By fiscal policy we mean, the government’s tax efforts, public expenditure and public borrowing. Through these the government can effectively encourage consumption, investment and savings habits and also restrict them. For example, suppose there is inflation in a country. Inflation implies that the people have high purchasing power and so they demand goods. To curb this, the government may raise the personal tax and also the corporate tax. Similarly, by altering its expenditure on various public projects, the government would be able to influence the prevailing economic condition. Public borrowing involves government issuing bonds and encouraging common public and other institutions to buy them. By this, the government would be able to bring down the level of purchasing power in the economy and control the inflation.
The following are the objectives of fiscal policy:
- Maximization of the aggregate saving is the first objective. Tins are achieved by encouraging people to reduce the current and future consumption. Specifically the attempt is to bring down and control the conspicuous consumption of the rich people. The government can impose taxes on them and can provide the basic necessities of life to the poor class on low rate. In this way by providing incentives, savings can be increased.
- Maximization of capital formation is the second objective. Through this objective the country can try to achieve an accelerated economic growth. This will help the country to overcome the stagnation and achieve a higher rate of economic growth.
- The third objective is to divert the available resources from the less productive to most productive purposes.
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Foreign capital or investment has become significant part of sources of funding for various projects in every country. This source of funding has received the attention of both the government as well as the corporate sector that there has been increasing reliance on this source for planning and execution of projects by the government as well as the corporate sector. Foreign capital can come into a country in different forms. Let us first understand these forms of foreign capital before discussing the need for foreign capital.
Forms of Foreign Capital
- Direct Entrepreneurial Investment: In this form of foreign capital, the foreign investors can start a company abroad mainly for the purpose of establishing its branches and subsidiaries in other countries. For instance an American business group may invest in a new project in India directly and start its own affiliate or branch or even a subsidiary. Sometimes, the investors abroad may participate in the stocks or share capital of Indian companies. Whenever the Indian companies go for public issue of shares or debentures, the foreign investors may respond by participating in such public issue. This is also called foreign capital. In the past external business group used to invest in new companies and that form of foreign capital used to flow much, but now-a-days participation in the equity or debenture of companies by foreign investors and non-resident Indians is becoming more predominant.
- Foreign Collaboration: Foreign collaboration is another form of foreign capital. Under this a domestic company may join with the foreign company, mostly the reputed one in the industry, and start with the joint operation in India.
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Inflation has to be controlled, otherwise the extent of damage done to the economy will be something substantial and the economy would take a long time to recover from the effects of inflation. In this direction of control of inflation, the following are the theoretical measures available. These measures could be classified into three groups viz. Monetary measures, Fiscal measures and Other measures.
1. Monetary Measures
Monetary measures are steps taken by the Central bank of a country as the head of the monetary system. These measures are usually refereed to as the, quantitative credit controls and qualitative credit controls. The former include bank rate, open market operations and the variable reserve ratio. The, latter include margin requirements, moral suasion, direct action, control through directives, consumer credit regulation or rationing, publicity, etc.
- Quantitative Credit Controls: Bank rate is the first, measure to curb credit creation activity of the commercial banks, as during inflationary period the volume of money supply has to be reduced. Bank rate is the rate at which the central bank of a country re-discounts the bills already discounted by the commercial banks. When the central bank wants to control credit creation by commercial banks, it would simply increase the bank rate. Correspondingly the commercial banks would increase the discount rate which acts as a disincentive for the businessmen and others to approach the commercial banks for discounting their bills. However, the success of this policy depends on the co-operation of the commercial banks. Open market operations are another quantitative credit control measure.
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The population of an economy is divided into two categories, the economically active and the economically inactive. The economically active population (labor force) or working population refers to the population that is willing and able to work, including those actively engaged in the production of goods and services (employed) and those who are unemployed. Whereas, unemployed refers to people who are willing and a capable of work but are unable to find suitable paid employment. The next category, the economically inactive population refers to people who are neither working nor looking for jobs. Examples include housewives, full time students, invalids,those below the legal age for work, old and retired persons.
Unemployment is of different types. The important types of unemployment are:
- Structural unemployment: This is a type of unemployment caused mainly by the change in the development strategy adopted by an economy. For example, suppose a country basically agricultural in nature, plans to adopt industrialization as a strategy. This will result in displacement of labor in agriculture and not all of them can be accommodated in the industries. This type of unemployment caused is called Structural unemployment. This type of unemployment is also known as the chronic unemployment or the Marxian or long-term unemployment. It is mostly to be found in the underdeveloped countries. This type of unemployment is due to the deficiency of capital resource sin relation to their demand. The problem in the underdeveloped countries is to get rid of this age-old chronic unemployment by accelerating the process of economic growth.
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According to the First report of the National Income Committee, “National income estimate measures the volume of commodities and services turned out during a given period, counted without duplication.” This means the total volume of goods and services produced in a year in a country is valued in monetary terms to obtain the National income of the country concerned.
Regarding the measurement of National income, it could be done in three different ways depending upon the interpretation of concept of national income. If National income is considered as a flow of goods and services, then the method used is called Product method. If National income is treated as a flow of income then the relevant method of measuring it is called Income method. Alternatively, if National income is treated as a flow of expenditure, the method used is called the Expenditure method. Apart from these traditional methods of measuring National income, one more method is evolved and it is called the Value added method. Let us now look into the contents of each of these methods.
- Product method: In this method, the value of goods and services produced in an economy during a year is found at the market prices, to obtain the GNP at market prices. By subtracting indirect taxes and adding subsidies, we obtain the Gross National Product (GNP) at factor cost. By deducting from GNP the depreciation, we obtain the Net National Product (NNP).
- Income method: When we aggregate the income received by various factor services, like rent, wages/salaries, interest and profit we obtain the National income at a factor cost.
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Economic dualism refers to the existence of a developed sector side by side with an under developed or undeveloped sector. We will come across the co-existence of sophistication and primitive characteristics in every walk of life. For example, in the urban areas, one will find the use of modem technology in the production field as well as households, while in the rural areas, the age old, antiquated techniques will be used in the production as well as in households. This dualism retards economic growth. That is, the subsistence sector in the rural areas will pull down whatever little economic progress is achieved with the developed and modem sector. Further in the urban areas, one can come across the existence of dualism, in every activity. For instance there will be modern, technologically sophisticated industries existing side by side with industries with labor intensive and poor technology. There will be high wage executives existing with poorly paid slum dwellers. Firms with international collaboration producing ultra modem products will be found along with the domestic firms using inferior technology. In the rural areas also the dualism can be found. We can find the co-existence of farms with vast expansive areas using modern production technology along with small farms where such technologies can never even be dreamt of. The bigger farms will be using trained and skilled laborers whereas the small farms will mostly be depending on the family labor and untrained, semi-skilled labor While the capital investment by the big farms will be several times higher than those of the small farms, the rural indebtedness will be found more with the small farms than the large farms.… Read the rest