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
2

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.
3

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.
4

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