The document discusses fiscal imbalances and deficit financing, outlining key concepts such as budget balance, fiscal deficit, and revenue spending in government budgets. It highlights causes of fiscal deficits, including poor public sector performance and excessive borrowing, and the consequences like inflation and investment issues. The document also covers the objectives and limitations of deficit financing, particularly in the context of economic development in underdeveloped countries like India.

1. Fiscal Imbalance and Deficit Financing
Presented By:
Animesh Arya
Harshit Jalan

2. Budget and Budget Balance (BBB)
A government budget is a financial statement
presenting the government’s proposed revenues and
spending for a financial year.
Budget balance refers to the difference between total
revenues and total expenditure of a government.
Surplus: TR > TE
Deficit : TR < TE

3. Fiscal Imbalance
Fiscal Imbalance refers to a situation when
the total expenditure of the government
and total receipts (excluding borrowing) are
not equal.
There can be two situations:
Fiscal Deficit
Fiscal Surplus

4. Fiscal Deficit

5. Fiscal Deficit as a percentage of GDP
GDP is the market value of all final goods
and services produced in a country in a year.
The GDP number includes both government
spending and private consumption of goods
and services.

6. Fiscal Deficit in GDP

7. Elements of Fiscal Deficit
Revenue Deficit
Revenue Deficit refers to
difference between revenue
expenditure and revenue
receipts.
This does not contains those
expenditure and receipts
which effects liabilities and
capital.
Capital Expenditure
Capital expenditure is the amount
a company spends on buying
fixed assets, other than as part
of acquisitions.
Capital expenditure is made by
the establishment to
consistently maintain the
operational activities.

9. Capital Expenditure of Centre in India
Particula
rs
2006-
07
2007-
08
2008-
09
2009-
10
2010-
11
2011-
12
A. NON
DEVELOPMETAL
EXPENDITURE
36690.69 41819 47379.08 62383.11 70106.40 90132.17
B.DEVELOP
METAL
EXPENDITU
RE
22602.49 65122.14 30110.85 38302.33 66990.08 62051.95
C. LOANS
AND
EXPENDITU
RE
8672.22 1385.55 6747.62 7034.35 16801.46 2130.22
)
67965.4 108326.6
9
84237.55 107719.79 153897.9
4
154314.3
4

10. Causes of Fiscal Deficit
Payment of Interest
Poor Performance of Public Sector
Excessive Government Borrowing
Tax Evasion
Increase in Subsidies
Defense Expenditure

11. Causes
Payment of Interest
One of the major components of
government expenditure is the
interest payment both on
domestic loans and foreign
loans. The government debt
has increased considerably
over the years. This has
resulted in increased interest
burden on the government
Poor Performance of Public
Sector
• Political interference
• Inefficiency and corruption
of management
• Lack of professionalism
• Surplus staff

12. Causes
Excessive Government
borrowings
The internal and external debt
of the government has
increased considerably
during the past few
decades. Due to the debts;
the government has to incur
high expenditure in form of
interest payments.
Tax Evasion
Indian tax system is made up
of complex procedures with
numerous exemptions.
Corruptions is rampant at all
levels, which leads to the
fiscal imbalance.

13. Causes
Increase in Subsidies
The major subsidies provided
by the Central Government
of India have increased over
the years resulting in fiscal
imbalance period .
Defense Expenditure
The government has limited
scope to reduce defense
budget due to security
problems across the Indian
borders.

14. Consequences
Debt. Trap
Cut in Capital Expenditure
No increase in expenditure on health and Education
High interest rates
Leads to inflation
Discourages foreign investment
Extra burden of Interest Payment

15. Article from Economic Times dated 14th November, 2012

16. Fiscal Policy to control deficit
The fiscal policy is concerned with the raising of government revenue
and incurring of government expenditure.
To generate revenue and to incur expenditure, the government frames
a policy called budgetary policy or fiscal policy. So, the fiscal policy is
concerned with government expenditure and government revenue.
Fiscal policy deals with the taxation and expenditure decisions of the
government. Fiscal policy is composed of several parts.
These include, tax policy, expenditure policy, investment or
disinvestment strategies and debt or surplus management.
Fiscal policy is an important constituent of the overall economic
framework of a country.

17. Deficit Financing
Deficit financing is defined as financing the budgetary
deficit through public loans.
Deficit financing is an approach to money
management that involves spending more money
than is collected during the same period

18. Objectives of Deficit Financing
• To finance war.
• Economic development.
• Mobilization of resources.
• To granting subsidies.
• To increase in aggregate demand.
• For payment of interest.

19. Objectives
To Finance War
Deficit financing has generally
being used as a method of
financing war expenditure.
During the war time through
normal methods of raising
resources. It becomes difficult
to mobilize adequate
resources. Therefore
government has to adopt
deficit financing.
Economic Development
The main objective of deficit
financing in an under
developed country like India is
to promote economic
development The use of
deficit financing in fact
becomes essential for
financing the development
plan especially in
underdeveloped countries.

20. Objectives
Mobilization of resources
Deficit financing is also used
for the mobilization of
surplus, ideal and unutilized
resources in the country
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.

21. Objectives
To increase aggregate demand
Deficit financing loads to increase
in aggregate demand through
increased public expenditure.
This increase the income and
purchasing power of the
people as a consequence
there is an increase availability
of goods and services and the
production and employment
level also increase.
Payment of Loans
Loan which are taken by the govt.
are supposed to be repaid
with their interest for that
government needs money
deficit financing is an
important tool to get the
income for the repayment of
loan along with the interest.

22. Adverse effect of deficit financing
• Leads to inflation.
• Adverse effect on saving.
• Inequality.
• Adverse effect on investment.
• Problem of balance of payment.
• Change in pattern of investment.

23. Effects
Leads to inflation
Deficit financing may lead to
inflation. Due to deficit
financing money supply
increases & the purchasing
power of the people also
increase which increases
the aggregate demand and
the prices also increase.
Adverse effect on savings
Deficit financing leads to
inflation and inflation
affects the habit of
voluntary saving adversely.
Infect it is not possible for
the people to maintain the
previous rate of saving in
the state of rising prices.

24. Effects
Inequality
In case of deficit financing income
distribution becomes unequal.
During deficit financing
deflationary pressure can be seen
on the economy which make the
rich richer and the poor, poorer.
The fix wage earners are badly
effected and their standard of
living detoriates thus no gap b/w
rich & poor increases.
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 Labor and creates
uncertainty in the business which
a decreases the level of
investment of the country.

25. Effects
Problem in BOP
Deficit financing leads to inflation. A
high price level as compared to
other countries will make the
exports more expensive and thus
they start declining. On the other
hand rise in domestic income and
price may encourage people to
import more commodities from
abroad. This will create a deficit
in balance of payment and the
balance of payment will become
unfavorable.
Change in pattern of investment
Deficit financing leads to
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.

26. Limitations 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.

27. Lets recall
by a video

29. Is deficit financing inflationary??????
Deficit financing may not necessarily be inflationary there are certain
conditions under which deficit financing may not lead to inflation. With
increase in money supply due to deficit financing prices do rise but rise
in price will only be temporary for about a period. As flow of goods and
services increase prices will began to fall. deficit financing is an
important device for financing development plans for underdeveloped
countries and accelerate their rate of economic development. But If
deficit financing is not kept with in limits It may give rise to prices,
distorted investment and unequal and unjust distribution of income.
therefore it is essential that deficit financing is kept within limits and its
impact on prices and costs are softened through various controls.