Meaning and definition
Deficit financing is the budgetary situation where expenditure is higher than the revenue. The
deficit is the gap caused by the excess of government expenditure over its receipts. The
expenditure includes disbursement on revenue as well as on capital account.
Deficit financing in Indian context occurs when there are budgetary deficits. Budgetary
deficit refers to the excess of total expenditure (both revenue and capital) over total receipts
(both revenue and capital).
Various indicators of deficit in the budget are:
Budget deficit = total expenditure – total receipts
Revenue deficit = revenue expenditure – revenue receipts
Fiscal Deficit = total expenditure – total receipts except borrowings
Primary Deficit = Fiscal deficit- interest payments
According to Indian Planning Commission “The term deficit financing is used to denote the
direct addition to gross national expenditure through budget deficits, whether the deficits are
on current revenue or of capital accounts.”
Methods of Deficit Financing
Borrowing from the Central Bank- Raising funds from the RBI in the form of new currency
is one of the important instruments for the government in this regard.
Issue of New Currency- The government may either borrow from the Central Bank in the
form of new currency or issue new currency itself to increase the money circulation in the
economy.
Withdrawal of its accumulated cash balances from the RBI.
Adverse Effects of Deficit Financing Deficit
financing has several adverse effects on economy. Important evil effects of deficit financing
are given below.
Leads to inflation - Deficit financing may lead to inflation. Due to deficit financing money
supply increases and so does the purchasing power of the people, which increases the
aggregate demand and thud, the prices increase.
Adverse effect on saving- Deficit financing leads to inflation and inflation affects the habit
of voluntary saving adversely. In fact, it becomes impossible for people to maintain the
previous rate of savings in the state of rising prices.
Adverse effect on Investment - Deficit financing affects investment adversely. When there
is inflation in the economy, the trade unions tend to demand an increase in wages, for which
they engage in strikes and lock outs. This is turn decreases the efficiency of labour and
creates uncertainty in the business, which decreases the extent of investment in the country.
Inequality - in case of deficit financing income distribution becomes unequal. During deficit
financing deflationary pressure can be seen on the economy which makes the rich, richer and
the poor, poorer. The fixed wage earners are badly affected and their standard of living
deteriorates.
Problem of balance of payment - Deficit financing leads to inflation. A high price level as
compared to other countries makes the exports more expensive On the other hand rise in
domestic income and price may encourage people to import more commodities from abroad.
This creates a deficit in balance of payment, and the balance of payment becomes
unfavourable.
Methods to Reduce the Inflationary Pressure of Deficit Financing
Deficit financing is very useful weapon for ensuring the high level of employment in the
advanced countries. Following are the important measures which can be adapted to control.
Formulation of Import and Export Policies: A country should frame its import and export
policy in such a manner that the supply of an essential goods may not fall.
Proper Allocation of Resources: The rise in price due to deficit financing can be controlled
by proper allocation of resources. Developing countries should prepare effective plans and
resources of the country may not be wasted in unproductive projects.
Fiscal Policy: The inflationary pressure can be controlled, if a government increases the rate
of taxes on luxuries and introduces the compulsory saving schemes.
3 instruments of fiscal policy in India are Taxes, Public Expenditure and Public debts
Monetary Policy: An effective monitory policy can be adopted to reduce the inflationary
pressure. Most of developing countries are also using these weapons against the inflatory
pressure to reduce the inflation. Controlled by RBI
PRICING IN INDIAN ECONOMY
Meaning of Pricing:
Pricing is a process of fixing the value that a manufacturer will receive in the exchange of
services and goods. Pricing method is exercised to adjust the cost of the producer’s offerings
suitable to both the manufacturer and the customer. The pricing depends on the company’s
average prices, and the buyer’s perceived value of an item, as compared to the perceived
value of competitors product.
While fixing the cost of a product and services the following point should be
considered:
The identity of the goods and services
The cost of similar goods and services in the market
The target audience for whom the goods and services are produces
The total cost of production (raw material, labour cost, machinery cost,
transit, inventory cost etc).
External elements like government rules and regulations, policies, economy,
etc.,
Objectives of Pricing:
Survival- The objective of pricing for any company is to fix a price that is reasonable
for the consumers and also for the producer to survive in the market. Every company
is in danger of getting ruled out from the market because of rigorous competition,
change in customer’s preferences and taste. Therefore, while determining the cost of a
product all the variables and fixed cost should be taken into consideration. Once the
survival phase is over the company can strive for extra profits.
Expansion of current profits-Most of the company tries to enlarge their profit
margin by evaluating the demand and supply of services and goods in the market. So
the pricing is fixed according to the product’s demand and the substitute for that
product. If the demand is high, the price will also be high.
Ruling the market- Firm’s impose low figure for the goods and services to get hold
of large market size. The technique helps to increase the sale by increasing the
demand and leading to low production cost.
A market for an innovative idea- Here, the company charge a high price for their
product and services that are highly innovative and use cutting-edge technology. The
price is high because of high production cost. Mobile phone, electronic gadgets are a
few examples.
Types of Pricing Method:
Pricing method is a technique that a company apply to evaluate the cost of their
products. This process is the most challenging challenge encountered by a company,
as the price should match the current market structure and also compliment the
expenses of a company and gain profits. Also, it has to take the competitor’s product
pricing into consideration so, choosing the correct pricing method is essential.
The pricing method is divided into two parts:
Cost Oriented Pricing Method– It is the base for evaluating the price of the finished
goods, and most of the company apply this method to calculate the cost of the
product. This method is divided further into the following ways.
Cost-Plus Pricing- In this pricing, the manufacturer calculates the cost of
production sustained and includes a fixed percentage (also known as mark up)
to obtain the selling price. The mark up of profit is evaluated on the total cost
(fixed and variable cost).
Markup Pricing- Here, the fixed number or a percentage of the total cost of a
product is added to the product’s end price to get the selling price of a product.
Target-Returning Pricing- The company or a firm fix the cost of the product
to achieve the Rate of Return on Investment.
Market-Oriented Pricing Method- Under this category, the is determined on the
base of market research
Perceived-Value Pricing- In this method, the producer establish the cost
taking into consideration the customer’s approach towards the goods and
services, including other elements such as product quality, advertisement,
promotion, distribution, etc. that impacts the customer’s point of view.
Value pricing- Here, the company produces a product that is high in quality
but low in price.
Going-Rate Pricing- In this method, the company reviews the competitor’s
rate as a foundation in deciding the rate of their product. Usually, the cost of
the product will be more or less the same as the competitors.
Auction Type Pricing- With more usage of internet, this contemporary
pricing method is blooming day by day. Many online platforms like OLX,
Quickr, eBay, etc. use online sites to buy and sell the product to the customer.
Differential Pricing- This method is applied when the pricing has to be
different for different groups or customers. Here, the pricing might differ
according to the region, area, product, time etc.