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In India, deficit financing is used for raising resources for
1. economic development
2. redemption of public debt
3. adjusting the balance of payments
4. reducing the foreign debt

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Correct Answer - Option 1 : economic development

The correct answer is economic development.

  • Deficit financing is a necessary evil in a welfare state as the states often fail to generate tax revenue that is sufficient enough to take care of the expenditure of the state.
    • The basic intention behind deficit financing is to provide the necessary impetus to economic growth by artificial means.
  • Hence option 1 is correct.

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  • Main objectives of Fiscal Policy in India
    • Economic growth: It helps to maintain the economy’s growth rate so that certain economic goals can be achieved.
    • Price stability: It controls the price level in the country so that when inflation is too high, prices can be regulated.
    • Full employment: It aims to achieve full employment, or near full employment, as a tool to recover from low economic activity.
  • Deficit Financing in India
    • Deficit financing is defined as “borrowings from the Reserve Bank of India against the issue of Treasury Bills and running down of accumulated cash balances”.
    • When the government borrows from the Reserve Bank of India, it merely transfers its securities to the Bank.
      • On the basis of these securities the bank issues more currency and puts them into circulation on behalf of the government. This amounts to the creation of money.
    • The rationale for Deficit Financing: sometimes the government fails to mobilize adequate resources. In this situation, the option of deficit financing is required to meet fiscal deficit targets.
      • If the option of deficit financing is not utilized the government ends up compromising on growth targets.

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