Deficit Financing in India

After reading this essay you will learn about deficit financing in India.

In a country like India, where resources mobilisation through taxa­tion is limited, and investment requirements for accelerating eco­nomic development is large, the method of deficit financing has be­come inevitable. It is believed that when there is large stock of ideal and unutilised resources, the adoption of deficit financing, for activa­tion of these resources will not generate inflationary pressure.


How­ever in India, deficit financing has resulted in inflationary financing. This is mainly due to insufficient use and improper diversion of re­sources raised through deficit financing to unproductive channels.

In the Indian context deficit financing is understood in the sense of budgetary deficits. This means excess of plan and non-plan ex­penditure over budgetary receipts on both revenue and capital ac­count. In Western countries deficit financing refers to the method of financing fiscal deficit. This fiscal deficit indicates budgetary deficit plus borrowing and other liabilities.

Indian economy has shown excessive dependence on deficit finance to meet budgetary deficits. This is because of the failure of the government to mobilise the required resources by way of taxa­tion and surplus from public enterprises, to check massive tax eva­sion and proliferation of black money and large volume of revenue lying as tax arrears on the one hand growing size of unproductive and non-development expenditure on the other.

The first five year plan was a modest one and provided for a modest deficit of Rs. 333 crores. This was about 17% of the total budget outlay.

Deficit financing during the first plan did not generate any inflationary pressure. In-spite of Rs. 333 crores of deficit financ­ing the first five years plan was able to generate reasonable growth with economic stability.

In the second five year plan deficit financing was the order of Rs. 954 crores. That is 20% of the total budget outlay. The volume of deficit financing increased to Rs 1133/- crores during the third plan.


However in terms of total budget outlay it was only 13.0 percent. However in the fourth plan period, the amount of deficit financing was to the extent of Rs. 2060/- crores, whereas the target amount was placed at Rs. 850 Crores.

The total deficit fi­nancing was Rs. 3560  crores against the total public outlay of Rs. 40712 crores during the fifth five year plan. Against a total outlay of Rs. 975000/- crores, sixth plan incurred a deficit financing of the tune of Rs. 15684 crores.

This is attributable to the overall rise in price and increases in the volume of public investment. In the seventh plan an amount of Rs 14000/- crores was spend as deficit financing and it further increased to Rs. 20000 crores in Eighth Plan period.

The increasing trend in deficit financing is attributed to the constituent increase in investment for development schemes and less realization of tax revenue and other ordinary source of revenue like profit of public enterprises. Although various plans provided for different amounts of deficit financing, the actual amount in-cured was larger and higher than what was stipulated.


Some peculiar characteristics of Indian economy tend to make deficit financing inflationary. Fac­tors like shortage of capital equipment high marginal propensity to consume inefficient economic Organisation etc. act as inhibiting fac­tors in the process of sound and stable economic growth.

More over a number of factors are responsible for the consistent increase in deficit of the government. During the past few decades the non-plan expenditure of the government has been increasing at a faster rate.

The resources available at the disposal of the government is quite inadequate to meet the growing non plan expenditure an account of increased salaries and allowance to employees, defence mainte­nance, administrative expenses etc. Low yield of tax revenue is an­other important factor contributing towards consistent increase in deficit.

The proportion of tax revenue to national income is very low in India. Hence for financing development plans, government is forced to depend on deficit financing. Hence we have to play safe with deficit financing.


The government should ensure that resources mobilized through deficit financing in channelized for capital forma­tion and economic development. The size of the deficit does not in any way provide a yard stick for measuring the effects of the budget on the economy. Inflationary pressure generated by deficit financing, to a large extend depends on the form of government expenditure.

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