Public Finance

Choose the Correct Answer

Correct Answer : Option a

Explanation
Market borrowings in the form of G-Securities: It is not directly inflationary. These are borrowings from the market (banks, financial institutions) and do not increase the money supply on their own. When the government issues G-Secs (Government Securities) to borrow money, here’s what typically happens:
Banks, insurance companies, and individuals buy these securities. They pay for them using existing money, their savings, deposits, or investment funds. That money moves from the private sector to the government. So, instead of creating new money, the government is reallocating existing money already in the financial system.
Printing money (Monetization of deficit): Yes, this is inflationary. When the government borrows from the RBI, the central bank creates new money, increasing the monetary base.
This leads to an increase in aggregate demand, potentially causing demand-pull inflation.
Taking loans against State Provident Funds: These borrowing are non-inflationary because it uses existing, idle savings from within the system. It’s a liability shift, not a monetary expansion.
This is borrowing from internal, non-market sources, like funds collected from government employees.It does not expand the money supply. This is similar to reallocating savings rather than injecting new money. That’s why it’s considered safe and non-inflationary in public finance theory.
External debts: These are borrowings from foreign sources (bilateral, multilateral, or commercial). They do not lead to an increase in domestic money supply. In fact, they may bring in foreign currency without putting pressure on local demand or prices. Hence, External debts are non-inflationary in nature.