Question

Discuss the role of fiscal policy in an underdeveloped economy.

Answer 1

1. Mobilization of Resources: Underdeveloped economies often suffer from low savings and inadequate capital formation. Through progressive taxation and reduced unproductive subsidies, the government can mobilise resources to fund development. Helps reduce reliance on foreign aid or excessive borrowing.
2. Acceleration of Economic Growth: Fiscal policy can direct public spending towards infrastructure, education, health, and agriculture. This improves productivity and builds the foundation for sustainable economic growth.
3. Reduction of Inequality and Poverty: In underdeveloped countries, income inequality is high. Fiscal policy redistributes income through progressive taxes and welfare schemes such as Public distribution systems (PDS), Free education and healthcare and Employment guarantee programs.
4. Employment Generation: Fiscal measures like increased spending on public works, rural development, and social infrastructure create jobs. Reduces underemployment and disguised unemployment in agriculture.
5. Correction of Market Failures: In underdeveloped economies, private sector investment in sectors like health, education, and rural infrastructure is inadequate. The government steps in through fiscal policy to provide essential services and correct market failures.