Principal Methods of Development Finance

A very important question that faces many countries today is how to finance economic development plans.

Huge resources are required for his purpose. In under-developed and economically backward countries, Mere is a very small margin between the volume of production in the country and the consumption of the people which limits the possibility of savings.

This makes the problem of financing development plans all the more difficult.

Methods of Development Finance:

The following are the principal methods of development finance:

Taxation:

Both direct and indirect taxes have to be levied to increase the State resources. Taxes restrict domestic consumption and increase savings. It is best to impose taxes on luxury consumption and on non-entrepreneurial incomes. In backward countries, it is essential to levy indirect taxes on commodities of mass consumption. Agricultural taxes are also necessary. But care has to be taken that taxes do not weaken incentives to work, save and invest.

Government Borrowing:

The savings of the people can be mobilized by means of public loans. But the private sector competes with the government in this matter. To ensure success of the government borrowing, it is essential to establish and extend financial institutions in rural areas. It is also necessary to check unproductive investment, such as that in real estate and jewellery.

Foreign Capital:

Foreign aid is also essential. But it must be without ‘strings’, i.e., the independence of the country must not be endangered. Foreign loans nowadays come from governments and international financial institutions like the World Bank and International Development Association.

Profits of Government Undertakings:

In course of time, government undertakings yield profit and help in financing further development. But if they are to yield surpluses, they must be run efficiently.

Deficit Financing:

This is also an important source. This is ‘created’ money. Care has to be taken to keep it within limits otherwise it may lead to dangerous inflation. India has made use of all these methods in financing her Five-Year Plans. Since deficit financing is an important and Controversial means of economic development.