Deficit financing is a method of meeting government deficits through the creation of new money. The deficit is the gap caused by the excess of government expenditure over its receipts. The expenditure includes disbursement on revenue as well as on capital account.
Advantages of Deficit
Financing: When the Government resorts to deficit financing, it usually borrows
from the Central Bank. The interest paid to the Central Bank actually comes
back to the Government in the form of profits. Through deficit financing,
resources are used much earlier than they can be otherwise. The development is
accelerated. This technique enables the Government to get resources without
much opposition.
The defects of deficit
financing are: (i) It leads to increase in inflationary rise of prices of goods
and services in the country. (ii) Inflationary forces created by deficit
financing are reinforced by increased credit credition by banks. (iii) Investment
caused by inflation may not be of the pattern sought under the plan. It
normally changed. (iv) If as a result of deficit financing inflation goes too
far, it becomes self-defeating.