fiscal policy of india

1. FISCAL POLICY
FISCAL POLICY OF INDIA:
Definition, Objectives and
Evaluation

2. Meaning:
• Fiscal policy is playing an important role on the economic and
social front of a country. Traditionally, fiscal policy in
concerned with the determination of state income and
expenditure policy. But with the passage of time, the
importance of fiscal policy has been increasing continuously
for attaining rapid economic growth.
• Accordingly, it has included public borrowing and deficit
financing as a part of fiscal policy of the country. An effective
fiscal policy is composed of policy decisions relating the entire
financial structure of the government including tax revenue,
public expenditures, loans, transfers, debt management,
budgetary deficit, etc. The policy also tries to attain proper
balance between these aforesaid units so as to achieve the
best possible results in terms of economic goals.

3. Definition:
• Harvey and Joanson ,defined fiscal policy as “changes
in government expenditure and taxation designed to
influence the pattern and level of activity.”
• Otto Eckstein defined fiscal policy as “changes in taxes
and expenditure which aim at short run goals of full
employment price level and stability.”

4. Objectives of Fiscal Policy:
In india, the fiscal policy is gaining its importance in recent years
with the growing involvement of the government in
developmental activities of the country. The following are some
of the important objectives of fiscal policy adopted by the
government of india:
1 To mobilise adequate resources for financing various
programmes and projects adopted for economic
development.
2 To raise the rate of savings and investment for increasing the
rate of capital formation;
3 To promote necessary development in the private sector
through fiscal incentive;

5. 4. To arrange an optimum utilisation of resources;
5. To control the inflationary pressures in economy
in order to attain economic stability;
6. To attain the growth of public sector for attaining
the objective of socialistic pattern of society;
7. To remove poverty and unemployment;
8. To reduce regional disparities;
9. To reduce the degree of inequality in the
distribution of income and wealth.

6. I. Merits or advantages of fiscal policy of india:
The following are some of the important merits or
advantages of fiscal policy of government of India:
1.Capital formation
2.Mobilisation of resources
3.Incentives to savings
4.Inducement to private sector
5.Reduction of inequality
6.Export promotion
7.Alleviation of poverty and unemployment

7. 1. Capital formation:
Fiscal policy of the country has been playing an important role
in raising the rate of capital formation in the country both in its
public and private sectors. The gross domestic capital
formation as per GDP in India has increased from 10.2 per cent
in 1950-51 to 22.9 per cent in 1980-81 and then to 24.8 per cent
in 1997-98. Therefore, it has created a favourable impact on the
public and private sector investment of the country.

8. 2. Mobilisation of Resources:
Fiscal policy of the country has been helping to mobilize
considerable amount of resources through taxation, public debt
etc. for financing its various developmental projects. The extent
of internal resources mobilisation for financing plan has
increased considerably from 70 per cent in 1965-66 to around 90
per cent in 1997-1998.

9. 3. Incentives to Savings:
The fiscal policy of the country has been providing various
incentives to raise the savings rate both in household and
corporate sector through various budgetary policy changes, viz.,
tax exemption, tax concession etc. Accordingly, the saving rate
has increased from a mere 10.4 per cent in 1950-51 to 23.1 per
cent in 1997-98.

10. 4. Inducement to Private Sector:
Private sector of the country has been getting necessary
inducement from the fiscal policy of the country to expand its
activities. Tax concessions, tax exemptions, subsidies etc.
incorporated in the budgets have been providing adequate
incentives to the private sector units engaged in industry,
infrastructure and export sector of the country.

11. 5. Reduction of Inequality:
Fiscal policy of the country has been making constant endeavour
to reduce the inequality in the distribution of income and
wealth. Progressive taxes on income and wealth tax exemption,
subsidies, grant etc. are making a consolidated effort to reduce
such inequality. Moreover, the fiscal policy is also trying to
reduce the regional disparities through its various budgetary
policies.

12. 6. Export Promotion:
The fiscal policy of the government has been making constant
endeavour to promote export through its various budgetary
policy in the form of concessions, subsidies etc. as a result, the
growth rate of export has increased from a mere 4.6 per cent in
1960-61 to 10.4 per cent in 1996-97.

