meaning, objectuves , types

1. Fiscal Policy

2. • Fiscal policy means the use of taxation and public expenditure by the
government for stabilization or growth.
• According to Culbarston, “By fiscal policy we refer to government actions affecting
its receipts and expenditures which ordinarily as measured by the government’s
receipts, its surplus or deficit.” The government may change undesirable
variations in private consumption and investment by compensatory variations of
public expenditures and taxes.

3. Fiscal policy is concerned with the determination of state income and
expenditure policy. However, over the time, the importance of fiscal policy has
been increasing given the need to attain rapid economic growth.
An effective fiscal policy consist of policy decision relating to the entire
financial structure of the government including tax revenue, public
expenditures, loans, transfers, debt management, budgetary deficit , and so on.

4. Main Objectives of Fiscal Policy in India
Before moving on the discussion on objectives of India’s Fiscal Policies,
firstly know that the general objective of Fiscal Policy. General objectives
of Fiscal Policy are given below:
• • To maintain and achieve full employment.
• • To stabilize the price level.
• • To stabilize the growth rate of the economy.

5. • • To maintain equilibrium in the Balance of Payments.
• • To promote the economic development of underdeveloped countries.
• Fiscal policy of India always has two objectives, namely improving the
growth performance of the economy and ensuring social justice to the
people.

6. Types of Fiscal Policy
• Neutral Fiscal Policy: This implies a balanced budget where (Government spending =
Tax revenue). It further means that government spending is fully funded by tax revenue
and overall the budget outcome has a neutral effect on the level of economic activity.
• Contractionary (restrictive) Fiscal policy: This policy involves raising taxes or cutting
government spending, so that (Government spending < Tax revenue) it cuts up on the
aggregate demand (thus, economic growth) and to reduce the inflationary pressures in
the economy.

7. • Expansionary Fiscal Policy: It is generally used for giving stimulus to the
economy ,i.e., to speed up the rate of GDP growth or during a recession
when growth in national income is not sufficient enough to maintain the
present standards of living. A tax cut and/or an increase in government
spending would be implemented to stimulate economic growth and lower
unemployment rates. This is not a sustainable policy, as it leads to budget
deficits and thus, should be used with caution.

8. The fiscal policy is designed to achieve certain objectives as follows:-
• 1. Development by effective Mobilisation of Resources: The principal
objective of fiscal policy is to ensure rapid economic growth and development.
This objective of economic growth and development can be achieved by
Mobilisation of Financial Resources. The central and state governments in India
have used fiscal policy to mobilise resources.
• The financial resources can be mobilised by:-
• a. Taxation: Through effective fiscal policies, the government aims to mobilise
resources by way of direct taxes as well as indirect taxes because most
important source of resource mobilisation in India is taxation.

9. 2. Reduction in inequalities of Income and Wealth: Fiscal policy aims at achieving
equity or social justice by reducing income inequalities among different sections of
the society. The direct taxes such as income tax are charged more on the rich
people as compared to lower income groups.
Indirect taxes are also more in the case of semi-luxury and luxury items which are
mostly consumed by the upper middle class and the upper class. The government
invests a significant proportion of its tax revenue in the implementation of Poverty
Alleviation Programmes to improve the conditions of poor people in society.

10. • 3. Price Stability and Control of Inflation: One of the main objectives of
fiscal policy is to control inflation and stabilize price. Therefore, the
government always aims to control the inflation by reducing fiscal
deficits, introducing tax savings schemes, productive use of financial
resources, etc.

11. • 4. Employment Generation: The government is making every possible effort
to increase employment in the country through effective fiscal measures.
Investment in infrastructure has resulted in direct and indirect employment.
Lower taxes and duties on small-scale industrial (SSI) units encourage more
investment and consequently generate more employment.
• 5. Balanced Regional Development: there are various projects like building up
dams on rivers, electricity, schools, roads, industrial projects etc, run by the
government to mitigate the regional imbalances in the country. This is done
with the help of public expenditure.

12. 6. Reducing the Deficit in the Balance of Payment: some time government
gives export incentives to the exporters to boost up the export from the
country. In the same way import curbing measures are also adopted to
check import. Hence the combine impact of these measures is
improvement in the balance of payment of the country.
There are some other measures like: reduction in tax rate so that more peoples
get motivated to deposit actual tax.

13. Tools of fiscal policy
• Components of Spending
• Maintenance (including staff salaries): This component can’t be altered in short-run
and hence is hardly a part of policy making, however, in long-run, through VRS and
reducing new jobs in public sector or vice versa, this expenditure can be altered.
• Loan payments: This again is a component, which can’t be touched in short-run,
however, governments in long-run can reduce these payments or eliminate them by
running the budget surplus.

14. • Subsidies: This component is a major part of policy as it can be
altered in short-run, but unfortunately, subsidies as policy
instrument, have been abused in India. These are used by
politicians as poll promise and political instruments to gain
more popular support.

15. Welfare schemes: These are one of the policy options that once introduced
can’t be removed due to their populist nature. Similarly, in most of the cases
these are necessary too and important instrument of social welfare and
economic growth.
However, it is the implementation part, which is key, as these schemes
generally suffer from poor implementation and massive corruptions and
loopholes. Thus, despite being meritorious expenditure in nature, these at
time appears as waste.

16. • Components of Earning
• Tax: single: Single most important source on government revenue is also a
very important policy measure as elaborated in the policy combinations
above.
• Borrowing: Borrowing is a necessary source of funds, though not a desirable
one. Particularly, in developing countries, as tax/GDP ratio is low due to less
per capita income. However, it becomes an important part of monetary
policy as well due to its impact on interest rates and credit creation and thus,
overall money supply.

17. • Proceeds from sale/lease of assets: This is a both a one-time and regular
source of income. For example, lending government buildings for private
use, or other assets such as telecom spectrum or lease of a mine block for
certain years, is a regular source of income, whereas sale of PSUs is a
onetime income. These however, are good sources of revenue, as they
provide government more room to spend without increasing taxes.

18. Profits from PSU: Profits from PSUs can also be a potential source of
revenue, however, since most of PSUs are generating losses, Indian
government usually ends up subsidizing them. At times PSUs are
deliberately kept in losses to keep prices low and ensure wider outreach for
social welfare, example, PSU banks in pre-reform era and post-offices.

19. Public Debt Policy
Taxation has a limit in a poor country like India given the poor taxable capacity
of the people. Therefore , the government takes resources to public debt for
financing its developmental expenditure. The total public debt of the central
government is made of internal debt and external debt.

20. Internal debt :
This is the amount of loan raised, from within the country by the
government. The internal public debt is raised from the OMO by issuing bonds
and cash certificates. The government also borrows for a temporary period
from the RBI.

21. External debt : The central governments also borrows from international
funding agencies for funding various developmental projects. These agencies
include the World Bank, friendly countries.