Role of fiscal policy in economic development of under developed countries

......

1. Role of Fiscal Policy in Economic Development of Under Developed Countries!
1. To Mobilize Resources:
The foremost aim of fiscal policy in underdeveloped countries is to mobilize resources in the
private and public sectors. Generally, the national income and per capita income is very low due
to low rate of savings. Therefore, the governments of such countries through forced savings
pushes the rate of investment and capital formation which in turn accelerates the rate of
economic development.
It also undertakes the policy of planned investment in the public sector. Private investments have
the favourable effect of increasing investment.
2. To Accelerate the Rate of Growth:
Fiscal policy helps to accelerate the rate of economic growth by raising the rate of investment in
public as well as private sectors. Therefore, various tools of fiscal policy as taxation, public
borrowing, deficit financing and surpluses of public enterprises should be used in a combined
manner so that they may not adversely affect the consumption, production and distribution of
wealth.
3. To Encourage Socially Optimal Investment:
In underdeveloped countries, fiscal policy encourages the investment into those productive
channels which are considered socially and economically desirable. This means optimal
investment which promotes economic development and avoids wasteful and unproductive
investment.
In short, aim of the fiscal policy should be to make investment on social and economic overheads
such as transportation, communication, technical training, education, health and soil
conservation. They tend to raise productivity and widen the market to enjoy external economies.
At the same time, unproductive investment is checked and diverted towards productive and
socially desirable channels.
4. Inducement to Investment and Capital Formation:
Fiscal policy plays crucial role in underdeveloped countries by making investment in strategic
industries and services of public utility on one side and induces investment in private sector by
giving assistance to new industries and introduces modern techniques of production. Thus,
investment on social and economic overheads are helpful in increasing the social marginal
productivity and thereby raising the marginal productivity of private investment and capital

2. formation. Here, optimum pattern of investment can also go a long way to yield fruitful results of
economic development.
Economic development is a most dynamic process which involves changes in the size and
quality of population, tastes, knowledge and social institutions. Keeping all factors in mind, if
social marginal productivity in socially desirable projects is low, fiscal policy should be framed
to raise social marginal productivity and to divert resources to that productive channels where the
social marginal productivity is the highest.
5. To Provide more Employment Opportunities:
Since in less developed countries, population grows at a very fast rate, the aim of fiscal policy in
such countries is to make high doses of expenditures which are helpful to raise employment
opportunities. Generally under developed economies suffer from unemployment.
The unemployment is of two types:
(I) Cyclical unemployment and
(II) Disguised unemployment.
(I) Cyclical Unemployment and Fiscal Policy:
Cyclical unemployment is caused by external factors in underdeveloped countries. These
countries mostly export their raw materials. When demand for these raw materials falls due to
cyclical depression, then under developed countries also have to face the problem of
unemployment in the primary industries. In order to remove this type of unemployment, the
government may increase public expenditure. But it is not likely to have any favourable effect.
As public expenditure increases, the people may spend on imports or conspicuous consumption.
Thus, expenditure on imports fails to generate employment in the country. Expenditure on
conspicuous consumption will lead to rise in prices instead of increasing output and employment.
It is because production capacity in under-developed countries is limited. It is not capable of
meeting rising demand. Thus, the objective of fiscal policy should be to modernize and diversify
the economy.
It implies that public investment should be directed towards the setting up of new industries,
promoting the growth of private industries and developing agriculture. Besides, Govt. should
provide tax concessions, tax holidays, bonus and subsidies etc. This will help to reduce the
problem of unemployment.

3. (II) Disguised Unemployment and Fiscal Policy:
Unemployment in under-developed countries is disguised in nature. It is found in agricultural
sector. It implies that more number of people are engaged in production activity than are actually
needed. To remove this kind of unemployment, it is necessary to increase the rate of capital
formation. Thus, the main objective of fiscal policy in under-developed countries should be to
foster the maximum rate of capital formation without inflation. Stability is the pre-requisite of
development.
This will help to raise the rate of savings. By increasing the ratio of saving to income, the
economy would not only be able to reduce unemployment but also maintain economic stability
in the long run. According to Raja J.Chelliah, “The main goal of fiscal policy in an
underdeveloped country may be the promotion of the highest possible rate of capital formation
without inflation. Stability is necessary for progress but the maintenance of stability does not
require a fall in the rate of saving…………..” Therefore, the fiscal operations of the government
for promoting the economic development of less developed countries are as of an investor, as a
stabilizer, as a saver and as an income redistributor.
6. Promotion of Economic Stability:
Still another role played by the fiscal policy in developing countries is of maintaining reasonable
internal and external economic stability. Generally, a developing country is prone to the efforts
of international cyclical fluctuations. Such countries mainly export primary products and import
manufactured and capital goods. However, in order to minimize the effects of international
cyclical fluctuations, fiscal policy should be viewed from a longer perspective.
7. To Check Inflationary Tendencies:
Inflationary tendencies is one of the main problems of developing countries as these countries
make heavy doses of investment for their development activities. Thus, there is always an
imbalance between the demand for and the supply of real resources.
With additional injection of purchasing power, the demand rises and supply remains inelastic on
account of its structural rigidities, market imperfections and other bottlenecks which in turn lead
to inflationary pressures on the economy. Aggregate demand as a result of rise in the income of
the people exceeds the aggregate supply. Capital goods and consumption goods fail to keep pace
with the rising income.
Fiscal policy, therefore, can take several steps to control inflationary forces in the economy.
They are:

