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Objectives of Fiscal Policy in Developing Countries
Objectives of Fiscal Policy in Developing Countries
The most important instrument of government intervention in the country is that of Fiscal or Budgetary policy. Fiscal policy refers to the taxation, expenditure and borrowing by the government. The economists now hold the government intervention through Fiscal policy is essential in the matter of overcoming recession or inflation as well as of promoting and accelerating economic growth, which monetary policy will not hold alone. There is no doubt that the government budgetary or fiscal policy must be sound, keeping in view the needs and requirements of a developing economy. In short we can say that, it is a part of government policy, which is concerned with raising revenue through taxation and other means and deciding on the level and pattern of expenditure. The main problem faced by the capitalist economies instability prevailing in them. This instability is reflected in the periodic occurrence of trade cycles, which are a general phenomenon in the free market capitalist economies. During a recession or depression fiscal policy should help in increasing demand.
In developing countries, taxation, the government expenditure, taxation and borrowing have to play a very important role in accelerating economic development. Fiscal policy is a powerful instrument in the hands of the government by means of which it can achieve the objectives of development. There are several peculiar characteristics of a developing country, which necessitate the adoption of a specific fiscal policy, which ensures a rapid economic growth. There are vast and diverse resources human and material, which are lying underutilized. Such countries have weak infrastructure, i.e. they lack adequate means of transport and communications, road ports, highway, irrigation and power and technical know-how. Their population increasing at an explosive rate, which necessitates rapid economic development to, met the requirements of the rapidly- growing population. In order to overcome these handicaps, a suitable fiscal and taxation policy is called.
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To mobilize resources for economic growth, especially for the public sector. To promote economic growth in the private sector by providing incentives to save and invest. To restrain inflationary forces in the economic in order to ensure price stability. To ensure equitable distribution of income and wealth so that fruits of economic growth are fairly dist
discouraged is therefore preferable.Hence, a democratic state must rely on indirect methods of control and regulation and this is doing through fiscal and monetary policies. Thus in democratic countries, fiscal policy is a powerful and least undesirable weapon on which the states can rely for promoting economic development.
I. BUDGET:Keeping budget in balance, in surplus or deficit, is in itself a fiscal instrument. When the government keeps its total expenditure equal to its revenue, as a matter of policy, it means it has adopted a balanced budget policy. When the government spends more than its expected revenue, as a matter of policy, it is pursuing a deficit-budget policy. And when the government follows a policy of keeping its expenditure substantially below its current revenue, it is following a surplus budget policy. II.TAXATION A tax is a non quid pro quo payment by the people to the government. By this definition, taxation means non quid pro quo transfer of private income to public coffers by means of taxes. Taxation takes many forms in the developed countries including taxation of personal and corporate income, so-called value added taxation and the collection of royalties or taxes on specific sets of goods. Government may want to smooth out the nation's income in order to minimize the pejorative effects of the business cycle or they may want to take steps designed to increase the national income. They may also want to take steps intended to achieve specific social objectives deemed to be appropriate by the political or legal process. Sound tax system, with moderate rates and a broad base, is an integral part of the prudent fiscal policy. The expansion in the tax base is sought to be achieved through expansion in the scope of taxes, specifically service tax, removal of exemptions and improvement in tax administration. With a decline in non-tax revenue receipts as a proportion of overall revenue receipts, the burden of fiscal corrections is expected to be mainly on tax revenues. However, the measures to increase the tax-GDP ratio must be harmonized with the overall growth objective. The strategy seeks to increase tax compliance, improve the efficiency of tax administration
and with intense focus on recovery of arrears of tax revenues and prevent further build-up of such arrears. Agricultural taxation: This economic surplus mainly goes to rich farmers, landlords, intermediaries in the absence of suitable taxation on agriculture. It has potential surplus & to achieve maximum utilization of land through devising a system of land taxation which would penalize poor use of good land. III.PUBLIC EXPENDITURE Suppose the government spends more on an electricity project for which the contract is given to a PSU like BHEL. Then the money that the government spends comes back to it in the form of BHEL's earnings. Similarly, suppose that the government spends on food-forwork programmers, and then a significant part of the expenditure allocation would consist of food grain from the Public Distribution System which would account for part of the wages of workers employed in such schemes. This in turn means that the losses of the Food Corporation of India (which also includes the cost of holding stocks) would go down and hence the money would find its way back to the government. In both cases, the increased expenditure has further multiplier effects because of the subsequent spending of those whose incomes go up because of the initial expenditure. The overall rise in economic activity in turn means that the governments tax revenues also increase. Therefore there is no increase in the fiscal deficit in such cases.
Government borrowing is another fiscal Method by which savings of the community may be mobilized for economic development. In developing economies, the government resort to borrowing in order to finances schemes of economic development. Government or what is also called public borrowing becomes necessary because taxation alone cannot provide sufficient funds for economic development. Besides, too heavy taxation has an adverse effect on private saving and investment. . Fiscal Policy Can Be Divided In Two Types.
impact to recession and inflation that might occur in an economy at sometimes. This means that because of existence of this automatic or built-in-stabilizers recession andinflation will be shorter and less intense than otherwise is the case. Important automatic fiscal stabilizes compensation, welfare benefits corporate dividends.