MONEY AND BANKING PART 12
OBJECTIVES Fiscal policy has 8 different objectives. Full employment 2. Price stability Economic development Optimum resource allocation Equitable distribution of income Economic stability 7. Capital formation Encouraging investment
EQUAL DISTRIBUTION OF INCOME The early stages of growth witness concentration of wealth in the hands of a few. Private ownership preavil in the country. This leads to political and economic instability. To avoid all of this, the government must invest in such areas which help to improve the income of the lower section of the society as well as to increase the total productivity. Regional disparities can also be removed through a well developed fiscal programme. A redistributive tax policy must be implemented, where the richer sections of the society are taxed higher and the lower sections are charged less.
ECONOMIC DEVELOPMENT Fiscal policy promote economic stability during short-run international cyclical fluctuations, causing variations in terms of trade. Certain fiscal measures can be used for this purpose. 1. During, export and import duties should be imposed to minimize the impact of international cyclical fluctuations.
2. To curb the use of additional purchasing power, heavy import duty on consumer goods and luxury import restrictions are essential. 3. During the period of recession, government should undertake public works programmes through deficit financing.
CAPITAL FORMATION The developing countries often are caught in a vicious circle of poverty. It it important to break this circle, which can be done with a high rate of capital formation. This can be done by using the following techniques: Increasing saving ratio. Increasing investment rate. Controlling consumption Encouraging the spending in productive chanels. Reducing income inequality
ENCOURAGING INVESTMENT The fiscal policy first, encourages investment in the public sector which helps to increase private investment. It aims at rapid economic development by directing resources into productives areas. In the early stages of economic development, the developing countries must focus on developing social and economic infrastructre such as power, irrgatiom, transport, schools, hospitals etc. this will pave way for agriculture and industrial growth. This will help to increase the market size,reduce production cost, and increase social marginal productivity of investment.
According to Prof. R.N Tripathi, the following steps are helpful in this case: (i) Direct physical control. (ii) Increasing the rate of existing taxes. (iii) Introduction of new taxes, iv) Public borrowing of non-inflationary nature (v) Deficit financing.