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Deficit financing means that the government borrows money from the
1. Revenue Department
2. World Bank
3. RBI
4. None of the above

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Correct Answer - Option 3 : RBI

The correct answer is RBI.

 

  • Deficit financing is the budgetary situation where expenditure is higher than revenue.
  • It is a practice adopted for financing the excess expenditure with outside resources.
  • The expenditure revenue gap is financed by either printing of currency or through borrowing.
  • This is borrowing by the government from RBI to finance the budget.

 

Methods of Bridging the Fiscal Deficit

  • Borrowing from the market
  • Monetization of the Deficit:
    • 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).
    • The money printed by the RBI is called high-powered money or reserve money or monetary base.

  

  • World Bank Group comprises of 5 institutions managed by their member countries
  • These 5 institutions are
    • International Bank for Reconstruction and Development (IBRD)- Commonly known as the world bank. It is the single largest provider of development loans
    • International Development Association (IDA) – assists the poorest countries.
    • International Finance Corporation (IFC) – supports private enterprise in developing countries.
    • Multilateral Investment Guarantee Agency (MIGA) – offers investors insurance against non-commercial risk and helps developing country governments attract foreign investment non-commercial risks such as political instability, govt deciding to nationalize a private business, etc.
    • International Centre for the Settlement of Investment Disputes (ICSID).

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