Deficit Financing practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or printing new money.

 

Issues:

 

  • Major issue being that of increased Fiscal Deficit.
  • Increased fiscal deficit makes government spending more volatile.
  • High Fiscal Deficit can lead downgrading by rating agencies, this leads higher cost of borrowing.
  • Higher interest rates affects borrowing by private businesses also causing negative effects for economic growth.
  • High Fiscal Deficit countries are avoided by foreign investors, reduced investments leads to reduced economic growth, leading to lesser tax resources.
  • Funding of deficit by printing more money would lead to high inflation.

 

So, best way to finance higher spending is by strengthening revenue generation and pursuing fiscal consolidation.

 

Suggestions:

 

  • N.K. Singh Committee recommendations should be implemented.
  • Expenditure should be rationalized
  • Direct tax base should be widened, overall tax system needs simplification.
  • Corruption and other black money generation activities should be curbed.
  • Measures should be taken to promote formalization of economy and promotion of organized sector area over unorganized sector.
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