DEFICIT FINANCING

When the Government exceeds its expenditure as compared to revenue receipts, it borrows from various sources. This borrowing is called Deficit Financing. Deficit financing is the result of unbalanced government budget. In India, the deficit financing resorts mainly to enable the government to obtain the necessary resources for the plan. Deficit financing takes places in various forms:

1. The Government draws upon the cash balances of the past.
2. The Government borrows from Central Bank against government securities.
3. The Government makes money by printing of paper currency and thus meets the expenditure over receipts.
4. The Government borrows externally.

The advanced countries consider deficit financing to be a useful instrument to increase the effective demand, whereas the underdeveloped countries take deficit financing as a mode to generate investments. Deficit financing acts as a catalyst for underdeveloped and developing countries. It not only accelerates economic growth but also helps in reconstructing the economy all over again. Deficit financing has both pros and cons in a developed nation as well as in an underdeveloped nation. Considering the underdeveloped countries, the following are few problems faced by them:

1. Growth rate of population is faster than the rate of economic growth
2. The sources of state revenue do not provide sufficient fund
3. Lack of initiative and entrepreneurial skills amongst the citizens
4. Less voluntary savings
5. Demonstration effect
6. Excess of evasion of taxes, etc.

With so many endless problems, no Government would like to raise its standard of living keeping its economic growth at stake. One can easily do it by raising the tax rates, channelizing the savings, etc., then probably the nation would not use deficit financing. Since, deficit financing is a sensitive tool; the state must use it wisely to uplift and develop the economy and to pull it out of depression.

Click here for government certification in Accounting, Banking & Finance