Correct Option
The correct option is 2 only
Explanation
Deficit Financing refers to the temporary arrangements or methods used by the government to bridge the gap between its total expenditure and its total receipts (revenue and non-debt capital receipts). It essentially involves generating funds to cover a fiscal shortfall.
Statement-wise Analysis
- Statement 1 is Incorrect: Printing money (often referred to as the monetization of the deficit) is a traditional method of deficit financing. In this process, the government borrows from the Central Bank (RBI in India), which creates new currency to purchase government securities. This directly injects new high-powered money into the economy.
- Statement 2 is Correct: Government borrowing from the public (market borrowing) involves issuing bonds or securities to the public. This process transfers existing money from the public to the government. It does not create new money; rather, it redistributes existing liquidity. Therefore, it does not increase the money supply directly, unlike borrowing from the Central Bank.
- Statement 3 is Incorrect: A budget deficit arises precisely because revenue receipts (including taxation) and non-debt capital receipts are insufficient to cover expenditure. Taxation is a component of revenue, not a method of financing the deficit. If taxes are raised, the deficit amount decreases, but taxes themselves are not considered a tool for "financing" the gap that remains after revenue is accounted for.
Key Takeaway
Deficit Financing is strictly the means of bridging the fiscal gap through borrowing (from the market or Central Bank) or printing currency. Taxation is a revenue source that reduces the need for deficit financing but is not a method of financing the deficit itself.