Deficit Financing

Deficit Financing refers to a situation where government expenditures are more than their revenues
which leads to making up for these differences either by borrowing or by minting new funds by the
government.

Need for Deficit Financing

Higher economic growth is a priority for developing nations like India. It takes money for high
economic growth. The government is responsible for raising money because the private sector is
reluctant to make significant investments.
Many times, neither tax nor non-tax revenues are able to raise enough money to cover the
expenditures.

Drawback of Deficit Financing

Printing new currency notes increases the flow of money in the economy. This causes inflationary
pressures to rise, which raises prices for products and services across the nation. Inflation is
necessarily a result of deficit finance. Since raising aggregate expenditure through deficit financing
also boosts aggregate demand, inflation is a serious concern.
Also, Individuals with fixed sources of income are not benefited and this can lead to income
disparity. Individuals’ purchasing power decreases as inflation take place more than the increase in
the income of the individual.

Conclusion

With adequate anti-inflation measures, deficit financing can be a success. It is an unavoidable

method of finance generation and therefore should be undertaken with other necessary measures.