---
title: "Deficit Financing: Definition and Mechanics | Model Diplomat"
description: "Deficit financing refers to funding government spending beyond revenue through borrowing or money creation, crucial for policymakers and economists."
url: "https://modeldiplomat.com/learn/glossary/fiscal-deficit-financing"
---

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Model Diplomat Research Team · Last reviewed June 22, 2026

TL;DR

- Deficit financing is the practice of meeting government expenditure that exceeds revenue by borrowing or creating new money rather than raising taxes.
- How does deficit financing differ from the fiscal deficit?
- Is monetisation of the deficit still permitted in India?
- What constitutional provisions authorise government borrowing for deficit financing?
- Why is monetised deficit considered more inflationary than market borrowing?

[Civil Service & Diplomatic Exams](https://modeldiplomat.com/learn/civil-services/glossary)Updated June 22, 2026

Deficit financing is the practice of meeting government expenditure that exceeds revenue by borrowing or creating new money rather than raising taxes.

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In May 2020, India's Ministry of Finance raised its gross market borrowing target to ₹12 lakh crore to finance a pandemic-widened fiscal deficit, with the RBI managing the expanded auction programme.

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