Question

What is meant by ‘deficit financing’?

What is deficit financing?

Answer 1

Deficit financing is the use of public loans and the creation of new money to cover the budgetary deficit. It is the expenditure that exceeds current revenue and public borrowing. The government may cover the deficit by drawing down its accumulated cash reserve with the Reserve Bank of India (RBI), borrowing from the RBI, the RBI providing loans by printing more currency, or the government issuing new currency.

Answer 2

Often, a government’s budget is in deficit, meaning government expenditures exceed government revenues. The government needs to arrange financing to cover this deficit. Hence, the process of raising funds to cover the gap between the government’s revenues and expenditures is known as deficit financing. The funds to cover this deficit may be raised in two ways: borrowing from the general public and borrowing from the Central Bank, which may result in the printing of new currency notes.