With reference to the concept of deficit financing in India, consider the following statements: 1. External grants are the most preferred means of deficit financing as they involve no repayment or interest. 2. Internal borrowings are preferred over external borrowings due to their lesser impact on economic sovereignty. 3. Printing currency to finance deficits can trigger inflation and is generally considered the last resort. Which of the statements given above is/are correct? |ForumIAS

[A] 1 and 2 only

[B] 1 and 3 only

[C] 2 and 3 only

[D] 1, 2 and 3

Answer: B

Notes:

Explanation:

External grants are non-repayable and interest-free, making them the most preferred option for deficit financing — though rarely available to India post-1975.
While internal borrowings preserve sovereignty, they are less preferred compared to external borrowings due to the “crowding out effect”—they reduce loan availability for private investment.
Printing currency (monetisation of deficit) is highly inflationary and can lead to a vicious cycle of rising expenditure and prices, making it the last resort in deficit management.

Source- TMH Indian Economy by Ramesh Singh

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