The document discusses deficit financing, which occurs when a government's expenditures exceed its revenues and the difference is covered by borrowing. Deficit financing is often used during wars, economic depressions, and periods of economic development to stimulate the economy. However, deficit financing also carries risks like higher interest payments, inflation, and limitations on using debt for productive investments. The document advocates for prudent fiscal management to reduce deficits and cut non-essential spending in order to address financial crises.

1. Deficit Financing is
Bad Economics
But
Good Politics
Col Dinesh Kumar (11214)
&
Lt. Col I.K. Lal (11219)

2. • Deficit financing is resorted to during
three different situations :-
• During War
• During Depression
• During Economic Development
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3. Deficit Financing
• Deficit financing occurs when there are
budgetary deficits.
• Budgetary Deficit is excess of total
expenditure both revenue and capital
over total receipts.
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4. • Besides taxation, the government’s other
major revenue source is borrowing.
• Deficit Financing refers to financing the
difference of expenditure over revenue
through borrowings.
• Higher deficit implies higher borrowings
and thus higher interest payments.
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5. 05/07/12

6. • Deficits have generally been the rule
(although there was a surplus from 1999
to 2000).
• Deficit (as fraction of GDP) was highest in
mid-1980s.
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7. Deficit Financing And Inflation
• Deficit financing creates monetary
incomes and demand for goods and
services increases.
• Though there is increased demand,
availability of consumer goods takes time
& prices rise.
• Also increase in money supply lead to
credit creation which aggravates
inflationary conditions. 7

8. Price Rise
• There is a close relationship between rate
of increase in prices & growth in money
supply.
• Prices have tendency to rise at every
successive increase in money supply.
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9. Limitation of Deficit Financing
• Deficit financing is inevitable under
planned economic development to
activate unutilized resources or step up
tempo of economic process.
• It is necessary to the extent it can
promote capital formation and economic
development.
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10. PATTERN OF DEFICIT FINANCING
• Gross Fiscal Deficit comprises of revenue &
capital deficit.
• Revenue deficit has shown continuous increasing
trend.
• Almost 60% of deficit is due to non plan
expenditure.
(i) Interest payment
(ii) Defence
(iii)Subsidies & inefficient PSUs 05/07/12

11. HEAVY INTREST BURDEN
• Continuous increase in revenue deficit depicts
continuous deterioration in the fiscal situation.
• Considerable part of net borrowings is utilized
simply for payment of interest.
• Public borrowings not being used for productive
investment but only for consumption
expenditure.
• It further widens the gap between net revenue &
net expenditure.
05/07/12

12. WAY OUT OF FINANCIAL CRISIS
• Prudent fiscal management is need of
the hour.
• Reduce growth of revenue expenditure
by cutting down subsidies, introducing
agriculture income tax, etc.
05/07/12

13. GOOD POLITICS MEANS
BAD ECONOMICS
Hence, we have
• Fiscal profligacy in place of prudence.
• Policy paralyses
• Food security act instead of subsidies
• Concern of political India – maintain fuel subsidy,
announce populist schemes
• Concern of productive India – steep decline of
rupee, fiscal deficit BoP crunch, retrospective tax
steady decline in GDP growth.

14. Thank you