7 Measures used to Stimulate Private Investment | Macro Economics

The following points highlight the top seven measures used to stimulate private investment. The measures are: 1. Tax Concession 2. Government Spending 3. Pump Priming 4. Reduction of the Rate of Interest 5. Stability of Wage Level 6. Price Policy 7. Abolition of Monopoly Privilege.

Measure # 1. Tax Concession:

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 of 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 this, it cannot be denied that heavy taxation docs act as a great disincentive on new investment.

Measure # 2. Government Spending:

The level of investment can also be stimulated by Government investment. There are many socially useful investments like construction of dams, low cost housing, slum clearance, and 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 is 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 it, is no longer capable of maintaining full employment either in the short run or in the long run. Keynes, therefore, stressed the need of public investment as a balancing factor when the economy happens to pass through a period of depression.

Measure # 3. Pump Priming:

Tax reductions alone 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 under-taken 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 fall employment, public investment is supposed to be 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.

Measure # 4. Reduction of the 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 was based on the assumption that investment is sensitive to change in the rate of interest Monetary authorities, by increasing the quantity of money (other things remaining the same) can lower the rate, interest to give encouragement 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 co-operatives and transport facilities, etc. But in his General Theory, Keynes did not have much faith in the ability of the interest rate to stimulate investment. According to him, recent studies have shown that interest rate is more or less an insignificant factor affecting investment activity.

Measure # 5. Stability of 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. But this policy ignores the dual nature of wage. 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.

Measure # 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 prices rise, the Government would release stocks to prevent a farther rise in prices. In this way, the Government attempts to secure some stability in prices, which, is supposed to 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 reservoir (buffer stock) is created to eliminate fluctuations in prices.

Measure # 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 which would otherwise call for increased investment. The innovations are suppressed because they conflict with certain vested interests.” There is a great need of abolishing monopoly privileges in India in certain industries in order to encourage new investors to enter the field.

It has been the experience of capitalist economies of the west that despite these measures, private investment cannot be induced except by profit incentives of a direct nature. 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.