MONEY AND BANKING PART 17
ROLE OF FISCAL POLICY Fiscal policy plays a significant role in the promotion of economic development and bringing stability in the economy. This role can be explained by the following points. 1. Mobilization of resources 2. Increase growth rate 3. Inducement to Investment and Capital Formation 4.To Encourage Socially Optimal Investment 5.Increase employment opportunities.
MOBILIZATION OF RESOURCES The main aim of fiscal policy is to mobilize the resources in the private and public sector. Often, the national income and per capita income is very low due to low rate of saving Therefore, the governments of such countries through forced savings pushes the rate of investment and capital formation which in turn accelerates the rate of economic development. This is also done through palnned investment and progressive taxation
INCREASE GROWTH RATE Fiscal policy helps to increase the growth rate by raising investment in public and private sector. So, the different tools of fiscal policy such taxation, budget etc should be used in a combined manner so that they may not adversely affect the consumption, production and distribution of wealth Investment in basic and capital goods industries is important for the economic development in an underdeveloped economy. Thus, top priority to such investment should be given to accelerate the all round growth of an economy
INDUCEMENT TO INVESTMENT AND CAPITAL FORMATION Fiscal policy helps to induce investment in important industries and services of public utility. It also induces investment in private sector by giving assistance to new industries and introduces modern techniques of production Thus, investment on social and economic overheads are helpful in increasing the social marginal productivity and thereby raising the marginal productivity of private investment and capital formation
ENCOURAGE SOCIALLY OPTIMAL INVESTMENT This aim of fiscal policy is to direct investments in more productive channels that are socially and economically important such as transport, power, school, hospital technical conservation, and soil conservation This is optimal investment which increases productivity widens the size of market, and raises the level of economic development. It also keeps a check on directing investment away from unproductive channels.
INCREASE EMPLOYMENT OPPORTUNITIES In under developed countries, the employment level is very low accompanied with high rate of population growth. The aim of fiscal policy is to increase the expenditure to help create more employment opportunities. The unemployment in such countries is of 2 types 1.CYCLICAL UNEMPLOYMENT 2. DISGUISED UNEMPLOYMENT
CYCLICAL UNEMPLOYMENT In under developed countries, cyclical unemployment is caused by external factors.They export their raw materials but when its demand falls due to cyclical depression, then unemployment rises in the primary industries.To remove this, the government may increase public expenditure. But it will not have any favourable effect. As public expenditure increases, the people may spend on imports or conspicuous consumption. So, public investment should be directed towards the setting up of new industries, promoting the growth of private industries and developing agriculture,providing tax concessions, bonus and subsidies etc. This will help to reduce the problem of unemployment.
DISGUISED UNEMPLOYMENT Disguised unemployment means that more number of people are engaged in an activity than is required normally. This prevails mostly in agriculture sector. In this case, the main aim of fiscal policy si to increase the rate of capital formation.. This will help to increase the rate of saving. By increasing the ratio of saving to income, the economy would not only be able to reduce unemployment but also maintain economic stability in the long run. Here, stability is the pre requisite.