In India, deficit financing is used for raising resources for:

Answer: (a) economic development

In India, deficit financing has been used to raise resources for economic development. Under the Five Year Plans it filled the gap between the outlay needed for planned development and what taxes, borrowing and external aid could provide. The government spends more than its receipts, and the gap is met mainly by borrowing from the RBI or drawing down cash balances.

• ✓ (a) Deficit finance was counted as a resource for financing India's Plan development outlay. In the early Plans, deficit finance of Rs 4.2 billion stood alongside external assistance and other capital receipts as a source of funds. Its purpose was to pay for economic development.
• ✗ (b) Redeeming public debt means repaying past borrowing. That is not the purpose for which deficit financing was used in India; its purpose was to fund development spending.
• ✗ (c) The balance of payments is corrected through trade, exchange-rate and foreign-exchange measures. Deficit financing expands domestic spending and money supply. By pushing up prices and imports, it can even worsen the external position.
• ✗ (d) Foreign debt has to be serviced in foreign exchange. Deficit financing creates domestic rupee resources for government spending, so reducing foreign debt is not its purpose.

Remember · Deficit financing means the government spends beyond its receipts, mainly through RBI credit or drawing down cash balances. In India it was a Plan resource for economic development, with a risk of inflation.

Question: UPSC Civil Services (Preliminary) 2013, General Studies paper. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). · Report an error