Measures to stimulate the Private Investments in an economy

Various measures to stimulate the Private Investments in an economy include reduction in interest rates, reduction in taxes, adopting a policy of wage cut, increase in government expenditure and pump pricing. They are discussed below:

Reduction in rate of Interest

  • During depression period, monetary authorities should deliberately lower the rate of interest with a view to stimulate investment. This policy was propounded by Keynes. However there are two problems with this policy.
    • Firstly, the rate of interest can not be made below a particular limit because it depends on liquidity preference. This in simple language means that the interest rate can not go below the liquidity preference (demand for money).
    • Secondly, Investment is influenced by marginal efficiency of capital than rate of interest that is why during the period of depression, despite fall in in the rate of interest there is no increase in investment. Ordinarily, lowering the interest rate can induce investment in some sectors of economy.

Reduction in Taxes

  • Taxation system should be such that the investor is not much burdened. Here, the problem is that if the taxation is generally low, the government revenues will fall and it will badly affect public investments.
  • The economists say that the people who spend their income on consumption and not investment can be taxed more. This further implies that the government should impose more indirect taxes and luxury taxes and rationalize the direct taxes such as Income Tax and Corporation Tax.

Policy of wage cut

  • This was propounded by the classical economists. It says that reduction in money wages would lead to fall in cost of production and thereby increase investment. This theory was not approved by Keynes though.

Increase in Government Expenditure

  • Government expenditure proves to be very effective in stimulating investment.

Other measures:

  • Price Support Policy by the government under which some essential goods are bought and sold by the government in the open market to keep the prices in equilibrium. Monopolistic hold of big firms on the production of a commodity should be abolished, so that new firms can enter to make fresh investments.
  • Government should government should enhance its expenditure on research and development. The R&D findings will attract investments from the private investors. During the depression, Pump Priming stimulates the private investments.
  • During depression period, private investment is at its lowest ebb. In order to stimulate it, increase in public investment is quite necessary. The policy of increasing public investment with a view to stimulating private investment is caused Pump Priming