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BBA 1st Year Business Environment FEMA Long Question Answer

(a) Full employment.

(b) Fiscal stabilization.

(c) Economic growth.

(d) Fiscal justice or equality in distribution of income and wealth.

(a) Fiscal Policy for Full Employment

In the matter of canons of fiscal policy, Prof. Keynes has laid down some fundamentals. According to him public finance is compensatory finance ordained to attain and maintain full employment in the economy. To pursue this goal, he suggested that:

(i) Taxation should be devised to promote and sustain consumption and investment.

(ii) To raise the level of effective demand and to overcome depressionary forces, budget should resort to deficit financing.

(iii) Public expenditure should finance public works programmes and provide social security.

(iv) Direct tax rates should be low so as to encourage savings and investments directed towards creation of more employment.

(v) Public expenditure must uplift the aggregate demand, investment and employment.

(vi) Public borrowing should finance productive public expenditure.

(b) Fiscal Stability: Fiscal policy should aim at relative price stabilization, control on inflation and avoidance of deflation. Forces stimulating growth process should be given a boost at a time

while inflationary pressures are to be curbed. In a growing economy when huge investment is undertaken to implement infrastructural projects, returns are not immediate, as such scarcity of consumption goods is felt. This results in raise in prices and wages and cost-push inflation is provoked. This vicious circle of inflation has to be checked through appropriate fiscal policy.

(c) Economic Growth: Appropriate fiscal policy encourages growth process, which has following objectives: (i) Fiscal policy should aim at improving marginal propensity ofsave and the consequent incremental saving ratio,

(i) To accelerate the rate of economic growth, fiscal policy should not adversely affect the ability and willingness to work hard, save more and invest.

(ii) To induce the stimulate private sector investment.

(iii) To promote investment into socially desirable channels.

(iv) To alter the pattern of investment and production to ensure improvement in economic welfare of general public, equity in the distribution and eradication of poverty.

(d) Fiscal Justice: Fiscal policy should aim at social justice by giving equitable distribution of income and wealth. Progressive tax system and redistribution of income through public expenditure by growing allocation for programmes like free medical care, free education, subsidised housing, subsidised essential commodities like milk etc., should be the objectives of fiscal policy.

Importance of Fiscal Policy: Classical economists believedthat the full employment is supposed to reach automatically and there is no necessity of any economic interference. According to the classical economists that government is the best government, which spend the least and imposed the lowest amount of taxes. This was considered a principle of sound finance.

But the modern economist like Keynes and Lerner have not accepted to classical concept of fiscal policy. They believed that the government has to play a positive role so as to regulate the economy by means of taxes and expenditure which they called as the principle of the functional finance and therefore, modern theory of fiscal finance is nothing but the application of functional finance. According to the modern concept of fiscal policy,”Fiscal policy is a technique to attain and maintain full employment by manipulating public expenditure as well as revenue in such a way so as to keep an equilibrium between effective demand and suppiy of goods and services as needed at that time”.

J.M. Keynes linked the objectives of fiscal policy to achievement of full employment. He was of the opinion that in order to increase the volume of employment, the state should step-up investment expenditure or public works, projects, such as roads, irrigation, works, public building etc, on a large scale and for this he advocated a policy on ‘unbalance budget’. He was of the view that deficit in the budget should be met through deficit financing.
Instruments of Fiscal Policy: There are three main instruments of fiscal policy, i.e., taxation, public borrowing and deficit financing which must be used in a harmonious combination so as to produce the best overall effect in realizing the macro-economic goals.

Taxation: A sound taxation policy should be accomplished:

(i) Curtailing consumption and thus garnering resources of public sector investment.

(ii) Reshaping the pattern of investment in a socially desirable manner.

Transfer of scare resources from unproductive private to productive public sector.

(iii) Inducing people to work hard, save and invest in production.

(iv) Reducing inequalities in income and wealth.

Public Borrowing: Public borrowing also pays an important role in mobilizing savings. It is a non-inflationary method of financing government programme as public debts divert savings of the people to government securities which are, less liquid assets. They tend to curb consumption and relieves inflationary pressure.

Deficit Financing: It is a financing of gap between public revenue and public expenditure. It Is done through public borrowing or a type that results in a net addition to national outlay or aggregate expenditure. In short, it implies creation of additional money supply. A country resorting to planning for development finds it easier to obtain additional resources for the plan through deficit financing. In India,, deficit financing constitutes an important resources of obtaining financial resources for the five year plans. When required public expenditure excee public revenue collected through taxation, borrowings, public sector profits, foreign aid etc., resorting to deficit financing become necessary to raise additional revenue to come at par with required expenditure.

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