13. 7. Alleviation of Poverty and Unemployment:
Another important merit of Indian fiscal policy is that it is making
constant effort to alleviate poverty and unemployment problem
through its various poverty eradication and employment
generation programmes, like, IRDP, JRY, PMRY, SJSRY,EAS etc.

14. II. Shortcomings of Fiscal Policy of India:
The following are the main shortcomings of the fiscal
policy of the country:
1. Instability
2. Defective tax structure
3. Inflation
4. Negative return of the public sector
5. Growing inequality

15. 1. Instability:
Fiscal policy of the country has failed to attain stability on various
fronts. Growing volume of deficit financing has created the
problem of inflationary rise in price level. Disequilibrium in its
balance of payments has also affected the external stability of
the country.

16. 2. Defective Tax Structure:
Fiscal policy has also failed to provide a suitable tax structure for
the country. Tax structure has failed to raise the productivity of
direct taxes and the country has been relying much on indirect
taxes. Therefore, the tax structure has become burdensome to
the poor.

17. 3. Inflation:
Fiscal policy of the country has failed to contain the inflationary
rise in price level. Increasing volume of public expenditure on
non-developmental heads and deficit financing has resulted in
demand-pull inflation. Higher rate of indirect taxation has also
resulted in cost-push inflation. Moreover, the direct taxes has
failed to check the growth of black money which is again
aggravating the inflationary spiral in the level of prices.

18. 4. Negative Return of the Public Sector:
The negative return on capital invested in the public sector units
has become a serious problem for the Government of India. In-
spite of having a huge total investment to the extent of Rs.
2,04,054 crore in 1998 on PSUs the return on investment has
remained mostly negative. In order to maintain those PSUs, the
Government has to keep huge amount of budgetary provisions,
thereby creating a huge drainage of scarce resources of the
country.

19. 5. Growing Inequality:
Fiscal policy of the country has failed to contain the growing
inequality in the distribution of income and wealth throughout
the country. Growing trend of tax evasion has made the tax
machinery ineffective for the purpose. Growing reliance on
indirect taxes has made the tax structure regressive.

20. III. Suggestions for Necessary Reforms in Fiscal
Policy:
The following are some of the important measures suggested
for necessary reforms of the fiscal policy of the country:
1. progressive taxes
2. Agricultural taxation
3. broad-based tax net
4. Checking tax evasion
5. Increasing reliance on direct taxes
6. Simplified tax structure
7. Reduction of non-development expenditure
8. Checking black money
9.Raising the profitability of PSUs

21. 1. Progressive Taxes:
The tax structure of the country should try to infuse more
progressive elements so that it can put heavy burden on the rich
and less burden on the poor. Necessary amendments be made in
respect of irrigation tax, sales tax, excise duty, land revenue,
property taxes etc.

22. 2. Agricultural Taxation:
The tax net of the country should be extended to the agricultural
sector for tapping a huge amount of revenue from the rich
agriculturists.

23. 3. Broad-based Tax net:
Tax net of the country should be broad-based so that it can cover
increasing number of population having the taxable capacity.

24. 4. Checking Tax Evasion:
Adequate measures be taken to check the problem of lax
evasion in the country. Tax laws should be made stricter for
prosecuting the tax evaders. Tax machinery should be made
more efficient and honest to gear up its operations. Tax rate
should be reduced to encourage the growing trend of tax
compliance.

25. 5. Increasing Reliance on Direct Taxes:
Tax machinery of the country should attach much more reliance
on direct taxes instead of indirect taxes. Accordingly, the tax
machinery should try to introduce wealth tax, estate duty, gift
tax, expenditure tax

26. 6. Simplified Tax Structure:
Tax structure and rules of the country should be simplified so
that it can encourage tax compliance among the people and it
can remove the unnecessary harassment of the tax payers.

27. 7. Reduction of Non-development Expenditure:
The fiscal policy of the country should try to reduce the non-
developmental expenditure of the country. This would reduce
the volume of unproductive expenditure and can reduce the
inflationary impact of such expenditure.

28. 8. Checking Black Money:
The fiscal policy of the country should try to check the problem
of black money. In this direction schemes like VDIS should be
repeated. Tax rates should be reduced. Corruption and political
interference should be abolished. Smuggling and other nefarious
activities should be checked.

