- Financing Methods:
- Domestic Borrowing: Issuing debt securities (Treasury Bills, Dated Securities) to banks, financial institutions, RBI.
- Borrowing from RBI: Through Ways and Means Advances (WMA) for temporary mismatches, or direct monetization in exceptional cases.
- Borrowing from Abroad: Loans from foreign governments and international organizations.
- Risks of Deficit Financing:
- Inflation: Increased money supply can lead to inflation.
- Increased Debt: Accumulation of public debt, requiring interest payments.
- Crowding Out: Government borrowing may reduce private investment.
- Exchange Rate Impact: Increased money supply can depreciate currency.
- Macroeconomic Instability: Can impact financial health and stability.