For instance, Herbert Hoover battled the Great Depression with a 50 percent-plus increase in government and immense public works projects during his four years as President from 1928 and 1932. That is why it is the most popular method of financing in developing countries. It is, thus, accepted that deficit financing, many a time, is inevitable, but it must be kept within limits. Today the most of developing countries also offered various incentives to the foreigners to increase the rate of investment in their country. The essence of such a policy lies therefore in governments spending; in excess of the revenue it receives in the shape of the taxes earnings of state enterprises, loans from public deposits and funds and other miscellaneous sources. This results in more incomes and employment in the economy.
The overall budgetary deficit comprises of deficits in revenue and capital accounts of the government. Ultimately, excess dose of deficit financing leading to inflationary rise in prices will exacerbate income inequality. Utilized and underutilized resources can be build up with the help of this policy. Lack of Capital :- The less developing countries are facing the problem of capital shortage. Deficit Financing :- The poor countries commonly use this source to increase the rate of investment in the country. Deficit financing and capital formation and economic development iii.
To them a country needs enormous resources to achieve a higher rate of growth. Suitable environment is also compulsory for capital formation. In such a situation, if the government resorts to deficit financing it will only help to increase employment, output and investment. Though there are objections to this alternative stating that it is basically inflationary, supporters argue the other way. It is true that deficit financing is self-defeating in nature as it tends to generate inflationary forces in the economy.
Again, a persistent deficit financing policy would soon directly lead to inflationary price rise. Much success of it depends on how anti-inflationary measures are employed to combat inflation. Saving propensities of the former are considerably higher. Lewis visualizes a three stage impact of deficit financing in an economy. The financial strength of the government is determinable if deficit financing is made. They increase the effective demand and adopt various measures to reduce the inflationary pressure. Where capital markets are undeveloped, deficit financing may place the government in to foreign creditors.
Therefore Keynes suggested public expenditure, financed through deficit financing, as an instrument to increase effective demand and remove unemployment during dispersion. The extent of deficit financing also depends upon the efficacy of regulatory devices in the economic system. Above all, governments in these countries are rather hesitant to impose newer taxes for the fear of losing popularity. Most of developing countries are also using these weapons against the inflationary pressure to reduce the inflation. This widens the distance between the two classes. Revenue deficit is the difference between revenue receipts and revenue expenditure in an accounting sense. In other words, inflation arising out of inflation is temporary in nature.
The method of financing this deficit is know as deficit financing. Meaning of Deficit Financing: Deficit financing in advanced countries is used to mean an excess of expenditure over revenue—the gap being covered by borrowing from the public by the sale of bonds and by creating new money. However, everything depends on the magnitude of deficit financing and its phasing over the time horizon of development plan. The main reasons for using this policy are as under : 1. Techniques Deficit Financing Deficit Financing in western countries It is done through market borrowings public and. This can be arranged for in different ways. Further allthe productive activities will be to meet war requirements.
This method encourages the government to utilize unemployed and underemployed resources. Search deficit financing and thousands of other words in English definition and synonym dictionary from Reverso. The rising of prices due to the deficit financing depends upon various factors such as time period, consumption, savings and habits of the people. Keynes' 1936 book gave academic and intellectual legitimacy to deficit spending programs. But in the underdeveloped countries there is a shortage of these institutions particularly in rural areas. Hence the monetized fiscal deficit is also not there. In these circumstances, reasonable deficit financing is well-justified.
Importance of Capital Accumulation or Capital Formation :- In the less developing countries economy depends upon capital accumulation. Its popularity is due to the following reasons: a Advantages: Firstly, massive expansion in governmental activities has forced governments to mobilize resources from different sources. This is all the more felt because some of these countries selected planning as a strategy of economic development. Seasonal Variations :- There are many industries which produce the goods seasonally like ice factory. Increase in Effective Demand :- Government should increase the rate of investment by establishing the various industries to increase the rate of employment.