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Sunday, June 24, 2018

Deficit Financing - Object of Deficit Financing

Meaning of Deficit Financing

The term Deficit financing or deficit spending is usually used to mean any government expenditure which is in excess of its current revenue. However, the term deficit financing carries different connotations in the western countries including the USA in India. In the western countries including USA Deficit financing implies an excess of expenditures incurred by the government over its current revenue.

Deficit Financing


The Deficit in the budget so incurred could be financing either through public borrowing through the creations of new currency by the government both the methods would result in deficit financing. Deficit financing in India sense may be said to occur when the budgetary deficit is financed by the government through the creation of new or additional currency.


Deficit financing Overview

The Deficit financing in India has been defined by the planning commission as the term Deficit financing is used to donate the direct addition to the gross national expenditure through the budget deficit budget whether the deficits are on revenue or capital accounts. In short, deficit financing in India sense involves the creation of new purchasing that is an issue of fresh currency by the government in order to meet the budget deficit.

The object of Deficit financing

  • To finance war expenditure
  • To promote economic development
  • To uplift the economy out of depression
  • To finance private expenditure

Effect of Deficit financing

The Effect of Deficit financing are as follows

Increase In Prize Level

The immediate effect of Deficit financing is a sharp rise in the general price level of the country through the creation of new money, Deficit financing, results are in an increase in the aggregate monitory demand for the existing supply of goods and services in the community. While aggregate monitory demand increases consequent upon Deficit financing, the supply of goods and services in the community does not increase in the same proportion. This produced an inevitable inflationary gap in the economy of a country, causing prices to higher levels.

Effect on Employment

Prof. J. M. Keynes advocated the use of deficit financing as a means of elimination mass unemployment in a developed country during the depression. During depression condition, deficit financing ensures additional purchasing power in the hands of people which becomes incentives for the producer. Producers go for more production and result in employment opportunities go on increasing.

Adverse effect on saving

Price level increase as a result of deficit financing which increases the consumption expenditure leaving fewer funds for savings.

Increase in capital formation

Deficit financing creates additional money supply in the economy which includes production and as result more capital formation takes place. 


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