Deficit financing is understood in different ways in different countries. It is understood as the excess of current expenditure over current revenue which is financed either through public borrowing or the creation of new money by the government. So the deficit budget is also called deficit financing in USA. But in India deficit financing is understood in a different way from deficit budget. While the former refers to a situation where the current expenditure exceeds current revenue of the government, the latter is taken to mean the excess of aggregate expenditure (both on current and capital accounts) over aggregate revenue. The former is called deficit budgeting and the latter deficit financing in India. Deficit financing in Indian context refers to the meeting of budgetary deficit through the creation of new money adding to the existing money supply in the economy. Deficit financing includes any or all of the following in India:
- The government withdrawing its cash balance with the Central bank,
- The government borrowing funds from the Central bank, and
- The government; resorting to printing of new currency notes with a view to cover the budget deficit
Purpose of Deficit Financing
There are several purposes for resorting to deficit financing.… Read More »
Qualitative or selective credit control policy refers to the set of policies implemented by the central bank in order to channelize the available credit in-the desired direction. For example, suppose in India the agricultural and small scale industry sectors are to be encouraged, then the RBI may direct the commercial banks to be more liberal in lending to these sectors and be strict while lending to other sectors. This will help the economy to provide ample opportunities for the priority sectors to grow. In other words, in every country the government determines in advance the priorities and to ensure that the banks conform to the priorities in their lending policies, the selective credit control policies are implemented. Hence, while the quantitative credit control policies aim at controlling the volume of credit created, and the money supply in the economy, the qualitative credit control policies help in using the available funds only for the important purposes and discourage unnecessary lending by commercial banks.… Read More »
A milestone in the history of banking in India is the nationalization of the 14 major commercial banks in 1969. This process was undertaken with the main objective of involving the banking sector in a big way in the nation building and economic development. To help to achieve this commendable objective, two committees were set up viz., National Credit Council Study Group with D.R. Gadgil as the Chairman and the Committee of Bankers under the chairmanship of Nariman. These committees independently went into their terms of reference and recommended an ‘area approach’ for involving the banks in economic development. This paved the way for giving a concrete shape to the Lead Bank Scheme. As nationalization of banks took place to extend and expand the banking services to all the non-banked areas especially the rural areas, the RBI decided to implement its Lead Bank Scheme through the nationalized banks. But this did not discourage the private sector banks from playing their role in economic development.… Read More »
According to the First report of the National Income Committee, “National income estimate measures the volume of commodities and services turned out during a given period, counted without duplication.” This means the total volume of goods and services produced in a year in a country is valued in monetary terms to obtain the National income of the country concerned.
Regarding the measurement of National income, it could be done in three different ways depending upon the interpretation of concept of national income. If National income is considered as a flow of goods and services, then the method used is called Product method. If National income is treated as a flow of income then the relevant method of measuring it is called Income method. Alternatively, if National income is treated as a flow of expenditure, the method used is called the Expenditure method. Apart from these traditional methods of measuring National income, one more method is evolved and it is called the Value added method.… Read More »
For measuring the national income, the national economy is viewed as follows:
- The national economy is considered as an aggregate of producing units combining different sectors such as agriculture, mining, manufacturing and trade and commerce.
- The whole national economy is viewed as a combination of individuals and household owning different kinds of factors of production, which they use themselves or sell-their factor services to make their livelihood.
- National economy is also viewed as a collection of consuming, saving and investing units (individuals, households and government).
The above notions of a national economy helps to measure National Income by following three different methods:
- Net output method
- Factor-income method
- Expenditure method
These methods are followed in measuring national income in a ‘closed economy’,
1. Net Output Method
This is also called as net product method or value-added method. This method is used when whole national economy is considered as an aggregate of producing units. In its standard form, this method consists of three stages:
1.… Read More »
National income is the final outcome of total economic activities of a nation. Economic activities generate two kinds of flow in a modern economy namely, product-flow and money-flow. Product-flow refers to flow of goods and services from producers to final consumers. Money flow refers to flow of money in exchange of goods and services. In this exchange of goods and services, money income is generated in the form of wages, rent, interest and profits, which is known as factor earning. Based on these two kinds of flows, national income is defined in terms of:
National Income in Terms of Product Flow
National income is the sum of money value of goods and services generated from total economic activities of a nation. Economic activities result into production of goods and services and make net addition to the national stock of capital. These together constitute the national income of closed economy’. Closed economy refers to an economy, which has no economic transactions with the rest of the world.… Read More »