As we know, the major sources of public revenue are taxes, fees, prices, special assessments, rates, gifts etc., etc. If during a given period of time, the government expenditure exceeds government revenue and the deficit is met by borrowing, it is called deficit financing or income creating finance. In order to have a significant expansion effects therefore, a program of public investment should be financed by borrowing rather than by taxation. This kind of borrowing or loan expenditure is popularly called deficit financing.
Deficit financing is said to have been practiced if state adopts any one or all the methods mentioned below:
(a) The government draws upon the cash balances of the past.
(b) The government borrows from the central bank against government securities.
(c) The government creates money by printing of paper currency and thus meets the expenditure over receipts.
(d) The government borrows externally.
Deficit financing was considered to be a very dangerous weapon by the…