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;