18.10 ndian onom
expenditures than the receipts, then it is a surplus make it come out of the red (i.e., doing away with
budget.12 the losses).
In practice, governments the world over
usually do not present a surplus budget as it neeD of Deficit finAncing
symbolises government’s lower concerns towards It was in the late 1920s that the idea and need of
development. But at times as a political weapon a deficit financing was felt. It is when government
government might come out with such a budget needs to spend more money than it was expected
(for example the Uttaranchal Budget for 2006–07 to earn or generate in a particular period, to go for
was a surplus budget). How can a government a desired level of growth and development. Had
propose for a surplus budget in a developing there been some means to go for more expenditure
state when even developed countries still need with less income and receipts, socio-political goals
development and are going for deficit budgets? could have been realised as per the aspirations of
The Union Budget in India had never been the public policy. And once the growth had taken
presented as a surplus budget. place, the extra money spent above the income
would have been reimbursed or repaid. This was a
defIcIt fInancIng good public/government wish which was fulfilled
by the evolution of the idea of deficit financing.
The act/process of financing/supporting a deficit It was by the early 1930s that the US first tried
budget by a government is deficit financing. In this its hand at deficit financing soon to be followed
process, the government knows well in advance by the whole Euro-American governments.14
that its total expenditures are going to turn out to Through this route the developed world was able
be more than its total receipts and enacts/follows to come out of the menace of the Great Depression
such financial policies so that it can sustain the (1929).15 The idea became popular around
burden of the deficits proposed by it. the world by the 1960s. India tried its hand at
First used in the area of public finance in the deficit financing in 1969 and since the 1970s it
early 1930s in USA,13 today the term is being used became a routine phenomenon, till it became wild
by the corporate sector, too and such a financial and illogical, demanding immediate redressal.
management of a firm might be followed by it The fiscal deficits in India did not only peak to
as part of its business strategy. Again, a sick firm unsustainable levels but its composition was also
might need to follow deficit financing route for 14. For a detailed discussion on the topic one may refer to
many years to come as required by the firm to Joseph. E. stiglitz, Economics of the Public Sector,
(New York: w.w. Norton, 2000).
12. In the Us economy if tax revenue falls short of 15. It should be noted here that although the governments had
government expenditures, the government has a fiscal run deficits i.e., udget deficit even efore the eynesian
deficit, and it means that the government needs to idea of the deficit, the pre eynesian thin ing was that
borrow in the capital market to cover the difference. in peacetime the budget should generally be balanced
Opposite to it, if the government runs a fiscal surplus (i.e., neither deficit nor surplus), or even in surplus
(i.e., its tax revenues exceed its expenditure) then the so that the government debt created by wartime
government, like the household sector, will be a net deficits could be paid off. For further reference on
saver and will represent a source of saving for the the topic and its constraints, stanley Fischer and
economy (see stiglitz and walsh, Economics, 549). william Easterly, Economics of the Government
13. J. K. Galbraith, A History of Economics, (London: Budget Constraints, world Bank Research
Penguin Books, 1987) p. 226. ( he hole hapter II Observer, Vol. 5, No. 2, July 1990, pp. 127–42;
on M e nes (pp is interesting to refer on also reproduced in Amaresh Bagchi (ed.), Readings in
the topic.) Public Finance, pp. 301–19.