18.14           ndian      onom
     Deficit finAncing in inDiA                                               the plans. This not only increased the
                                                                              interest burden of the governments but
     India was declared to be a planned economy
                                                                              also ruptured the whole financial system
     right after Independence. As development
     responsibilities of the government were very high,                       in coming years—banks did not remain
     there was a need of huge funds in rupee as well as                       commercial entities and became part of
     in foreign currency forms. India faced continuous                        the government’s political statement.
     crises in managing the required fund to support its                (iv) Establishing giant PSUs with higher
     Five Year Plans—neither foreign funds came nor                           revenue expenditures (salaries) which
     internal resources could be mobilised in sufficient                      increased the revenue expenditures of the
     amount. (Due to lower tax collections, weaker                            future governments when the pensions
     banks that too privately owned, and negligible                           and the PFs needed to be serviced.
     saving rate, etc.)28                                                (v) Unable to go for the required level of
          By the late 1960s, the government headed                            investment even after taking recourse to
     for deficit financing and from the 1970s onwards,                        all the above given means.
     India started going for higher and higher fiscal
     deficits and became more and more dependent on                 the seconD PhAse (1970–1991)
     increased deficit financing with every fresh year.
     We may classify dificit financing in India into                This is considered the period of deficit financing,
     three phases.                                                  follow up of unsound fundamentals of economics
                                                                    and finally culminating in severe financial crisis by
     the first PhAse (1947–1970)                                    the year 1990–91. Major highlights of this phase
     This phase had no concept of deficit financing                 may be summed up as follows—
     and the deficits were shown as Budgetary Deficits.                   (i) This phase saw the nationalisation policy
     Major aspects of this phase were—                                        and simultaneous revival of an increased
           (i) Trying to borrow from inside and outside                       emphasis on expansion of the PSU (two
                 the economy but unable to meet the                           points should be noted here specially—
                 target.                                                      first, many of the South East Asian
         (ii) In the 1950s, a serious attempt was made                        economies have, officially declared their
                 to increase tax collections and check                        acceptance of capitalism and privatisation.
                 revenue expenditures to be ultimately                        Secondly, China had declared that
                 able to emerge as a surplus revenue budget                   investment in the government-controlled
                 economy. But huge cost was paid in the                       companies are a loss of money at this
                 form of tax evasion, rise in corruption,                     time).
                 stagnating standard of life and a neglected             (ii) Upcoming PSUs increased the total
                 social sector.                                               expenditure of the government’s revenue
        (iii) Taking recourse to heavy borrowings                             as well as capital.
                 from the RBI and finally nationalisation
                                                                       (iii) Existing PSUs were taking their own
                 of banks so that their money could be
                                                                              due from the economy—the illogical
                 used by the government to support
                                                                              employment creation excessively increased
       28.      or a detailed data ased discussion refer to Sudipto           the burden of salaries, pensions and PF;
              Mundle and M. Govinda Rao, ‘Issues in Fiscal olic               many of them had started fetching huge
              in Bimal Jalan (ed.), The Indian Economy: Problems
              and Prospects (New Delhi: Penguin Books, 2004),                 losses by this time; as the public sector
              pp. 258–85.                                                     does not have profit as its primary goal;