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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