4. (i) Reducing the purchasing power of the people through Compulsory Deposit Scheme
(ii) Mobilizing resources through public debt
(iii) Levying of Expenditure Tax
(iv) Imposing more taxes on rentier class
(v) Raising the rate of Capital Gains Tax
(vi) Encouraging the habit of saving among the people
(vii) Raising the percentage deduction of provident fund
(viii) Making of public investment in such production projects as have short gestation period,
(ix) Encouraging more production
(x) Mobilizing more resources by way of public borrowing and using the same in production
projects.
8. National Income and Proper Distribution:
The importance of increasing national income and removing inequalities of income and wealth
can hardly be exaggerated. According to Prof… Raja J. Chelliah, a mere increase in per capita
income does not necessarily lead to an increase in the welfare of all sections of the people, unless
an equitable distribution is usually taken to mean a reduction in the existing inequalities of
income and wealth.
The existence of extreme inequalities in income and wealth create social cleavages, lead to
economic and political instability and the biggest hindrance in the way of economic development
of an economy. As a result, few rich roll in wealth and misuse their income on conspicuous
consumption and inventories, real estate, gold and speculation, while poor masses grow under
poverty and misery.
9. Subsidies in Consumption and Production:
Fiscal instruments are also used in under developed economies to provide subsidized food and
production inputs to the poor people. Government programmes like public distribution system,
price support policy, procurement of food grains, marketing facilities to the producers, input

5. supply schemes, etc. are all directed to help the poorer sections to enable them to be more
productive so that the income level is raised. For example, in India, many of poverty alleviation
programmes like IRDP, NREP, RLEGP etc. have been directed to improve the position of the
poorer sections and to create permanent community assets in order that the national and per
capita income can grow with the passage of time.
10. Reallocation of Resources:
Allocation of resources are not proper in the underdeveloped countries. Much of the resources in
private sector are directed to the production of those goods which meet the need of richer
sections of society and yield higher profit. It is very important that the fiscal tools are employed
in such a way as to divert resources from less useful production to more useful channels. This
can be done by various tax incentive measures and government subsidy programmes.
11. Incentive to Production:
Increase in production and productivity can be influenced by fiscal policy to a greater extent.
Through grant of tax holiday or tax concessions relating to output produced from desirable lines
of production, the industrial activity can be enhanced. On the other hand, discriminatory fiscal
policy against the output on undesirable lines of business activity will help more essential
commodities to grow because the resources will be released for their use in such production.
12. Balanced Growth:
Most of the underdeveloped countries suffer acutely from regional imbalance in the matter of
economic development. Private sector in these countries normally concentrates its production on
those luxury goods which are consumed mostly by richer sections who live in the urban areas.
Hence, backward areas will not be developed unless government interferes into the decision
making relating to industrial location. By providing fiscal incentives to the private sector and by
setting up industries in the public sector in these geographical areas, the government can achieve
balanced development of the country.
13. Reduction of Inequality:
Since inequality of income and wealth is vast in the underdeveloped countries, fiscal policy has
an important role to play in reducing inequality. Taxation of income and property at progressive
rates, imposition of heavy taxes on goods consumed by the rich and exemption from tax or tax
concession granted to commodities of mass consumption, government expenditure on relief
programmes, supply of inputs for small industries and agricultural farms, provision of essential
commodities to the poor at subsidized prices, etc. are the fiscal measures directed to the

6. reduction of the gap between poverty and prosperity. Hence, the role of fiscal policy becomes
significant to frame such policy to remove these inequalities of income and direct these misused
resources into productive channels for economic development.

1. Metallic Mineral Resources
2. Nonmetallic Mineral Resource
3. Metallic Fuel Mineral Resource
1. mineral resources-
are minerals resources that contain metal in raw form, their appearances have
metallic shine and they can be melted to obtain new products. They also contain
metals in their chemical composition, the only way you can extract them is
through mining some examples of metallic mineral resource include Gold, Silver,
Copper, Tin, Iron, Lead, Zinc, Nickel, Chromium, and Aluminium.
2. Nonmetallic mineral resources
are minerals that do not contain extractable metals in their chemical composition;
they contain nonmetallic shine or lustre in their appearance. Examples of
nonmetallic mineral resource include sand, stone, gravel, clay, gypsum halite,
and Uranium. These minerals can be reprocessed through grinding, mixing,
cutting, shaping for intermediate use.
3. Fuel mineral resource
are the basic mineral resources in the world, some examples of these include
fossil fuels such as coal, crude oil (petroleum) and natural gas; these are
primarily gotten from the remains of dead plant and animal, they are often
referred to as fossil fuels and are formed from hydrocarbon. When fossil fuels are
burned, they particularly give rise to a great source of heat energy.The proper
use of fossil fuels has enabled large-scale industrial development and largely
supplanted water-driven mills, as well as the combustion of wood or peat for
heat.
Types of mineral resources and their uses
1. Fuel/Crude oil- crude oil which is popularly known as petroleum, is a liquid
found within the Earth comprised of hydrocarbons, organic compounds and small
amounts of metal. Crude oil is a mixture of naturally occurring hydrocarbons that
is refined into heating oil, diesel, gasoline, jet fuel and kerosene,

