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Deficit Financing, Various deficit financing in India

Meaning:

Deficit financing refers to the practice of covering the gap between a government’s expenditure and revenue by borrowing or creating new money (monetization). It is a tool used by governments to boost economic activity, especially during times of recession or economic stagnation. This method involves borrowing from internal or external sources or printing new currency through the central bank. While it stimulates demand and promotes development, excessive reliance on deficit financing can lead to inflation and fiscal instability.

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Types of Deficit Financing in India:

1. Borrowing from the Public:

   • The government issues bonds and securities to the public, financial institutions, and banks to raise funds for its expenditure.

2. External Borrowing:

   • Loans and grants from international institutions (e.g., World Bank, IMF) or foreign governments are used for developmental projects.

3. Monetization of Debt:

   • The Reserve Bank of India (RBI) directly funds the government by printing money or purchasing government securities. Although discouraged, it was commonly used in the past.

4. Market Borrowing:

   • The government borrows from domestic financial markets through instruments like treasury bills and long-term government bonds.

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Significance in India:

Deficit financing has been vital for funding India’s development programs, building infrastructure, and reviving the economy during downturns, such as after the COVID-19 pandemic. However, it is managed cautiously to avoid inflationary pressures and rising debt-to-GDP ratios. Balancing deficit financing is crucial for sustainable growth.

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