What is the Role of Fiscal Policy in Economic Growth ?

What is the Role of Fiscal Policy in Economic Growth ?

In the developing countries, government plays a very important role in accelerating economic growth and development by using fiscal and monetary policies.

Capital formation is very important for economic growth and development of a country and most of the developing countries suffer from capital deficiency, therefore it is necessary to achieve a higher ratio of savings to national income.

As Nurkse says, ‘Public finance assumes a new significance in the face of the problem of capital formation in underdeveloped countries.’

Promoting Savings for Economic Growth –

Capital formation is an important determinant of economic growth and to accelerate the rate of capital formation, saving and investment rate in the economy must be raised. Fiscal policy, if used properly and in an efficient and equitable way it can increase private savings and also investment in the economy.

Taxation and Resource Mobilisation –

According to the Indian Taxation Commission, ‘taxation may be the most effective means of increasing the total volume of saving an investment in an economy where the propensity to consume is normally high. A fiscal policy can also be used to achieve the objectives such as equitable distribution of income and wealth, price stability and increasing employment.