7. crude oil is commonly extracted simply by drilling into the ground in the exact
position where the oil is found.
2. Coal- coal is a sedimentary/metamorphic rock produced in swamps where there
is a large-scale accumulation of organic matter from plants. As plants die, they
decay and accumulate to first become peat. Compaction of the peat due to burial
drives offvolatile components like water and methane, eventually producing a
black- colour organic- rich coal called lignite. Further compaction and heating
results in a more carbon- rich coal called bituminous coal. If the rock becomes
metamorphosed, a high-grade coal called anthracite is produced. However, if
temperatures and pressures become extremely high, all of the carbon is
changed to graphite. Graphite will burn only at high temperatures and is
therefore not useful as an energy source. Anthracite coal produces the most
energy when burned, with less energy produced by bituminous coal and lignite.
3. Natural gas- natural gas is derived from marine plants and animals; that is by a
combination of sedimentary processes) which trap and bury plant and animal
remains, and then metamorphic processes which heat and change the plant and
animal remains into deposits of oil and gas.
4. Gold- gold is a rare, valuable and durable precious metal with a versatile use;
gold is relatively heavy and can be made into a wide range of intricate jewelry
designs. Apart from being used as jewelry, gold is also used in dentistry,
medicine, coins, and applications for the aerospace industry. However, gold has
a high corrosion resistance and will not tarnish from everyday use, thus making it
ideal for jewelry. Gold is commonly alloyed with other metals to increase its
strength and durability, as well as to alter its hue. Gold is available in various
degrees of purity. Yellow gold is seen most often, but white gold (gold mixed with
palladium, nickel and silver) is also popular in some parts of the world, especially
for bridal jewelry.
5. Silver- silver is a light precious substance used for making jewelry, cell phone
covers, fine silverware, coins and photography. Because of its versatility,
availability, affordability and appeal; it is used for different things and it is very
bright, durable and easy to work with. Silver also is substantially cheaper than
gold or platinum.
6. Platinum- platinum is the most precious and durable of all metals used in jewelry
industry; it is very pure and it is rarer, denser and stronger than gold or silver.
Because of its purity, it doesnt tarnish or fade after much use, and its extremely
durable. Platinum has a deeper and more luminescent white hue than either
white gold or silver. Platinum is the traditional metal for heirloom-quality jewelry.
It's a natural partner for a fine white diamond.
7. Lead- it is a bluish-white soft malleableductileplastic, or inelastic heavy metallic
element found mostly in combination and its used especially in X-ray and gamma
radiation shielding, pipes, cable sheaths, batteries, solder, and shields against
radioactivity, ceramics, weights, and ammunition.
8. Gypsum- this is a soft white or grey mineral consisting of hydrated calcium
sulphate. It occurs chiefly in sedimentary deposits; it is used for making cement,
plaster of Paris, fertilizer, wallboard, and glass.

8. 9. Tin- a soft silvery-white, ductile and malleable metal which is obtained mainly
from themineralcassiterite, which containstin dioxide, SnO, tin is used in
containers, as a protective coating, in tinfoil, and in soft solders and alloys.
10. Copper- copper is a soft shiny and malleable metal used as an alloy (bronze and
brass), it is the 29th elements on the periodic table. This metal is resistant to
corrosion when it is exposed to air and water and it is used to make coins, brass
instruments, pipes and fungicides, it is also a good conductor of electricity which
is why its used for electrical wiring in our homes.
11. Aluminium- this is asilvery-white lightweight metal with malleable and durable
property; it is soft and malleable. Aluminium is the third most abundant mineral in
the Earth crust and it is used in smartphones, tablets, laptops, and flat screen
TV. However, because of its strength and weight ratio, Aluminium is used in a
huge variety of products including pots, pans, basins, cans, rail constructions,
zinc, foils, kitchen utensils, window frames, and aeroplane parts.
12. Gravel- gravel is one of the most accessible natural deposits classified byparticle
sizerange; it includes size classes fromgranule- toboulder-sized fragments that
are gotten from river channels, river flood plains, and glacial deposits. Gravel is
used for various constructions and mostly its often used for making construction
materials such as concrete blocks, bricks, pipes, mixing with asphalt and as
construction fill.
13. Sand- this is the most accessible natural resources which found in the beach,
roadside, water channels, rivers and streams, it is mostly quartz, formed by
weathering of igneous rocks like granite, it comes in various sizes of grain. Sand
has varieties of uses. It is used in sandbags, for construction or to line the floors
of arenas and other surfaces, for playgrounds and hosts of other uses.