Question

What role does deficit financing play in promoting economic development?

Answer 1

Numerous economists have suggested deficit financing as a practical way to fund development programs in developing nations and to quicken the pace of economic growth.

1. Raising Additional Resources: The government can swiftly raise funds to finance development through deficit financing. Enough funds cannot always be raised by internal and external borrowing, as well as taxes. It is challenging for the government to raise significant funds through taxes in a democratic nation like India. This is mostly because people’s low incomes make it difficult for them to pay taxes.
2. Generation of Saving: A covert and cunning way to raise money is through deficit financing. Despite being mandatory, taxes have a noticeable and tangible impact. It is challenging to raise taxes significantly in a democracy. Although borrowing is entirely optional, its use is restricted. Because it doesn’t directly harm the public, deficit funding doesn’t cause them to object.
3. Increase in Aggregate Demand/Additional Purchasing Power: Increased governmental spending brought about by deficit financing raises aggregate demand. People’s income and purchasing power rise as a result. Production, employment, and income all rise as a result of the increasing demand for goods and services.
4. Price Rise Self-destructive in the Long Run: The argument that price increases will ultimately be self-destructive is another defence of deficit finance. Prices do rise when the money supply expands as a result of deficit financing. However, price increases are just temporary. Prices may decrease as soon as development projects funded by deficit financing begin to produce goods.
5. Meeting Increased Demand for Money: The justification for deficit financing is that emerging nations like India need more funding to meet the increased demand for funds during economic development. As the economy develops, greater demand for money is created by increased monetisation and income levels.