BANKING AFFAIRS

Detailed explanation-1: -Deficit financing, defined narrowly as the change in the government’s indebtedness to the Reserve Bank of India, has been an important part of plan financing in India, and a key element in determining the environment for monetary policy.

Detailed explanation-2: -When a government borrows from the RBI or prints money to fill the gap between its income and expenditure, it is called deficit financing. Q. means financing of a budget deficit by borrowing from the central bank or printing more money.

Detailed explanation-3: -Earlier referred to as deficit financing, the Government can finance the Fiscal Deficit by borrowing from the Reserve Bank of India in lieu of government securities. This increases the money supply and can lead to inflation.

Detailed explanation-4: -Monetizing deficit means RBI purchases government bonds in the primary market and prints more money to finance the debt. This is resorted to only when the government cannot borrow from the market (Banks and other Financial Institutions like LIC).

Detailed explanation-5: -It increases the financial strength of the government. It leads to inflation which can prove to be beneficial under certain circumstances. It can have a multiplier effect on economic development as it encourages the government to utilize unemployed and underemployed resources.