The government first estimates its expenditure and then generates revenue accordingly. When doing so, it usually plans more expenditure than revenue. This is good for the development of the country. To fill any gaps between its income and expenditure, the government raises loans in the Reserve Bank of India, withdraws
its cash reserves in the Reserve Bank of India, obtains loans from internal and external sources etc.
In developing countries, the expenditure of the governments is increasing more than the revenue. Hence, situations of deficit financing are cropping up. According to the definition of the Indian Planning Commission, deficit financing is “improving the net purchasing power of the economy through the budgetary operation of the government.” To put it briefly, deficit financing is when the government’s expenditure is more than its revenue. As a result, the developmental activities in the country increase and the amount
of money in circulation increases. Due to this, the purchasing power of the people improves. Deficit is indicated by the nagative sign (-).
There are four kinds of deficit financing:
Fiscal Deficit and