The practice of meeting a government's budget gap by borrowing or, in the narrower Indian sense, by the central bank creating new money, rather than by raising taxes or cutting spending.
- In Indian usage, deficit financing traditionally meant the government borrowing from the RBI, effectively printing money to cover the deficit.
- This can be inflationary, because new money is injected without a matching rise in output; see concept inflation.
- The automatic monetisation of deficits through ad hoc Treasury Bills was phased out in India after 1997, when the system shifted to market borrowing under the Ways and Means Advances arrangement.
- Today the fiscal deficit is financed mainly by borrowing from the market through government securities; see concept fiscal deficit and concept government securities.
- Heavy deficit financing can lead to crowding out and a rising debt burden; see concept crowding out effect.
The definition, the inflationary risk, and the 1997 phasing out of automatic monetisation (ad hoc Treasury Bills) are testable fiscal-policy facts.
Deficit financing in the narrow Indian sense meant the RBI creating money for the government (now ended); broadly it means filling the budget gap by borrowing, mainly from the market today.
Filling the budget gap by borrowing or money creation; RBI monetisation via ad hoc Treasury Bills ended in 1997, replaced by market borrowing.