significance of fiscal policy in developing countries

the fiscal policy has a main role in the economic development of developed as well as developing or underdeveloped countries. however, for developing countries the fiscal policy is such an instrument or tool, which works as a directive for capital formation, economic development, increase in production, increase in employment, increase in social welfare, etc.
decrease in national income in underdeveloped or developing countries is not only the problem of fiscal policy. in such countries, "vicious circle of poverty" and "high propensity to consume"will decrease "propensity to save" decreasing the investment. as a result of this, employment and income will be directly affected. so , the effect of "vicious circle of poverty"will be directly on effective demand.as a result of this,

national income of such countries will decrease due to low liters, unemployment, malnutrition. decrease in production, etc. to gain freedom from such situations, the government of underdeveloped or developing countries should formulate and implement appropriate and feasible fiscal policies to break the "vicious circle of poverty" and to increase economic activities. for this, the government has to undertake appropriate tax-system, so that without any negative effects in the social structure the collection of government revenues will be increased. people having high income will pay a larger amount of tax while people having low income will pay a smaller amount of tax. this will increase in saving and as a result capital formation will also be increased.

after government revenues, the next major part of fiscal policy is the public expenditure. the revenues of the government from various sources should be spent on public sectors according to priority and necessity. the government expenditure may create inflation in the economy. therefore, appropriate fiscal policy should be formulated according to the state of the economy. so, due to proper fiscal policy production will increase. in addition to this , as a result of optimum mobilisation of resources, employment and income will increase with the increase in effective demand also.

the third tool of fiscal policy after public expenditure is the policy of public borrowing. through public borrowing also the employment, production and capital formation required for a country's economic growth will increase accelerating the economic development. since capital formation in underdeveloped country is slow, the loan can be obtained in two ways viz. internal and external. internal borrowing will mobilise the capital in stock while insufficient capital will be fulfilled with the loan from foreign countries or donor organisations to enhance the economic activities. the dependence of large population of the country on agriculture, high population growth rate, lack of capital formation ,lack of industrial and technological development, very low per capital income, adverse balance of payment, inequality in the distribution of income, etc. are the main causes for the occurrence of such states in the underdeveloped countries. improvement in these various causes should be brought about through fiscal policy. therefore, in underdeveloped and developing countries the role of the fiscal polity will be to meet the objectives as has been mentioned above. in addition to these things, the important role of the fiscal policy is in the following things:

1. appropriate income and expenditure system

in underdeveloped or developing countries their occurs evils in social, economic and political structures. government plays an important role to control evils on such sectors by controlling public economic administration with appropriate income and expenditure system.

2. maintaining regional balance

in underdeveloped countries the development of all sectors won't be in the same rate. the reasons for this are the geographical structure of the country,culture, customs and traditions of the people. the government plays an important role in developing the underdeveloped sectors through fiscal policy and public expenditures.

3. increase in foreign trade

in underdeveloped countries due to inadequate capital, industries won't increase. as a result, necessary goods will be imported from foreign countries. this will increase it he quantity of imports and balance of payment will be unbalanced. but the government will encourage the production of export goods and tries to decrease imports through fiscal policy. for this the government will provide various subsidies and facilities on the export goods. this will encourage the investors towards investment,as a result, foreign trade will increase and adverse balance of payment will decrease.

4. equal distribution of national income

in underdeveloped countries their will be inequality in the distribution of the national income. most part of the national income will be concentrated In the hands of a few people. this is taken as inappropriate from the view of social as well as economic justice. such a situation will create political instability in the country. to be free from such problems the government has to undertake appropriate fiscal policy. the government has to implement progressive tax system through fiscal policy. as a result, the government will tax the rich people heavily. thus obtained revenue will be spent by the government for the benefit of poor people such as education, health, employment generation activities , etc. this on one hand will save the expenditures of poor people in such sectors and on the other will get employment. so , the fiscal policy plays an important role in the equal distribution of national income.

5. maximum social welfare

in underdeveloped and developing countries the government plays an important role in the equal distribution of national income and providing maximum social welfare through fiscal policy. fiscal policy plats an important role in taxing rich people heavily and investing such revenue in productive sectors. so, there will be a great importance their social policy to increase the income level of poor class for increasing their social and economic welfare.

6. increase in per capital income

fiscal policy tries to involve all people of the country in employment. this will increase the per capital income of the country. due to investment in different sectors the national income will increase. this will help in the increase in per capital income.

7. expansion of industries

through government fiscal policy on one hand capital formation increases resolution development and expansion of industries while on the other hand due to open fiscal policy internal and external investment increase resulting expansion of industries. in addition to these various things, basically the main role of the fiscal policy is to fulfill the objectives maintained above.