Financing of deficit and economic development in India

The developing countries aim to achieve higher economic growth. A higher economic growth requires high capital resources, but in the developing countries capital resources are inadequate for financing economic development. The rate of taxes cannot be increased because the rate of saving and consumption will fall, since the savings are already very low in developing countries. Thus, deficit financing is a necessary evil in developing countries to generate revenue sufficient to undertake various activities for development purpose. The concept of deficit financing was popularized by the British economist J. M. Keynes, who used the concept to mobilize resources for planned economic development. The paper discusses the importance of deficit financing in Indian economic scenario. In the paper calculation of budget deficits in various years has been done. The paper discusses how the concept of deficit financing has changed from 1st April, 1997 and also suggests the how deficit financing can be used for development purposes in India. Classical economists believed in ‘Laissez Faire Policy’ and so did not consider the role of fiscal and monetary policy for economic development. Classical economists were of the view that savings is always equal to investment and if in any situation savings become more than investment then the interest rate makes them equal.