Fiscal Policy

Fiscal policy is the guiding force that helps the government decide how much money it should spend to support the economic activity, and how much revenue it must earn from the system, to keep the wheels of the economy running smoothly.


Fiscal policy in India:

Fiscal policy in India is the guiding force that helps the government decide how much money it should spend to support the economic activity, and how much revenue it must earn from the system, to keep the wheels of the economy running smoothly. In recent times, the importance of fiscal policy has been increasing to achieve economic growth swiftly, both in India and across the world. Attaining rapid economic growth is one of the key goals of fiscal policy formulated by the Government of India. Fiscal policy, along with monetary policy, plays a crucial role in managing a country’s economy.


What is meant by Fiscal Policy in India?

Example of Fiscal Policy in India:
Through the fiscal policy, the government of a country controls the flow of tax revenues and public expenditure to navigate the economy. If the government receives more revenue than it spends, it runs a surplus, while if it spends more than the tax and non-tax receipts, it runs a deficit. To meet additional expenditures, the government needs to borrow domestically or from overseas. Alternatively, the government may also choose to draw upon its foreign exchange reserves or print additional money.
For example, during an economic downturn, the government may decide to open up its coffers to spend more on building projects, welfare schemes, providing business incentives, etc. The aim is to help make more of productive money available to the people, free up some cash with the people so that they can spend it elsewhere, and encourage businesses to make investments. At the same time, the government may also decide to tax businesses and people a little less, thereby earning lesser revenue itself.
Main objectives of Fiscal Policy in India:
• Economic growth: Fiscal policy helps maintain the economy’s growth rate so that certain economic goals can be achieved.
• Price stability: It controls the price level of the country so that when the inflation is too high, prices can be regulated.
• Full employment: It aims to achieve full employment, or near full employment, as a tool to recover from low economic activity.

The objective of fiscal policy is to maintain the condition of full employment, economic stability and to stabilize the rate of growth.
Generally following are the objectives of a fiscal policy in a developing economy:

  1. Full Employment:
    The first and foremost objective of fiscal policy in a developing economy is to achieve and maintain full employment in an economy. Therefore, to reduce unemployment and under-employment, the state should spend sufficiently on social and economic overheads. These expenFull Employment:ditures would help to create more employment opportunities and increase the productive efficiency of the economy.
    In this way, public expenditure and public sector investment have a special role to play in a modern state. A properly planned investment will not only expand income, output and employment but will also step up effective demand through multiplier process and the economy will march automatically towards full employment. Besides public investment, private investment can also be encouraged through tax holidays, concessions, cheap loans, subsidies etc.
  2. Price Stability:
    In developing economies, inflation is a permanent phenomena where there is a tendency to the rise in prices due to expanding trend of public expenditure. As a result of rise in income, aggregate demand exceeds aggregate supply. Capital goods and consumer goods fail to keep pace with rising income.
    In short, fiscal policy should try to remove the bottlenecks and structural rigidities which cause imbalance in various sectors of the economy. Moreover, it should strengthen physical controls of essential commodities, granting of concessions, subsidies and protection in the economy. In short, fiscal measures as well as monetary measures go side by side to achieve the objectives of economic growth and stability.
  3. To Accelerate the Rate of Economic Growth:
    Primarily, fiscal policy in a developing economy, should aim at achieving an accelerated rate of economic growth. But a high rate of economic growth cannot be achieved and maintained without stability in the economy. Therefore, fiscal measures such as taxation, public borrowing and deficit financing etc. should be used properly so that production, consumption and distribution may not adversely affect. It should promote the economy as a whole which in turn helps to raise national income and per capita income.
  4. Optimum Allocation of Resources:
    Fiscal measures like taxation and public expenditure programmes, can greatly affect the allocation of resources in various occupations and sectors. As it is true, the national income and per capita income of underdeveloped countries is very low. In order to gear the economy, the government can push the growth of social infrastructure through fiscal measures. Public expenditure, subsidies and incentives can favorably influence the allocation of resources in the desired channels.
    Tax exemptions and tax concessions may help a lot in attracting resources towards the favoured industries. On the contrary, high taxation may draw away resources in a specific sector. Above all, direct curtailment of consumption and socially unproductive investment may be helpful in mobilization of resources and the further check of the inflationary trends in the economy.
  5. Equitable Distribution of Income and Wealth:
    To reduce inequalities and to do distributive justice, the government should invest in those productive channels which incur benefit to low income groups and are helpful in raising their productivity and technology. Therefore, redistributive expenditure should help economic development and economic development should help redistribution.
  6. Economic Stability:
    Fiscal measures, to a larger extent, promote economic stability in the face of short-run international cyclical fluctuations. These fluctuations cause variations in terms of trade, making the most favourable to the developed and unfavourable to the developing economies. So, for the purpose of bringing economic stability, fiscal methods should incorporate built-in-flexibility in the budgetary system so that income and expenditure of the government may automatically provide compensatory effect on the rise or fall of the nation’s income.
    What is the difference between fiscal policy and monetary policy?
    The government uses both monetary and fiscal policy to meet the county’s economic objectives. The central bank of a country mainly administers monetary policy. In India, the Monetary Policy is under the Reserve Bank of India or RBI. Monetary policy majorly deals with money, currency, and interest rates. On the other hand, under the fiscal policy, the government deals with taxation and spending by the Centre.
    Importance of Fiscal Policy in India:
    • In a country like India, fiscal policy plays a key role in elevating the rate of capital formation both in the public and private sectors.
    • Through taxation, the fiscal policy helps mobilise considerable amount of resources for financing its numerous projects.
    • Fiscal policy also helps in providing stimulus to elevate the savings rate.
    • The fiscal policy gives adequate incentives to the private sector to expand its activities.
    • Fiscal policy aims to minimise the imbalance in the dispersal of income and wealth.

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