EFFECT OF PUBLIC FINANCE

•EFFECT OF PUBLIC DEBT
PUBLIC FINANCE
DR SHASHI AGAGRWAL

•     EFFECT OF PUBLIC DEBT

•     PUBLIC BORROWING INVOLVES TRANSFER OF PURCHASING POWER FROM INDIVIDUAL TO GOVERNMENT AND A SUBSEQUENT RE TRANSFER OF THE SAME TO INDIVIDUALS FROM THE GOVERNMENT

•     PUBLIC DEBT IN ONE SENSE  THE REVENUE EFFECT AND IN ANOTHER HAS THE EXPENDITURE EFFECT

•     PUBLIC BORROWING PRODUCES DIFFERENT EFFECT ON THE ECONOMY.

•     DEPEND ON THE SOURCES OF BORROWED FUNDS

•     EFFECT OF PUBLIC DEBT AND THE SOURCES OF BORROWING

•     IN CASE OF INTERNAL BORROWING FUNDS ARE TRANSFERRED FROM INDIVIDUAL INVESTORS/FINANCIAL INSTITUTIONS/COMMERCIAL BANKS/CENTRAL BANK

•     IT CREATES EXPANSIONARY EFFECT WHEN GOVERNMENT USE  INDIVIDUAL’S IDLE SAVING

•     BESIDE BORROWING FROM THE COMMERCIAL BANKS AND THE CENTRAL BANK WILL ALSO PRODUCE DUE TO INCREASE IN ADDITIONAL PURCHASING POWER AS A RESULT OF CREDIT EXPANSION

•     EFFECT OF PUBLIC DEBT AND THE PURPOSE OF BORROWING

•     BORROWED FUNDS ARE USED FOR  UNPRODUCTIVE ACTIVITIES LIKE REPAYMENT OF LOANS,RESOURCES THEN MAY NOT BE ALLOCATED IN AN OPTIMAL MANNER. BUT EFFECT OF PUBLIC BORROWING ON CONSUMPTION SPENDING IS LIKELY TO BE LESS ADVERSE AND IT WILL NOT PRODUCE ANY'S SIGNIFICANT EFFECT ADVERSE EFFECT ON INVESTMENT

•     IF LOANS ARE RAISED FOR PRODUCTIVE PURPOSE,SCARCE RESOURCES MAY BE DISTRIBUTED RATIONALLY AND NATIONAL INCOME WILL RISE

•     IMPOSITION OF HIGH TAXES DISCOURAGES TO PEOPLE WORK MORE AND IT WILL PRODUCE UNFAVOURABLE EFFECT ON THE INCOME

•     EFFECT OF PUBLIC DEBT AND THE PURPOSE OF BORROWING

•     BECAUSE OF DEBT,PRESENT GENERATION OBTAINS LESS CAPITAL. A LOWER VOLUME OF CAPITAL REDUCES PRODUCTION AND PRODUCTIVITY OF AN ECONOMY.

•     GENERALLY PUBLIC BORROWING WIDENS INCOME INEQUALITY AND BURDEN OF TAXATION IS FELT MORE OR LESS BY ALL BOTH RICH AND POOR . BURDEN OF TAXATION IS MOSTLY FELT BY THE POOR

•     RICH PEOPLE WHO LEND MONEY TO THE GOVERNMENT GET MORE INTEREST WHAT THEY SACRIFICE BY PAYING TAXES AND INEQUALITY WIDENS AND POOR PEOPLE WILL BENEFIT IF THE BORROWED FUNDS ARE USED FOR THEIR UPLIFTMENT

•     EFFECT ON PRODUCTION:=BOTH GOOD AND BAD

•     GOOD EFFECT:-

1.       PRODUCTIVE USE OF DEBT FOR SETTING UP INDUSTRIES

2.       FOR CREATING INFRASTRUCTURE

3.       GENERATE SUFFICIENT INCOME TO REPAY DEBT ALONG WITH INTEREST

•     BAD EFFECT:-

1.       UNPRODUCTIVE WORK AND MORE TAXES WILL BE IMPOSED

2.       REDUCES THE PEOPLE’S TENDENCY TO WORK

3.       PRICES OF THE COMMODITIES GO DURING WAR

•     EFFECT ON DISTRIBUTION

•     GOOD EFFECT

1.       GENERATES EMPLOYMENT

2.       SECURED IN THE FORM OF SMALL SAVING BENEFIT THE WEAKER SECTION

·         BAD EFFECT

1.       TAKEN FROM THE RICH CLASS. USED FOR UNPRODUCTIVE PURPOSE, BURDEN WILL BE ON POOR CLASS

2.       THEY WILL BECOME RICHER ON REDEMPTION OF DEBT

•     EFFECT ON CONSUMPTION

•     GOOD EFFECT

•     IF PEOPLE GIVE PUBLIC DEBT OUT OF SAVING,PRODUCTION INCREASES SO  THE SUPPLY INCREASES CONSUMPTION ALSO

•      BAD EFFECT :USED FOR UNPRODUCTIVE PURPOSE THEN ADDITIONAL TAXES WILL BE IMPOSED FOR REDEMPTION,SO CONSUMPTION WILL ALSO FALL

