Mobilisation of Capital for Industrial Sector: 8 Methods

The following points highlight the top eight methods used for the mobilisation of capital for industrial sector. Some of the methods are: 1. Agricultural Taxation 2. Fees 3. Change in The Terms of Trade 4. Minimisation of the Use of Inputs and Investment in Agriculture 5. Developing Rural Market for Industrial Goods 6. Voluntary Investment by Agriculturist and Others.

Method # 1. Agricultural Taxation:

Mellor makes the following observations about agricultural taxation:

(1) It is easier to tax a growing agriculture than a static agriculture. It is also possible that the imposition of additional taxes compel the farmers to accept new income generating innovations. The taxes and technological advance can thus supplement each other. Again, taxes may result in increased production if it is difficult for the farmers to bring down their consumption standards.

(2) It will be better if taxes are collected for certain local projects. This will invoke less resistance from the agriculturists. Rural schools, rural roads, minor canals and bridges in the given area are some such projects.

(3) Taxation of unemployed resources is more easy and useful than taxation of resources already employed. Labour is one such resource which can be exploited in this way. We know, there is disguised unemployment as well as open underemployment in the rural areas. If agriculturists are asked to compulsorily contribute some labour for a project, there may not be much opposition to such a demand. On the other hand, a fully employed factor will resent such a suggestion. The results of such a tax will be more encouraging if, as already stated, the project selected is planned for the local area.

(4) Taxes which are imposed, should be simple to understand and, easy to administer. Such requirements are necessary if the tax payers are less educated. From that angle, agricultural taxes have an edge over other types of taxes. Many of them are easy to administer.

Forms of agricultural taxation:

Some of the important agricultural taxes are as follows:-

Land Taxes:

Taxes on land are the most important form of taxes on agriculture. These are popular because these are easy to administer, are generally fixed in amount and therefore do not discourage production and can be so levied as to suit the capacity as well as convenience of agriculturists to pay these taxes.

Generally such taxes are imposed on the basis of area of the holding. These can be regressive or progressive, depending upon how far these taxes take into consideration the productivity of the land, besides the size of the farm.

It is felt that if the land taxes are paid in cash these would encourage commercialisation of agriculture. No doubt, tax paid in cash will decline in real value in times of inflation but this fall in the real value can be met by an upward adjustment in the rate of tax.

Alternatively, the tax can be paid in kind. This would automatically keep the real value of the tax intact. This would also ensure that a certain minimum amount of the commodity is definitely marketed. Such a tax, however, will be generally difficult to administer.

Land revenue in India is an example of land tax. For quite some time during the last quarter of the 19th century and beginning of ‘the 20th century, land tax in Japan has been the most important source of tax revenue.

Income Tax:

Tax on agricultural incomes is generally proposed on, the ground that it would ensure equity not only between various classes of farmers but also between the people in the agricultural as well as nonagricultural sectors. It is also felt that if agricultural incomes are also taxed besides the non-agricultural incomes which are already taxed, it would help in checking the evasion of the income tax.

There is a feeling that in India/much of the income tax is evaded as the people in the non-agricultural sector (which is taxed) .can show a major portion of their income as having been derived from the agricultural sector (which is not taxed).

However, it is very difficult to administer such a tax. The income from agriculture is difficult to determine. The illiterate farmers generally do not maintain proper accounts of all inputs. Some of the inputs like family labour cannot be properly evaluated. As the number of farmers is very large and they are widely scattered, tax collection will be quite cumbersome.

Existence of different tenurial arrangements under which the land is cultivated will hinder the evolution of a uniform formula for assessment of income. The complexity in depreciation patterns, marketing procedures, wide variability in productivity of land, substantial home consumption of agricultural produce- all will create hindrances in the correct assessment of income from agriculture.

“The enormous political strength gained by the people belonging to agricultural sector, as a result of universal franchise introduced in various countries, has also made the imposition of this tax (for that matter, any fresh direct tax on the agricultural sector) quite difficult.

It has, therefore, been suggested by many economists that it would be better if instead of imposing a tax on agriculture incomes, the existing land taxes are made more progressive and their rates revised so as to ensure more equity as well as more revenue.

Indirect taxes:

These appear to be the easiest to administer. These include sales tax on commodities sold in the domestic markets and export duties on goods exported to other countries. It is suggested that a part of the tax proceeds may be used for purpose of agricultural research, SQ that the costs are reduced at the same time and production is thus encouraged.

Labour Taxes:

This is another type which has been especially suggested by Mellor in order to encourage capital formation. We have already mentioned about it while discussing taxes on the unutilized resources. Mellor suggests that if this tax is to be effective, a popular local government as well as the use of labour for local project only, is essential. He also suggests that physical inputs complementary to labour should be provided by the state.

