Statement I : Deficit financing does not lead to inflation if adopted in small doses. Statement II : Deficit financing is an often used tool for financing budgetary deficits.

Statement I is true as deficit financing, when adopted in small doses, can stimulate economic growth without causing significant inflation, particularly if it leads to increased production that matches the rise in money supply [c1, t8]. Keynesian theory suggests it is a tool to achieve full employment by boosting aggregate demand [t8]. However, excessive deficit financing increases the money supply and purchasing power beyond productive capacity, leading to inflationary pressure [c1, t1]. Statement II is also true because deficit financing is a standard tool used by governments to bridge the gap between expenditure and revenue [c2, t3, t6]. While both statements are factually correct, Statement II describes the nature/utility of the tool, whereas Statement I describes its macroeconomic impact. The fact that it is an 'often used tool' does not explain why it remains non-inflationary in 'small doses'; the latter depends on the economy's absorptive capacity and output response.

Sources

1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 5: Indian Tax Structure and Public Finance > Adverse Effects of Deficit Financing > p. 113
2. [2] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Effective revenue deficit' and 'effective capital expenditure' > p. 154
3. [3] https://www.imf.org/external/pubs/ft/pam/pam49/pam4902.htm