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Disadvantages of Deficit Financing

There is always a time lag between Govt. investment and the output from the projects. Increase in supply of money creates inflation, by which poor people are badly affected. Their purchasing power reduces to a greater extent whereas profit margin of businessmen increases. Society is divided between haves and have-not. Increase in prices of domestic goods causes imports of cheaps goods whereas domestically produced goods high prices reduces the export earnings, which results in the adverse balance of payments position. Cost of production of industrial goods increases with the increase in prices of raw material etc., therefore foreign investment in the country becomes less attractive.

Fahim Patel

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