Money and Banking - UPSC CSC

MONEY AND BANKING PART 18

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. 6. Promotion of economic stability 7. National income and proper distribution 8. Check inflationary trends 9. Reallocation of resources

Promotion of economi stability The aim of the fiscal policy is to maintain internal and external economic stability. It must aim at the diversification of all sectors of the economy. For bringing balanced growth and reducing the effects of cyclical fluctuations, a contra-cyclical fiscal policy of deficit budgeting in depression and surplus budgeting in inflation are most suitable measures. The public work programmes through budget deficity gives best results.

NATIONAL INCOME AND PROPER DISTRIBUTION There is a great need to increase level of national income and reduce the inequalities of distribution of income According to Prof. Raja J. Chelliah, an increse in per capita income does not increase the welfare of all sections of society Such inequalities in income and wealth create social cleavages, economic and political instability and become an obstacle for economic development of an economy. As a result, few rich roll in wealth and misuse their income on conspicuous consumption, gold and speculation, while poor masses grow under poverty and misery

CHECK INFLATIONARY TRENDS Underdeveloped countries make heavy doses of investment which leads to inflation. There is always an imbalance in the demand and supply of resources The increase in purchasing power, leads to a rise in demand but the supply remains inelastic due to structural rigidities, market imperfections and other bottlenecks which in turn raises the inflation. The risei in the income level implies ADAS. Capital goods and consumption goods fail to keep pace with the rising income

CHECK INFLATIONARY TRENDS Fiscal policy can take certain steps to control the inflation level in the economy: 1. Mobilize resources 2. Encouraging production 3. Investing in projects with short gestation period. 4. Encourage saving habit among people 5. Raising the percentage deduction of provident fund 6. Raising the level of capital tax gain 7. Imposing more tax on rentier class 8. Levying of Expenditure Tax

CHECK INFLATIONARY TRENDS 9. Reducing the purchasing power of the people through Compulsory Deposit Scheme 10. Mobilizing resources through public debt

REALLOCATION OF RESOURCES The resources are not properly allocated in underdeveloped countries. The resources in thr private sector are focused on producing goods which cater to the needs of the richer sections of the society It is very important that the fiscal tools are employed in such a way as to divert resources from less useful production to more useful channels. This can be done by various tax incentive measures and government subsidy programmes.