Deficit Financing and Economic Development

Deficit Financing and Economic Development Nowadays, deficit financing is increasingly being used as an instrument of economic development in under-developed countries like India. We know that the basic problem confronting these nations is that po

Deficit Financing and Economic Development

Nowadays, deficit financing is increasingly being used as an instrument of economic development in under-developed countries like India. We know that the basic problem confronting these nations is that population growing much faster than the rate of capital formation. If these countries are to provide full employment to their labor force, they need huge amounts of capital. Unlike the advanced economies, the problem facing under-developed countries is not one of deficiency of effective demand but lack of sufficient capital.

This basic problem can be solved only by increasing the rate of investment. This requires additional resources and in the absence of sufficient foreign aid, they can come out only through increased domestic savings and these being channelized along productive lines. One way of increasing domestic savings is through additional voluntary efforts on the part of the public. These savings are then utilized through the national small savings schemes to add to the resources available to the government.

But in a country, where a majority of people are living on the subsistence level, the margin between income and consumption is very low so that voluntary savings, howsoever welcome, cannot by themselves provide sufficient resources for development. The government may also attempt to increase the volume of resources by additional taxes. During the last few years, taxes have been increased in our country to find resources for development activity. Yet because of extreme poverty of die great mass of the people, additional taxation beyond a point raises difficult problems, beeneconomic and political. Therefore, in their anxiety to implement development schemes, the governments are com­pelled to resort to deficit financing.

As for the effects of deficit financing, when used for economic development, in the earlier stages of development, the inflationary danger is very real indeed. This is because of the urgent need to invest large sums in the creation of an adequate system of transport and communications. Besides, owing to political considerations, large outlays are incurred on social services like education, public health, medical aid and schemes of social welfare. Such investments generate demand like any other investment outlay, yet they do not directly add to the supply of consumption goods.

Similarly, if sufficient additional supply of consumers' goods can be made available with the help of additional investment, once again there need be no inflationary pressures and supply and demand may be in equilibrium at a higher level. However, if for various reasons supply cannot be increased rapidly and sufficiently, the pressure of demand may lead to an inflationary rise in prices.

We have thus seen that deficit financing has a specific position in development finance. But it is advantageous to keep it inside secure perimeters. The extent of deficit financing depends on our capability to manage pressures of inflammation by maintaining demand in check as well as by simultaneous increase in production.

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