The deficit is the gap caused by the excess of government expenditure over its receipts, so to fulfill this gap by borrowing/creating new money is known as Deficit Financing. Under this system, the government gets only temporary loans to overcome its mismatch between expenditure and receipts.
The demand of the government on account of deficit financing is met by taxation and borrowing money from public bodies. Generally, Government used to borrow money from Reserve Bank of India.
Advantages of Deficit Financing:-
- The development speed is accelerated.
- Interest paid to RBI comes back in the form of profits.
- It leads to rise in the price of goods and services in the country.
- Inflation resulted from the deficit financing becomes self defeating.
- The amount of FDI in the country’s market gets affected.