Economics(Paper-4) - Shivaji University

f) Use of disguised unemployed : According Nurkse, one of the important source
of capital is the concealed saving potential containd in rural under employment in over
populated underdeveloped countries. Disguised unemployed people contribute little or
nothing to total output i.e. the marginal physical productivity remains zero. In this way
mobilizing disguised unemployed becomes a savings potentional as well as selffinancing.
g) Taxation : Taxation is the most effective tool of fiscal policy for reducing inequality,
reducing private consumption and transfering resources to the government for
productive investment. Thus taxation will bring income to the budget of the country.
According to Prof. Lewis an underdeveloped country should raise at least 20% of
its national income through taxation Out of this 12% should be utilized on current
expenditure and 8% on capital investment in the public sector.The taxation should aim
at incentives to work, save and invest in this way capital formation would take place.
2) External Sources :
The following are the import aspect of external sources of capital formation. They
are as follows.
1) Foreign capital / Aid : If the domestic source of capital is inadequate then
capital formation should invited through foreign capital in the form of loans, grants and
Foreign Direct Investment. Now a days globalization has made a better climate to
developing countries to have more and more capital formation.
2) Imports Restricted : If a developing country restricts all luxurious imports will
save the foreign exchange. This will enhance the savings and it leads to an increase in
net capital formation.
3) Favourable Terms of Trade : If the terms of trade move in favour of an
underdeveloped country, it is in position to import large quantity of capital goods. Moreover
due to favourable terms of trade domestic income rises which should be saved and
invested productively.Then only the favourable terms of trade will be useful for capital
formation.
3.2.2 Role of Agriculture and Industry in economic Development :
A) Introduction :
The over-populated developing countries like India, Pakistan, Indonesia, China etc.
are heavily dependant on Agricultural sector.These country cannot go without agricultural
sectors help. Since most of these countries are fully dependent on agriculture. The role
of agriculture in economic development is self evident of these countries.
B) Role of Agriculture in Economic Development :
Agriculture helps the process of economic development in the following way.
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