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Deficit Financing #DeficitFinancing

  1. External Aids
    •   Best money as a means to fulfil a government’s deficit requirements.
    •   They are free i.e. neither interest nor any repayments.
  2. External Borrowings

 External loans are considered an erosion in the nations sovereign decision making process but are considered better than the internal borrowings due to 2 reasons –

  •   Bring in foreign currency/hard currency which gives extra edge to the government spending as by this the government may fulfil inside and outside requirement.
  •   Preferred over the internal borrowings due to ‘crowding out effect’. If the government itself goes on borrowing from the banks of the country, the private sector gets crowded out.

3. Internal Borrowings

 Even though they lead to crowding out of private sector, they are relatively stable not affected by exchange rate.

4. Printing Currency

  •   Increases inflation proportionally because supply is same but demand for goods is increased as people have more money.
  •   Creates regular pressure on the government for upward revision in wages and salaries of government employees which increases the government expenditures necessitating further printing of currency and further inflation—a vicious cycle into which economies entangle themselves.

 

 

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