Defence and Development:: Economic Policy

Defence and development:
National income estimates help us to divide the national

product between defense and development purposes.
From such figures, we can easily know how much can be
spread for war by the civilian population.
Economic policy:
National income figures are an important tool of macroeconomic analysis and policy, national income estimates
are the most comprehensive measures of aggregate
economic activity in an economy. It is through such
estimates that we know the aggregate yield of the
economy and lay down future economic policy for
development.
Economys structure:
National income statistics enable us to have a correct idea
about the structure of the economy. It enables us to know
the relative importance of the various sectors of the
economy and their contribution towards national income.
From these studies we learn how income is produced and
how it is distributed, how much is spent, solved or taxed.
Economic planning:
National income statistics are the most important tools for

long-term and shortterm economic planning. A country
cannot possibly frame a plan without having a prior
knowledge of the trends in national income. The Planning
Commission in India also kept in view the national income.
The national income estimate before formulating the five
year plans.
Inflationary and deflationary gaps:

National income and national product figures enable us to
have an idea of the inflationary and deflationary gaps. For
accurate and timely anti-inflationary and deflationary
policies, we need regular estimates of national income.
National expenditure:
National income studies show as to how national
expenditure is dividend between consumption expenditure
and investment expenditure. It enables us to provide for
reasonable depreciation to maintain the capital stock of a
community. Too liberal allowance of depreciation may
prove harmful as it may unnecessarily lead to a reduction
in consumption.
Merits of Public Deposits:

1. Simplicity:
Public deposits are a very convenient source of

business finance. No cumbersome legal
formalities are involved. The company raising
deposits has to simply give an advertisement
and issue a receipt to each depositor.
2. Economy:
Interest paid on public deposits is lower than that
paid on debentures and bank loans. Moreover,
no underwriting commission, brokerage, etc. has
to be paid. Interest paid on public deposits is tax
deductible which reduces tax liability. Therefore,
public deposits are a cheaper source of finance.
3. No Charge on Assets:
Public deposits are unsecured and, therefore, do
not create any charge or mortgage on the
companys assets. The company can raise loans

in future against the security of its assets.
4. Flexibility:
Public deposits can be raised during the season
to buy raw materials in bulk and for other shortterm needs. They can be returned when the
need is over. Therefore, public deposits
introduce flexibility in the companys financial
structure.
5. Trading on Equity:
Interest on public deposits is paid at a fixed rate.
This enables a company to declare higher rates
of dividend to equity shareholders during periods
of good earnings.
6. No Dilution of Control:
There is no dilution of shareholders control

because the depositors have no voting rights.
7. Wide Contacts:
Public deposits enable a company to build up
contacts with a wider public. These contacts
prove helpful in the sale of shares and
debentures in future.
Demerits of Public Deposits:

1. Uncertainty:
Public deposits are an uncertain and unreliable
source of finance. The depositors may not
respond when economic conditions are
uncertain. Moreover, they may withdraw their
deposits whenever they feel shaky about the
financial health of the company.
Depositors are entitled to withdraw their deposits

at any time after giving prior notice to the
company. During times of financial tightness or
distress the depositors may get panicky and wish
to withdraw their deposits.
Moreover, if a large number of depositors
simultaneously withdraw their deposits during
slump, the company may find it difficult to repay
a huge sum at once. Therefore, public deposits
are described as fair weather friends.
2. Limited Funds:
A limited amount of funds can be raised through
public deposits due to legal restrictions.
3. Temporary Finance:
The maturity period of public deposits is short.

The company cannot depend upon public
deposits for meeting long-term financial needs.
4. Speculation:
As public deposits can be raised easily and
quickly, a company may be tempted to raise
more funds than it can profitably use. It may
keep idle money to meet future contingencies.
The management of the company may indulge in
over-trading and speculation which exercise
harmful effects on the business.
5. Hindrance to Growth of Capital Market:
Public deposits hamper the growth of a healthy
capital market in the country. Widespread use of
public deposits creates a shortage of industrial
securities.
6. Limited Appeal:
Public deposits do not appeal as a mode of
investment to bold investors who want capital
gains. Conservative investors may also not like
these deposits in the absence of proper security.
7. Unsuitable for New Concerns:
New companies lacking in sound credit standing
cannot depend upon public deposits. Investors
do not like to deposit money with such
companies.

Defence and Development:: Economic Policy

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Defence and Development:: Economic Policy

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Defence and development:

National income estimates help us to divide the national

National income statistics are the most important tools for

Inflationary and deflationary gaps:

Merits of Public Deposits:

Public deposits are a very convenient source of

companys assets. The company can raise loans

There is no dilution of shareholders control

Demerits of Public Deposits:

Depositors are entitled to withdraw their deposits

The maturity period of public deposits is short.

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