BBA Objectives of Fiscal Policy in Developing Countries

The most important instrument of government intervention in the economy today 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 and inflation as well as of promoting and accelerating economic growth. Monetary policy alone will not do. 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.

Objectives of Fiscal Policy in Developing Countries:

In developing countries, taxation, Government expenditure and borrowing have to play a very important role in accelerating economic development. In fact, 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 special fiscal policy which ensures a rapid economic growth. There are vast and diverse resources, human and material, which are lying underutilised.

Such countries have weak infra­structure, i.e, they lack adequate means of transport and communications, roads, ports, highways, irrigation and power. They also lack technical know-how. Their population is increasing at an explosive rate which necessitates rapid economic development to meet the requirements of the rapidly growing population. Above all, these countries suffer from deficiency of capital. They are caught up in a vicious circle of poverty. In order to overcome these handicaps, a suitable fiscal and taxation policy is called for.

The principal objectives of fiscal policy in a developing economy are:

1. To mobilise resources for economic growth, especially for the public sector;

2. To promote economic growth in the private sector by providing incentives to save and invest;

3. To restrain inflationary forces in the economy in order to ensure price stability; and

4. To ensure equitable distribution of income and wealth so that fruits of economic growth are fairly distributed.