The traditional way of budgeting was to plan expenditure according to the resources that are available with the government. The notion of deficit financing is a recent development in fiscal management. The American Heritage Dictionary of Business Terms defines it as an exercise of raising funds by resorting to the sale of debt securities when income is less than the expenditure. Its unfavourable effect is that the interest rate increases because it takes away some share of private securities. Dr. V.K.R.V. Rao defined deficit finance as, “The financing of a deliberately created gap between public revenue and public expenditure or a budgetary expenditure or a budgetary deficit, the method of financing resorted to being borrowing or a type that results in a net addition to national outlay or aggregate expenditure”. Hence, it is implied from these two definitions that deficit financing is the addition of money supply to meet public expenditure. It can be resorted to by a public authority, a central, state or a local body to fill up the budgetary gap.
Deficit financing is seen through two approaches – the Western and the Indian. The Western approach emphasises on utilising the idle funds lying with the public through borrowing or from the Central Bank or even the commercial banks. It results in increasing employment and output. The Indian approach, on the other hand, borrows from the public as well as commercial banks. The borrowed funds fall under the capital account.
Need for Deficit Financing
The tool of deficit financing is used in the following four situations:
1. War: Deficit financing grew immensely during the Second World War and was used later to build defence equipment for security by nations. India presently allocates about 1.5 per cent of its budgetary allocations for defence which is shared by its three main wings of army, air force and the navy. Since defence equipment is very expensive and taxation is unable to meet its requirements, a public loan is floated to borrow to fund its needs.
2. Budget Deficit: In case of emergencies like disasters, deficit financing helps in bridging the gap in the revenue collection and public expenditure.
3. Recession: The problems in economic stabilisation have led the governments to devise the method of deficit financing. Over-taxation is not considered healthy for the economy while deficit financing can get the economy out of recession.
4. Economic Growth: An increase in funds with the expenditure gives an impetus to developmental activities which although it has an inflationary effect but it helps in capital formation. It results in economic growth of the nation.
Subcribe on Youtube - IGNOU SERVICE
For PDF copy of Solved Assignment
WhatsApp Us - 9113311883(Paid)
0 Comments
Please do not enter any Spam link in the comment box