Public Finance and Its Significance in Developing Countries like India

Public Finance Notes

Role of public finance in an underdeveloped country like India

Meaning and Definition of Public Finance

Public finance is a study of income and expenditure or receipt and payment of government. It deals the income raised through revenue and expenditure spend on the activities of the community and the terms ‘finance’ is money resource i.e. coins. But public is collected name for individual within an administrative territory and finance. On the other hand, it refers to income and expenditure. Thus public finance in this manner can be said the science of the income and expenditure of the government.

Different economists have defined public finance differently. Some of the definitions are given below. 

According to prof. Dalton “public finance is one of those subjects that lie on the border lie between economics and politics. It is concerned with income and expenditure of public authorities and with the mutual adjustment of one another. The principal of public finance are the general principles, which may be laid down with regard to these matters.

According to Adam Smith “public finance is an investigation into the nature and principles of the state revenue and expenditure”

To sum up, public finance is the subject, which studies the income and expenditure of the government. In simpler manner, public finance embodies the study of collection of revenue and expenditure in the public interest for the welfare of the country

Role of public finance in an underdeveloped country like India

Public Finance occupies great significance in an underdeveloped or developing country. According to R. J. Chelliah, “Public finance has a positive and significant role in the context of economic development.” The importance of public finance in an underdeveloped/developing country like India may be summarized as under:

a)      Capital Formation: Since development entirely depends on the rate of capital formation in the country, the first and foremost aim of public finance is to promote capital formation. Students of commerce and economics are well aware of the fact that the burning problem of an underdeveloped or developing country is the low capital formation. In the words of Dr. Baljit Singh, “For an undeveloped country all economic policies and measures in the initial stages must concentrate on production and fiscal policy should act as a tool of capital formation.” Capital formation can be increased through an effective and well-planned taxation policy. In the words of R. Nurkse, “For economic development, it is not the aim of public finance to bring about reduction in inequalities of incomes but its aim is to increase that proportion of the income which goes into capital formation.”

b)      Unemployment Problem: Another major problem of an underdeveloped/developing country is the unemployment problem. Increased income may be eaten up by a large mass of unemployed people. This problem of unemployment leads again to low standard of living, poverty, backwardness, ignorance and above all starvation. It is the function of public finance to provide employment opportunity. In the connection must be remembered that fiscal policies (public finance policies) are most effective tools for tackling of the problem of unemployment.

c)       Planned Economic Development: In underdeveloped/developing countries the productive resources are limited in quantity as well as quality. Public finance renders valuable help in the planned economic development of the country. The entire machinery of planning works through the mechanism of public finance. The principles of public finance have paramount importance in the sphere of rapid economic planning because both of these are the closely related activities of the state. For example, the Government of India is raising necessary funds through taxation etc. for formulation and implementation of its five year plans.

d)      Increase in Income: Capital formation is not an end in itself but only a means of achieving another important end, i.e. increase in income. The object of public expenditure is to increase the income in underdeveloped countries so at to invest funds in such industries and in such an economical and efficient manner that least amount of money fetches the greatest possible output. The Government gives subsidies and grants to industries to enable them to increase production at cheaper rates. This will lead to prosperity and development with an overall increase in the income of the masses.

e)      Reduction in Economic Inequalities: Another problem of underdeveloped or developing countries is the unequal distribution of income and wealth to the public. Public finance has an important role to play in this context. For example, the Government can impose heavy taxes (such as income tax) on the richer sections of the society and spend the income so received on providing cheap food, cheap housing, employment, free medical aid etc. for poorer sections of the society.

f)       Optimum Utilization of Resources: Another major problem of underdeveloped or developing countries is the problem of non-utilization or even destruction of the scarce and limited resources. The solution of this basic problem lies in the optimum utilization of these available resources by means of adopting planned monetary and public finance policies. The state can direct the flow of consumption, production and distribution in the right direction by adopting balanced budget policy.

g)      Problem of Economic Stabilization: Another problem of an underdeveloped and developing country is the economic instability. After 1929-30 worldwide depression, it has been emphasised that public finance (revenue and expenditure process of the Government) may be used to secure economic stability or to remove economic fluctuations and distortion in the economy.

h)      Increase to Savings: The major problem of developing and underdeveloped countries is that savings are very nominal which hinder their economic development. Public finance encourages the accumulation of savings.