Deficit Financing in India

Deficit Financing in India

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In a given year deficit occurs when liabilities surpass the assets, imports surpass exports, or expenses surpass revenues. Businesses and governments sometimes consciously course deficits in order to prop up growth in the future or in times of recession in the economy.

Types of Deficit in an Economy

Revenue deficit - It refers to the difference between the government's total revenue receipts and expenditures. Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts. OR Revenue Deficit = Total Revenue Expenditure – (Tax Revenue + Non-Tax Revenue)

Fiscal Deficit - Fiscal Deficit is defined as Revenue Expenditure + Capital Expenditure + Revenue Receipts + Capital Receipts excluding borrowings OR Fiscal Deficit is defined as Revenue Expenditure + Capital Expenditure + Tax Revenue + Non-Tax Revenue + Loan Recovery + Disinvestment. It is defined as the total borrowing requirement of the government. It is a sign that the government will have more debt to pay for interest and loans in the future. In the future, the government must repay the borrowed amount with interest. As a result, the government must either increase its borrowing from the public or increase its taxes to cover the interest and loan amount in the future.

Primary Deficit - The fiscal deficit less the interest payments on previous borrowings is the primary deficit. Essential Deficiency shows the acquiring necessities of the govt. for meeting expenses, interest not included.

Gross Primary Deficit - Fiscal Deficit minus Interest Paid Net Primary Deficit = Fiscal Deficit minus Interest Received minus Interest Paid This figure depicts the total amount of money that the central government must borrow.

Deficit Financing - The central government finances deficit in three ways. They are:

(a) Borrowing from Public and Foreign Governments

(b) Withdrawing Cash Balances from the Reserve Bank of India (R.B.I.)

(c) Borrowing from the Reserve Bank of India (R.B.I.)

Instead of borrowing from the R.B.I. or withdrawing cash balances from it, the government typically prefers to borrow from its citizens or foreign governments. The last two methods for supporting Deficiency increment the stock of cash. The expansion in supply of cash builds the costs in an economy. In contrast, borrowing money from the public domestically has no effect on prices because when the government borrows, the money held by the public is transferred to the government without changing the money supply. However, if the government borrowed money from other nations, the money supply would grow. The money supply is increased in the final two ways to finance the deficit. The amount of money that leaves the R.B.I. surges the money-supply within the economy as also driving the prices upward.