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.
- 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.
- 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.