Question

What do you mean by deficit financing in the context of the Indian economy?

Answer 1

1. However, the definition of deficit financing has changed in India. It represents the difference between overall government spending and total revenue, which includes both current revenue and public borrowings.
2. Therefore, spending more than current income and governmental borrowings is referred to as deficit financing in India. The government might borrow money from the Reserve Bank of India or deplete its accumulated cash balances to make up the shortfall. The Reserve Bank of India's cash balances are withdrawn when the government depletes its accumulated cash balances, thereby expanding the money supply.
3. The Reserve Bank provides loans by printing more currency notes when the government borrows money from it. The RBI refers to this as demonetisation of the government budget deficit. Consequently, the money supply rises in both situations.