Top 9 Measures to Stimulate the Investment of Employment

Read this article to learn about the top nine measures to stimulate the investment of employment.

1. Tax Concessions:

It is argued that tax concessions allowed on company and corporation profits would stimulate investment during depression period and will work as a great incentive for new entrepreneurs.

Many economists like Hansen, Lerner and Klein have supported this view. Doubts, have, however, been expressed as to the efficacy of tax reductions to stimulate investment.

Tax reductions on incomes lead to a loss in government revenues, which may be made up by indirect taxation on commodities, thereby depressing the marginal propensity to consume and hence effective demand. Thus, whatever is gained on the one hand is lost on the other. Despite, it cannot be denied that unduly heavy taxation does act as a great disincentive on new investment, as is perhaps the case in India.

2. Government Spending:

The level of investment can also be stimulated by Government investment. There are many socially useful investments like construction of dams, roads, low-cost housing, slum clearance, recreation houses etc., which are essential from the point of view of the community but which are not undertaken by private businessmen because they do not ensure quick profits.

Direct investment by Government in the United States in these socially desirable projects ensured full employment and led to favourable multiplier effects. This type of government spending may assume the nature of compensatory public spending which is incurred on the assumption that private investment, left to itself, is no longer capable of maintaining full employment either in the short run or in the long run. Keynes, therefore, stressed the need for public investment as a balancing factor, when the economy happens to pass through a period of depression.

3. Pump Priming:

Tax reduction may not encourage private investment. In order to cope with the deficiency of private investment, a programme of Pump Priming is necessary. Under it, public investment is undertaken not only to meet the deficiency of private spending but also to take the economy out of the depths of depression. The idea is to ‘prime’ the “pump’ of private spending. Once the economy starts working towards full employment, public investment is given up.

Pump priming is a helpful policy not only as a method of financing but also as a method of spending. As a method of financing, it not only facilitates investment but also stimulates credit expansion. Pump priming stimulates private investment through its magnifying effects on income via the multiplier.

4. Rate of Interest:

Keynes favoured for a long time in his earlier books a low rate of interest to stimulate private investment. Such a policy is based on the assumption that investment is sensitive to changes in the rate of interest. Monetary authorities, by increasing the quantity of money (other things remaining the same) can lower the rate of interest to give a fillip to investment activity. Low interest rates especially give stimulus to investment in some sectors of the economy.

For example, provision of low interest government loans has raised the activity in the construction of residential houses, establishment of cooperatives and transport facilities, etc. But in his ‘General Theory’ Keynes did not have much faith in the ability of the interest rate of stimulate investment. According to him, recent studies have shown that interest rate is more or less an insignificant factor affecting investment activity.

5. Wage Level:

Sometimes, reduction in the wage level is suggested to increase the level of investment activity on the ground that reduction in wages will reduce the total wage bill and hence the cost of production thereby leading to a rise in the expected rate of profitability (MEC).

Under such circumstances businessmen will be encouraged. But such an argument ignores the dual nature of wages. Wages are not only costs to employers but also incomes to workers, and if reduced considerably, may adversely affect the purchasing power of the workers and hence effective demand. Thus, the stimulating effects of wage reductions on investment are of doubtful validity.

6. Price Policy:

Frequent fluctuations in prices have been found to be one of the important causes of the instability of private investment. Certain amount of stability in the price level, it is felt, will surely stimulate private investment.

To achieve the objective of stability in prices, a price-support policy has been suggested. Such a policy implies open market operations in commodities, that is, Government purchases and sales of certain storable commodities with a view to adjusting their supply to demand. When prices decline and the symptoms of overproduction appear, the Government would make bulk purchases to prevent further fall in prices.

Similarly, when the prices rise, the Government would release stocks to prevent a further rise in prices. In this way, the Government attempts to secure some stability in prices, which in turn, will promote private investment.

In India, such a policy is being pursued in respect of agricultural commodities like wheat, rice and other food grains. It would be better if such a policy is extended to other durable consumer goods as well. This will promote price stability to a certain degree, removing a good deal of uncertainty and preventing speculation in commodities thereby encouraging private investment. Such a price support policy is also known as ‘The Reservoir Plan’ because under it a kind of reservoir (buffer stock) is created to eliminate fluctuations in prices.

7. Abolition of Monopoly Privileges:

“Another reform…which is advocated as a stimulus to investment is the abolition of certain monopoly privileges. For example, it is said that the patent system which grants at least 17-year monopolies on new inventions, serves to decrease the volume of investment by holding back innovations which would otherwise call for increased investment. The innovations are suppressed because they conflict with certain vested interests.” There is a great need to abolishing monopoly privileges in India in certain industries in order to encourage new inventors to enter the field.

8. Market Structures:

The term market structure refers to the kind and degree of competition characteristic of the industrial environment within which the firm functions. It is argued that a competitive market structure is highly conducive to economic progress and high rate of investment.

Under competitive conditions firms must seize every opportunity for introducing cost reducing innovations. Such innovations result in more investment expenditure. It is Domar’s contention that monopoly is harmful to both investment expenditure and economic progress. But now-a-days the competition that is desirable is of different type than that envisaged in the model of a purely competitive market economy.

9. Role of Technology and Innovation:

Technology and innovation are concepts which cannot be defined clearly and precisely. Even then, they have great influence on investment and innovation may imply, according to Schumpeter, an introduction of new goods, new method of production, discovery of new market and new source of supply or new organisation. Innovations are of two types—one, having to do with new goods, two, having to do with new ways to produce old goods.

Technology as a concept is generally concerned with the productive process than with the introduction of new goods or with changes in the quality and style of existing goods. The common definition of technological change is a change involving a shift in the production function. It is not necessary that introduction of a new product may encourage a new investment, unless it is followed by a rapid rise in the demand for the product. In this case more investment will be encouraged. It is generally believed that technological change is highly favourable to new and more investment.

It is argued that the new techniques that shift the production function require that the ratio of capital to other resources be increased, and that technological change renders the existing capital goods obsolete. But the relationship between technological change and new investment is not that simple or direct as made out by the traditional view.

If technological change raises the capital output ratio, it will definitely encourage more investment, but if the technological change is capital-saving rather than capital-using, then the demand for additional capital may be reduced. On the whole, it may be said that investment is likely to be encouraged by this factor.

Despite these measures, private investment cannot be induced except for profit motives. It will continue to be highly uncertain and sticky in the absence of such an incentive. It was because of this fundamental nature of private investment that Keynes wanted it to be supplemented by public investment. “There is fairly wide agreement now among economists that as business activity is determined by decisions of business alone, the economic system will remain liable to periodic fluctuations.”

It is, therefore, clear that public investment must come forward as a balancing factor. Whether public or private, investment remains one of the most involved problems relating to the operations of the modern economy for the factors that enter into it are more varied and less predictable than those that enter into consumption-income relationship.