Deficit Financing
Most of the classical economists favoured balanced budgets which implied that the governments, like individuals, should live ‘within their means’ and their expenditures should not exceed their revenues. However, during the period of the Great Depression in the 1930s, it was recognised that the State could push up the productive activity and usher the economy into a phase of economic recovery if it extended its expenditures much beyond its revenues. It was argued that such an expansion would generate additional demand and this, in turn, would give a boost up to industrial production and business activity. Therefore, deliberate ‘unbalancing of the budget in such a way that government expenditure exceeded government revenue was advocated as a measure to overcome depression and to set the economy on the path of economic recovery. But how can the government spend more than its revenue? It is here that deficit financing comes in.
In simple words, deficit financing is the financing of the deliberately created gap between public revenue and public expenditure or a budgetary deficit, the method of financing resorted to is a type of borrowing that results in a net addition to national outlay or aggregate expenditure. Here it is necessary to point out the difference in the definition of deficit financing as adopted by the developed countries of the West and as adopted by the Government of India. In Western countries, the government borrowing from the banks to cover the budgetary gap is defined as deficit financing. In this way, through deficit financing idle savings of the people are borrowed by the Government and spent, increasing the public expenditure. This increase in public expenditure leads, in turn, to an increase in output and employment by making use of ‘idle employable resources available in the economy
In India, deficit financing is defined in a narrow way as it implies only borrowings from the Reserve Bank of India against the issue of treasury bills or a running down of accumulated cash balances. When the government borrows from the Reserve Bank of India, it merely transfers its securities to the Bank who, on the basis of these securities, issues more notes and puts them into circulation on behalf of the government. This amounts to the creation of money. Thus it is clear that in India deficit financing implies a direct increase in money supply in the form of newly created money.
In the developing economy when the government fails to mobilise adequate resources for the public sector from domestic as well as external sources, recourse to deficit financing becomes necessary. Alternatively, the government can cut the size of the plan itself and that in turn will slash the demand for investible funds. It will, however, have serious repercussions on growth. Therefore, a developing country often has to make a difficult choice between two regrettable necessities viz. a lower growth rate and an inflationary price rise. The need for deficit financing in this country arises on the one hand from the failure of the government to mobilise the desired volume of surplus for the public sector plans and on the other, from its rapidly growing expenditures (mostly on unproductive non-developmental activities).
Procedure For Conducting Transactions In A Stock Exchange
A typical investment transaction will consist of:
(a) Placing an order with a broker:
A.client places his order with a stockbroker who alone is entitled to transact business in a stock exchange either to buy or to sell the shares of a company at fixed prices or at best market prices.
(b) Execution of the Order:
The broker or his authorized clerk will execute the order and the same will appear in the Stock Exchange Daily Official List which will include the number and price of shares that exchanged hands.
(c) Reporting the deal to the client:
As soon as the deal is transacted, the broker sends a contract note to the client giving details of the security bought or sold, the price, the broker’s commission, etc.,
(d) Settlement of transactions
There are two methods of settlement of transactions. In the case of ready delivery (or cash) transaction, payment has to be made immediately on the transfer of the securities or within a period of one to three days. In the case of forwarding delivery contracts, the settlement is made on a fixed day-it is generally fortnightly..