Method # 2. Fees:

Fees can be levied on services provided to the agriculturists. Such fees can be charged, for example, for provision of education, health services etc. It is, however, felt that when the agriculturists are already paying taxes, any imposition of fees may only discourage people from utilizing these services- a tendency, which is not in the public interest. So generally, the fees, if at all, these are imposed, are very low in amount and the total revenue collected from them is not much.

Method # 3. Change in The Terms of Trade:

Capital for the industrial sector can be provided by the agricultural sector in another way also. It is through a fall in the relative prices of agricultural crops. When the relative prices of agricultural crops-both food and fibre-fall, the profit of the industrial sector which purchases these commodities will rise due to reduction in costs.

Increased profit of the industrial sector could be used for industrial expansion. Some economists feel that the terms of trade will automatically change against agriculture when the production in the agricultural sector increases.

However, all economists do not agree with this view. According to them, it is quite possible that in the initial stages increase in production may not result in the fall in the relative prices of agricultural crops. High income elasticity of demand for food grains on the part of the farmers may not allow the increased agricultural production to flow into the market.

It may be consumed by the agriculturists themselves. In their view, it is only at a later stage of agricultural development, that the terms of trade will change, by themselves, against agriculture.

Most of the economists, therefore, hold the view that, in the earlier stages of economic development, the state should deliberately change the terms of trade against agriculture. A review of the price policy followed by many countries in the initial stages of their development strongly supports this contention,

Method # 4. Minimisation of the Use of Inputs and Investment in Agriculture:

The only way to reduce the use of inputs in agriculture and at the same time to continue with the development of agriculture is to encourage the use of improved technology (resulting in better input-output relations) in agriculture.

The improved technology, in turn, has to be imported from the industrial sector. This means that the non-agricultural sector should supply various improved inputs to agriculture and the agriculture should spare the resources saved as a result of use of these imported inputs, for industrial sector. In this way, on balance, capital should move out of agriculture to the non-agricultural (industrial) sector.

Method # 5. Developing Rural Market for Industrial Goods:

We have already suggested that if terms of trade turn against agriculture, it would lead to more capital formation in the industrial sector. This object can be achieved by a decrease in the relative prices of agricultural commodities. In fact, encouragement to the agriculturists to purchase more of the industrial goods would achieve the same end.

Prices of the industrial products would, as a result, experience a relative rise. In fact, according to some economists this encouragement is necessary if the manufacturing sector has to have a sufficiently wide home market for its expansion.

Method # 6. Voluntary Investment by Agriculturist:

Voluntary Investment by agriculturists in the industrial sector is another method suggested for providing capital to it. This method will be more successful if the industrial projects are located in the rural area and are, somehow or other, connected with some aspects of rural development.

Method # 7. Use of Disguisedly Unemployed Labour:

This method can be used even when agriculture is still traditional in character. Suggestion in this regard was originally put forth by Nurkse. According to him, in the underdeveloped, over populated countries, there is a huge amount of labour in the agricultural sector whose marginal productivity is zero.

This part of the labour is disguisedly unemployed. It can be shifted to the non-agricultural sector and used in creating certain social assets, without additional cost to the society. This type of labour can be used, for example, for digging canals, building roads, carving embankments and for the creation of other important forms of overhead capital, though of a crude type, because of its unskilled nature.

This suggestion, on the face of it, is quite logical. However, the main problem in this connection is the identification and mobilisation of the surplus labour.

Method # 8. Mopping up of the Savings of the Agriculturists:

Agriculturists, especially the big farmers, too, save. Various institutions like banks can be set up in the rural areas to mop up the unspent part of the incomes earned by them. The results can be more encouraging if attempts are simultaneously made to discourage the agriculturists from wasting their income on drinking, litigation and on various social ceremonies like marriages, births etc.

Bryce has made two suggestions with regard to mobilisation of finances from the rural area. Both of these seem to be relevant in the present context. Firstly, most of the underdeveloped economies have recently gone through the exercise of land reforms, especially that of the abolition of intermediaries and absentee land lords. They have been paid compensation in the form of long term bonds. The bond money should be mopped up for development of the non -agricultural sector through various incentives.

Secondly, the recent ‘green revolution’ in a number of countries, has resulted in greater demand for agricultural land and therefore, in high land prices. Not only, should this investment in land be discouraged through tax on capital gain on sale of land and on current income from agriculture, but also, efforts should be made to get the funds received by the sellers of land (in case such a sale takes place) channeled for the development of the non-agricultural sector. He calls this measure as conversion of ‘land capital’ into industrial capital’.