest and are of long term.
    • Internal Borrowings: It is the third best way to finance the deficit. But it hampers the investment prospects of the government and the public sector.
    • Printing Currency: It is the last resort to finance the deficit and should be used only in exceptional circumstances. Its negative effects on the economy are: it increases inflation proportionally and it also increases pressure on the government for increasing wages and salaries of government employees-ultimately increasing government expenditure.
  • Purpose of Deficit Financing
    • To finance defence expenditures during war
    • To lift the economy out of depression so that incomes, employment, invest­ment, etc. all rise
    • To activate idle resources as well as divert resources from unproductive sectors to productive sectors with the objective of increasing national income and, hence, higher economic growth
    • To raise capital formation by mobilizing forced savings made through deficit financing
    • To mobilize resources to finance massive plan expenditure