How to reduce inflationary pressure of deficit financing? Advertisements: Lately, the under-developed countries have increasingly realised its potentialities for adding Jo the resources available for development. If in a situation of demand-induced inflation as a monetary phenomenon, there is a growing anticipation that the prices will keep on rising still further with added momentum, that may force the income-earners to dissave and to store up the necessities for life. It has its adverse effect on economy. Economics editor David Wessel of the Wall Street Journal points out that while short-term deficit spending may be good for creating growth in a sluggish or shrinking economy, habitual deficit spending is unsustainable and eventually will cause a market crash, at which point the indebted government will no longer be able to borrow money and will be forced to reduce spending. However, deficit financing helps to a certain extent only and beyond that it may cause havoc. This shows expenditure on interest payments exceeded borrowing by the Government. The proportion of tax revenue to national income is very low in India.
For granting subsidies :- In a country like India government grants subsidies to the producers to encourage them to produce a particular type of commodity, granting subsidies is a very costly affair which we cannot meet with the regular income this deficit financing becomes must for it. This, however, should only be seen as a short-term stimulus. The following table indicates the magnitude of revenue deficit, budgetary deficit, gross fiscal deficit, primary deficit and actual monetized deficit or deficit financing from 1989-90 to 1996-1997. Since the shortfall in receipts over expenditure must be covered through borrowing, therefore, Gross Fiscal Deficit, gives the overall borrowing requirements of the government over a given financial year. Problem of balance of payment :- Deficit financing leads to inflation. The total deficit financing was Rs. Thus a vicious circle of rising price level and increased cost sets in.
Selon les estimations, le Gabon accuserait un dficit de 200 000 logements, dont. This has bad consequences for the economy. Utilized and underutilized resources can be build up with the help of this policy. The main reasons for using this policy are as under : 1. As a result, the government finds this measure handy.
To mobilize resources to finance massive plan expenditure If the usual sources of finance are, thus, inadequate for meeting public expenditure, a government may resort to deficit financing. It is a conclusion to which a good Keynesian can easily subscribe. In India, and other developing countries, the term deficit financing is explained in a restricted sense. Previous research has mainly focused on the impact of Chinas and Indias rapid growth on the. Similarly, public borrowing is also insufficient to meet the expenses of the state.
However, it is difficult to increase the supply of food items in the short run. In order to bring the economy to the right track the government of India has become successful to reduce these deficits in 2007-2008 budget proposals. A high price level as compared to other countries will make the exports more expensive and thus they start declining. The consumption incorporates dispensing on income and also on capital record. Deficit financing allows the state to undertake activities which, otherwise, would be beyond its financial capacity. Hence the fiscal deficit is the ideal indicator of deficit financing.
In other words, there are various purposes of deficit financing. According to him, deficit financing in India has led to an increase in current expenditure and has hardly served the purpose of investment. If idle resources including idle manpower are brought into productive uses, deficit financing may provide opportunities for gainful employment. 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 iv. We specialize in Text books, Guides, Question Banks, Model Specimen Papers and Ten Years Solved Papers for the students appearing for I. In India, a large deficit in the capital account is mostly responsible for budgetary deficits in India. Much success of it depends on how anti-inflationary measures are employed to combat inflation.
During inflation prices rise and reach to a very high level in that case people instead of indulging into productive activities they start doing speculative activities. That is to say, whether deficit financing is conducive to a transfer of real resources from consumption to investment. Financing the budget by issuing new money through borrowing from the Reserve Bank against securities in the new terminology is called monetisation of fiscal deficit. On the contrary, resources mobilized through deficit financing get diverted from civil to military production, thereby leading to a shortage of consumer goods. Amadou, I The High Cost of High Finance G. In India, the government began to report the fiscal deficit only after 1991.
For example, public borrowing only means addition to the financial burden of the government and the pubicin terms of debt servicing or payment of interest on public debt. However, the multiplier effect of deficit financing in poor countries must be weaker even if these countries exhibit underemployment of resources. By deficit financing we today mean financing of fiscal deficit. In addition, in many less-developed countries, budget surpluses may be desirable in themselves as a way of encouraging private saving. The financing of growing deficits led to an immense increase in public debt and other liabilities.
In India, and in other developing countries, the term deficit financing is interpreted in a restricted sense. Where capital markets are undeveloped, deficit financing may place the government in to foreign creditors. Adverse effect on Investment ;- deficit financing effects investment adversely when there is inflation in the economy trade unions make demand for higher wages for that they go for strikes and lock outs which decreases the efficiency of Labour and creates uncertainty in the business which a decreases the level of investment of the country. To them a country needs enormous resources to achieve a higher rate of growth. The fiscal deficit represents borrowing by the government. As a source of finance, tax-revenue is highly inelastic in the poor countries. Adverse effect on saving Deficit financing leads to inflation and inflation affects the habit of voluntary saving adversely.