UPSC Prelims 2013 Q44: Indian Economy – Fiscal Policy & Budget
In India, deficit financing is used for raising resources for
- (a) economic development
- (b) redemption of public debt
- (c) adjusting the balance of payments
- (d) reducing the foreign debt
Answer: (a) economic development
Explanation
Deficit financing in India
Deficit financing means the Government spends more than its receipts and covers the gap by borrowing or by printing money.
In India it was used to raise resources for economic development under the Five-Year Plans.
| Option | Verdict |
|---|---|
| (a) Economic development | Correct |
| (b) Redemption of public debt | Incorrect; it adds to debt |
| (c) Adjusting the balance of payments | Incorrect |
| (d) Reducing the foreign debt | Incorrect |
Ways of financing a deficit:
| Method | Detail |
|---|---|
| Borrowing from the RBI | Creates new money; ended by stopping ad hoc treasury bills in 1997 |
| Market borrowing | Selling Government securities |
| External borrowing | Loans from abroad |
Risk: too much deficit financing causes inflation.
Answer: (a) economic development.
Why each option is right or wrong
- (a) CORRECT. Deficit financing was used to raise resources for economic development.
- (b) Incorrect. It increases debt; it does not help in redemption of public debt.
- (c) Incorrect. It is not a tool for adjusting the balance of payments.
- (d) Incorrect. It does not help in reducing the foreign debt.
Key point
Deficit financing: spending beyond receipts, met by borrowing or new money; used for plan development; excess causes inflation.
Remember
Deficit financing = funds for development.
Common mistakes
- Thinking deficit financing reduces debt.
- Forgetting its link with inflation.
- Confusing a budget deficit with a balance of payments deficit.
Exam tip
A poor country with big plans borrows to build. That was the logic of deficit financing.
Sources
- NCERT Class XII — Introductory Macroeconomics, Ch 5 (Government Budget and the Economy)
- NCERT Class XI — Indian Economic Development (Indian Economy 1950-1990)