Economics(Paper-4) - Shivaji University

development Keynes advocated fiscal policy to reduce the savings and raise the
propensity to consume. But in under developed country savings are low and consumption
is very high. Therefore Fiscal Policy plays a dynamic role in underdeveloped countries
and it is indispensable for economic development. According Raja J. Chelliah. “The
implementation of the financial plan and the achievement of balances in real and money
terms obviously will have to rely largely on fiscal measures.
Here are few objectives of Fiscal Policy.
1) To increase the rate of investment.
2) To increase socially optimal investment
3) To increase Employment opportunity
4) Economic stability
5) Control inflation.
6) To increase and redistribute National Income.
The success of fiscal policy in achieving these objectives depends upon how role
of fiscal policy plays in the instituted economic development.
2) Role of Fiscal Policy : Fiscal Policy is also a potent weapon for the
achievement of economic development in developing economy. To achieve high
economic growth, the government has to deploy all the tools of fiscal policy. Such as
taxation public expenditure public debt and deficit financing.
3) Aggregate Savings : Fiscal policy maximize the levels of aggregate savings
by applying a cut in the consumption of the public. It curbs conspicuous consumption
of the rich and force them to save more for capital formation.
4) To control inflation : Inflation can ruin an economy.The growth process gives
rise to some inflationary pressure in the economy. It is not controlled in time, then will
bring bad position to an economy.Thus, fiscal policy can play prominent role to have
economic development through the control of inflationary situations.
5) Eliminates unemployment : Fiscal policy prepares incentives for encouraging
those industries which have a high employment potential in the economy. In developing
country labour intensive industries should be according with better fiscal policy, which
may create more employment opportunities.
6) Inequality : Inequality of income and wealth retards the economic development
of a country.The fiscal policy can be worked out in such way that there will be equitable
distribution of income and wealth in society.Taxation policy can reduce the inequality in
income and wealth. Higher rate of taxation to rich people and lower rate of taxes to poor
people. Thus, inequality in income can be reduced.
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