Deficit Financing Final

8/8/2019 Deficit Financing Final

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Definition

Fiscal deficit is an economic phenomenon, wherethe Government's total expenditure surpasses therevenue generated. Deficit Financing refers to meansof financing this excess expenditure.


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W estern Context

Indian Context

C oncept & Meaning


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Deficit financing during war.

Deficit financing during depression.

Deficit financing and economic development.

Deficit Financing as an aid


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2003:FRBM was adopted

FRBM improved the transparency in budgetary policy

As a result fiscal deficit decreased to 7% of GDP

In 2007-2008 fiscal deficit was 5.5 %

Shot up to 8 % in 2008-2009


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2007-08(Cr)

45963

70926

24261

0000

14400

7,12,671

6

Employeecompensation

Subsidies

Pensions

Farm debt waiver

NREGS

Total expenditure

Fiscal deficit

2008-09(Cr)

70944

1,29,243

32,690

15,000

36,750

9,00,953

7.8

2009-10(Cr)

87581

1,11,276

34,980

15,000

39,100

10,20,838

6.9

Source-economic times 1 feb

G overnment Expendit u re


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Fiscal Deficit (as % of G DP)


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0

50000

100000

150000

200000

250000

300000

350000

1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09

Fiscal Deficit

FiscalDeficit

Source ministr of finance ovt. of india

Fiscal Deficit (in crores of Rs.)


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G overnments Reven u e

Revenue Receipts

Capital Receipts


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Reven u e Receipts

0

100000

200000

300000

400000

500000

600000

700000

1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09

R evenue receipts

Revenue receipts


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C apital Receipts

0

50000

100000

150000

200000

250000

300000

350000

400000

1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09

Capital R eceipts

Capital Receipts


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Revenue E xpenditure

Capital E xpenditure


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Reven u e Expendit u re

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09

R evenue Expenditure

Revenue Expenditure

Source: ministry of finance govt. of India


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C apital Expendit u re

0

20000

40000

60000

80000

100000

120000

140000

1990-91 2000-01 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08a 2008-09 2008-09

C apital Expenditure

Capital Expenditure



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Domestic So u rces

T axation

Public Borrowings

Government Savings

Printing Currency


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Sou rces

Income tax (9%)

Borrowings and other liabilities (34%)

Non-tax revenue (12%)

Service tax and other taxes (5%)Union Excise Duties (9%)

Customs (8%)

Non-debt capital receipts (1%)

Corporate tax (22%)


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A dditional So u rces

Disinvestment

3 G Auction


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4 1.5200 4 -05

38.22005-06

34 .62006-07

31.62007-08

34 .32008-09(RE)

36.72009-10(RE)

I nterest payments (as %of reven u e receipts)


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Foreign So u rces

Loans

Grants

Private Investments


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Deficit Financing and Inflation

Developed Country

Developing Country

Sudden rise in monetary incomes Investment on Capital Goods

Supply vs. Demand of Consumer Goods

Industries with long gestation periods

Velocity of circulation of money Credit Creation


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Deficit Financing as an A id

Investment in Consumer Goods

BoP Deficit as a counter measure

Controlled Liquidity

Inflation helps economic development

Savings in developed countries Capital formation in developing economies


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I mpact on Prices

First 5 year plan (1951-56) expansion in money supply shortof increase in output

Second Plan (1956-61) actual financing short of target

T hird Plan (1961-66) abnormalities ( 62 & 65 war), deficitfinancing more than double the target

Fourth Plan (1969-74) 71 war, Bangladesh refugees, oilprice hike, deficit financing about 2.5 times target

Post 1975, deficit financing has been in excess of targetleading to price rise


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E xtent of tolerance is called the safe limit of deficitfinancing

It is not possible to quantify it, but desirable to identifythe factors that affect it

Factors that affect deficit financing

factors related to demand for money and factors related to supply of money


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Factors A ffecting Safe Limit

T he supply elasticity of consumption goods in thecountry

Nature of government expenditure for which newmoney is created

If the foreign exchange reserves are increasing

T ime lag between the initial investment and the flow of final products


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Large speculative business community

G overnment implementation of its economic policies

Inflationary phase in the country

Rate of growth of population is high

Country's tax structure and the borrowing schemes


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In a developing economy

Rigidities in the tax system

All these factors exert their influence simultaneously

Change in the economic conditions of the country

Deficit Financing Final

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