Page 139 - DMGT401Business Environment

Business Environment

Notes and economic growth in an underdeveloped country. Saving potential in an underdeveloped
economy is limited partly because of shortage of several specific resources, lack of adequate
demand and high cost of production. This vicious circle can be broken by the government with
the help of saving-oriented budgets.
Through its fiscal policy, the government can also encourage growth of certain particular
industries in particular areas.

Example: For this, industries are provided with specific tax concessions and subsidies
such as tax holidays, higher depreciation allowances, etc., designed and incorporated in the
budgetary policy.
Further, the role of fiscal policy in economic growth can be understood through the impact of
Public Debt, Deficit Financing, and Taxes.

Role of Taxes in Economic Growth

Taxation is an effective budgetary tool to influence the level of savings and investment in the
country. Abolition and reduction of various taxes pushes the profits up and reduces the cost of
production and prices. Lower prices are expected to increase demand production and employment,
which in turn add to effective demand, and so on. Similar steps can be taken in the case of custom
duties. Raising import duties diverts the domestic demand from imports to domestically produced
goods. Reducing or abolishing export duties or providing export subsidies increases the demand
for export and contributes towards recovery from depression.
It is more helpful to lower tax rates on those goods which have a higher elastic demand. Demand
will be high if persons with a higher marginal propensity to consume are provided a relief in
direct taxation. In he same manner, investment may be encouraged by specific tax concessions
like tax holidays and greater depreciation allowance.
Taxes are also considered effective to control inflation. This happens in two ways: the first as in-
built stabilizers and the second relates to the common belief that taxes can be used to curb prices
and demand.
Public Debt in India

Public debt in the Indian context refers to the borrowings of the Central and State Governments.
Gross public debt is the gross financial liability of the government. Net public debt is the gross
debt minus the value of capital assets of the government and loans and advances given by the
government to other sectors. Debt obligation can be of many types:

1. Short term debts are those where maturity is less than one year at the time of issue and
consists of items like the treasury bills.

2. Some obligations may not have specific maturity but may be repayable subject to various
terms and conditions. They are called Floating Debt like provident funds, small savings,
reserve funds and deposits.
3. Permanent funded debts are loans having a maturity of more than one year at the time of
issue. Usually, their maturity is between three and thirty years. Some of them may even
be non-terminable so that the government is only to pay the interest on such debt without
ever repaying the principle amount.

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