29. 9. Raising the Profitability of PSUs:
The government should try to restructure its policy on public
sector enterprises so that its efficiency and rate of return on
capital invested can be raised effectively. PSUs should be
managed in rational manner with least government interference
and on commercial lines. Accordingly, the policy of budgetary
provisions for maintaining the PSUs should gradually be
eliminated.

30. IV. Recent Fiscal Policy Reforms:
The following are some of the important measures of fiscal
policy reforms adopted by the Government of India in recent
years:
1. Reduction of rates of direct taxes
2. Simplification of tax procedure
3. Reforms in indirect taxes
4. Fall in the volume of government expenditure
5. Reduction in the volume of subsidies
6. Reduction In fiscal deficit
7. Reduction in public debt
8. Disinvestment in public sector

31. 1. Reduction of Rates of Direct Taxes:
The peak rate of income tax was reduced to 30 per cent in 1997-
98 budget. This has resulted an increase in the share of direct
taxes in total revenue of the country from 19 per cent in 1990-91
to around 30 per cent in 1996-97.

32. 2. Simplification of Tax Procedure:
In recent years as per the recommendation of Raja Chelliah or
Taxation Reform Committee, several steps have been taken to
simplify the tax procedure in the successive budgets. The 1998-
99 budget has introduced a series of tax simplification measures,
viz., “Saral”, “Samadhan” and “Samman”, which is considered as
an important step in right direction. The 2003-04 budget
introduced filing of return through e-mail.

33. 3. Reforms in Indirect Taxes:
These include introduction of advelorem rates, MODVAT scheme
etc.

34. 4. Fall in the Volume of Government
Expenditure:
Several measures were undertaken recently by the government.
Accordingly, total expenditure of the government under various
heads has been reduced. As a result, total public expenditure as
per cent of GDP has declined from 19.7 per cent of GDP in 1990-
91 to 16.4 per cent in 1996-97.

35. 5. Reduction in the Volume of Subsidies:
Central Government has been making huge payments in the
form of subsidies, i.e., food subsidies, fertilizer subsidies, export
subsidies etc. Steps have been taken to reduce these subsidies
phase-wise.

36. 6. Reduction in Fiscal Deficit:
The Central Government has been trying seriously to contain the
fiscal deficit in its annual budget. Accordingly, it has reduced the
extent of fiscal deficit from 7.7 per cent of GDP in 1990-91 to 5.1
per cent in 1998-99. But fiscal stabilisation necessitates
containing the fiscal deficit at least to 3 per cent of GDP.

37. 7. Reduction in Public Debt:
Recently, the Central Government has been trying to reduce the
burden of public debt. Accordingly, the external debt as per cent
of GDP which was 5.4 per cent in 1990-91 gradually declined to
3.2 per cent in 1998-99 (BE). The internal debt as per cent of
GDP has declined from 48.6 per cent in 1990-91 to 49.8 per cent
in 1998-99. Similarly, the total outstanding loan or liabilities as
per cent of GDP has also declined from 54.0 per cent to 49.1 per
cent during the same period.

38. 8. Disinvestment in Public Sector:
Another important fiscal policy reforms introduced by the
Government of India is to disinvest the shares of the public
sector enterprises. The government has disinvested as part of its
stake in 39 selected PSUs since the disinvestment process began
in 1992. Till 2002-03, it has raised around Rs. 29,440 crore
through disinvestment of share of PSUs. In the mean time, the
government has constituted a Disinvestment Commission to
advise it on how to go about disinvesting the shares of PSUs. A
separate Ministry of Disinvestment has also been formed.

39. Evaluation of Fiscal Policy:
• Fiscal policy formulated by the Government of India has been
creating considerable impact on the economy of the country.
Taxation, public expenditure and public debt have been
increasing at a considerable proportion. Public sector of the
country has also been expanded considerably.

40. • The country has been able to attain significant development
of its industrial and infrastructural sector. But the burden of
taxation in our country is comparatively heavy and thereby it
has been affecting the saving capacity of the people.

41. • Moreover, the fiscal policy of the country has also failed to
check the extent of inequality in the distribution of income
and wealth and has also failed to solve the problem of
unemployment and poverty even after 50 years of planning.
The fiscal policy has also failed to maintain stability in price
level of the country.