DMPQ-. What is deficit financing ? Explain how it effects India’s economy.

 Deficit financing is a practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds. Although budget deficits may occur for numerous reasons, the term usually refers to a conscious attempt to stimulate the economy by lowering tax rates or increasing government expenditures. The influence of government deficits upon a national economy may be very great. It is widely believed that a budget balanced over the span of a business cycle should replace the old ideal of an annually balanced budget. Some economists have abandoned the balanced budget concept entirely, considering it inadequate as a criterion of public policy.

The Finance Ministry has revised the fiscal deficit target of 9.5 per cent of gross domestic product (GDP) for the financial year 2021 against the earlier estimate of 3.5 per cent. The government has fixed the target to spend Rs 11.7 trillion in only three months in the current financial year, which ends on March 31. In the next financial year, net market borrowing would be Rs 9.17 lakh crore to meet the fiscal deficit of 6.5 per cent of GDP.

Printing new currency notes increases the flow of money in the economy. This leads to increase in inflationary pressures which leads to rise of prices of goods and services in the country. Deficit financing is inherently inflationary. Since deficit financing raises aggregate expenditure and, hence, increases aggregate demand, the danger of inflation looms large.

Retail inflation in India already shot up to a five-and-a-half-year high of 7.35% in December, breaching the central bank’s tolerance limit of 6% and confirming fears raised by some economists that India is entering a phase of slow growth and rising prices.

 

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