Measures to Reduce the Inflationary Potential of Deficit Financing

Measures to Reduce the Inflationary Potential of Deficit Financing What is deficit financing? When a ruling body uses us in excess revenue received by means of taxation as well as fees throughout the current fiscal year, it hits in to a deficit budg

Measures to Reduce the Inflationary Potential of Deficit Financing

What is deficit financing?

When a ruling body uses us in excess revenue received by means of taxation as well as fees throughout the current fiscal year, it hits in to a deficit budget. When such deficit budget is meet up by means of loans generally from the Reserve Bank of the nation and the general public and banks, it is known as deficit financing.

The following measures will minimize the inflationary potential of financing:

1.  Fiscal Policy. Through a proper disinflationary fiscal policy, the inflationary pressures generated by deficit financing can be controlled to some extent. This involves raising taxes on income and consumption and reduce non-essential government expenditure. Through various tax measures, the government can mop up a part of the increase in incomes generated by the development expenditure. All these measures will reduce the pressure of demand on the available resources.

2.  Monetary Policy. By adopting a restrictive monetary policy, non essential private investment can be kept under control, thereby releasing resources for the expansion of essential investment.

3.  Selective Controls. Through selective credit, physical and fiscal controls, the government can influence private investment and channelize it into desirable lines, e.g., scarce materials can be rationed, building activity can be controlled and controls imposed on capital issues by companies.

4.  Proper Allocation of Resources. All the above measures have for their aim the reduction of pressure of demand. But attempts should be simultaneously made to increase the supply of output of consumption goods. In this connection, a proper balance must be kept between agriculture and industry and heavy and light industries. Agriculture is the supplier of basic wage-good, e.g- food. Therefore, a programme of economic development which fails to lay proper emphasis on the increase in agricultural production must run into inflationary difficulties. Similarly, industries requiring small investment and maturing quickly should also receive their due emphasis.

5.  Developing an Import Surplus. The supply of goods can also be increased by incurring an import surplus. However, there is a limit to which a country can have an import surplus. This is limited by the availability of foreign exchange previously accumulated or by receiving fresh foreign loans.

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