defici final

8/8/2019 Defici Final

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Presented By-

Ankit Bansal

Jasleen KaurAshish Joshi

Bhupendra Khatri

Smita Saxena

Ram Go al Yadav


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` Deficit financing refers to means of financing thedeliberate excess of expenditure over incomethrough printing of currency notes or throughborrowings

` Western Approach - Financing of a deliberatelycreated gap between public revenue andexpenditure or a budgetary deficit. This gap is

filled up by government borrowings which includeall the sources of public borrowings


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` Deficit financing in Indian context occurs when

there are budgetary deficits.

` Budgetary deficit refers to the excess of totalexpenditure (both revenue and capital) over total

receipts (both revenue and capital).


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` 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.


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` While borrowing from the central bank of the

country, withdrawal of accumulated cash balances

and issue of new currency are included within its

purview


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` Deficit financing during war

` Deficit financing has its historical origin in war

finance.

` At the time of war, almost every government hasto 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.


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` 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.


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` Deficit financing and economic development

` Deficit financing for development, like depression

deficit financing, provides stimulus to economic

growth by financing investment, employment andoutput in the economy.


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` 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.


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` 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 furtheraccelerate their investment.

` New factories are established and capital

formation increases. Govt. expenditure and private

capital formation creates more jobs opportunitiesin the economy.


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` 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.


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` Deficit financing has to be tolerated, at least in thedeveloping 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.


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` 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 powerwith the public increases, other things being equal,

it will have an inflationary tendency and the safe

limit of deficit financing will be low.


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` 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 forunproductive 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 orfor intensive farming.


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` Time lag between the initial investment and theflow of final products also determines the safe limitof deficit financing.

` If the rate of growth of population is high then lowdeficit financing is good and vice versa.

` The safe limit of deficit financing depends on the

supply elasticity of consumption goods in thecountry.


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` 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.


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` 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 bediscouraged.


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` 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 sametime, inflation is also kept in check in the economy.


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` 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 anygiven increase in investment (private or government) will

result in an increase in national income as a. multiple of the

increase in investment.


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` Deficit financing has proved to be conducive to

economic development, especially in countries

with acute shortage of Capital in breaking thevicious circle of poverty and uplifting the

economic conditions.

` It is not limited to government use. Businessesof all sizes may choose to spend more money

up front in hopes of generating funds to pay off

the investment at a later date.


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` 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, andeven 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.


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` The idea of resorting to deficit financing for economic

development has remained very controversial. There are

no two opinions regarding the evil consequences ofdeficit 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 andface inflation or

to go without development programmes due to

insufficient of funds


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` http:// www.google.com

` http://en.wikipedia.org

` http://www.investorwords.com` Deficit financing and economic development in

India By Manorma Hukku, Unit-14

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