•     EFFECT ON THE COST OF PRODUCTION

1.       GOOD EFFECT

1.       IF FUNDS ARE UTILIZED FOR SUPPLYING OF RAW MATERIALS AT REASONABLE RATE

2.       PROMOTING INDUSTRIAL RESEARCH

3.       WILL REDUCE THE COST OF PRODUCTION

4.       WHEN BORROWED FUNDS ARE USED,DEMAND FOR LABOUR AND CAPITAL IS GENERATED

•     IF LABOUR IS SCARCE,WAGES MAY RISE AND THE COST OF PRODUCTION MAY INCREASE AND THE PRIVATE INDUSTRY WILL BE ADVERSELY EFFECT

•     EFFECT OF PUBLC DEBT ON INVESTMENT

•     GOOD EFFECT

•     IF THE GOVERNMENT BORROWS FROM THE COMMERICAL BANKS AND RBI,IT WILL PROVIDE EXTRA PURCHASING POWER TO THE PUBLIC, INVESTMENT WILL NOT BE EFFECTED

•     BUT WHEN INVESTMENT IN GOVERNMENT BONDS IS MADE FROM THE WITHOUT EXCESS OF RESERVE OR INDIVIDUALS OUT OF FUNDS KEPT FOR BUSINESS INVESTMENT THEN IT WILL ADVERSELY EFFECT THE INVESTMENT

•     EFFECT OF PUBLIC DEBT ON RESOURCE ALLOCATION AND NATIONAL INCOME

•     UNLIKE TAXATION FINANCE,PUBLIC BORROWING HAS LITTLE EFFECT ON RESOURCE ALLOCATION OR COMPOSITION OF NATIONAL INCOME

•     IF GOVERNMENT SPENDS ON CREATION OF MORE ON CAPITAL GOODS THEN PRODUCTION WILL INCREASE AND SO ON NATIONAL INCOME

•     WHEN INVESTMENT LEVEL IS REDUCED,OUT WILL DECREASE OF CAPITAL GOODS AND NATIONAL INCOME WILL NOT IMPROVE

•     EFFECT OF PUBLIC DEBT ON WORKING OF MONEY MARKET

•               IF DEMAND FOR FUNDS FROM THE PRIVATE SECTOR IS ON HIGH LEVEL,GOVT WILL HAVE TO FIX HIGHER INTEREST RATE FOR ATTRACTING INVESTORS

•               IF THE GOVERNMENT BORROWS FROM THE PUBLIC,COMPETE WITH PRIVATE INVESTOR

•               IF THE STATE BORROWS FROM THE BANKS AND RBI MORE THAN THE AVAILABLE SUPPLY THEN IT MAY LEAD TO CURRENCY EXPANSION

•     EFFECT ON INFLATION/DEFLATION

•     DURING INFLATION TO CHECK IT GOVT SELLS PUBLIC BONDS THE MONEY WITH THE PUBLIC WILL REDUCE

•     DURING DEFLATION DUE TO REPAYMENT THEN MONEY WITH PUBLIC INCREASE SO DEMAND WILL ALSO GENERATE

•     DEBT TRAP

•     INCREASE IN PUBLIC DEBT AFTER CERTAIN LIMIT,NOT POSSIBLE TO REPAY PRINCIPLE AND INTEREST. IT HAS TO BORROW TO PAY THE INTEREST AND PRINCIPLE. DEBT TRAP.

•     WHICH MEANS THE GOVT CAN NOT SERVICE ITS EXISTING DEBT WITHOUT BORROWING ITS FRESH.

•     EFFECT OF FOREIGN LOAN ON THE ECONOMY

•     EXTERNAL BORROWING IN ECONOMIC DEVELOPMENT  MADE IT POSSIBLE THAT IMPORT OF HIGH PRIORITY GOODS WHICH WILL CREATE PRODUCTIVE CAPACITY

•     IT WILL HAVE FAVOURABLE EFFECT ON CONSUMPTION AND INVESTMENT AND

•     NATIONAL INCOME WILL ALSO RISE

•     THESE IMPORT ON THE ONE HAND REDUCE THE DEMAND OF INDIGENOUS PRODUCTS AND ON THE OTHER HAND WILL THEIR INVESTMENT WILL BOOST PRODUCT. IMPORT IS ANTI INFLATIONARY