Fiscal policy aims to improve economic growth and social justice in India. The government uses fiscal policy tools like taxation, spending, and benefits. Expansionary policy is used in recessions by spending more than tax revenue collects, while contractionary policy reduces spending below revenue to pay down debt and control inflation. India faced fiscal imbalances in the 1980s, addressed through deficit financing. The FRBM Act of 2003 instituted fiscal responsibility, aiming to eliminate the revenue deficit and reduce the fiscal deficit to 3% of GDP by 2009 through transparency, expenditure control, and borrowing limits. While bringing discipline, the FRBM Act faces criticism for neglecting equity and growth.

1. FISCAL POLICY

2. INTRODUCTION
• Fiscal Policy is that part of economic policy which is mainly
concerned with the sources of revenues and intended
expenditures of the government.
• According to Gillespie, fiscal policy refers to the decisions
made by the government regarding its spending, taxation and
benefits policies.
• It aims at improving the growth performance of the economy
and ensuring social justice to the people

3. ROLE OF FISCAL POLICY IN INDIA
• Mobilization of resources to increase the rate of capital
formation
• Acceleration of economic growth
• Balanced growth
• Provision of economic and social overheads
• Increasing employment opportunities
• Reduction of inequalities of income and wealth
• Price stability

4. TYPES OF FISCAL POLICY
• Neutral: This type of policy is usually undertaken when an economy is
in equilibrium. In this instance, government spending is fully funded
by tax revenue, which has a neutral effect on the level of economic
activity.
• Expansionary: This type of policy is usually undertaken during
recessions to increase the level of economic activity. In this instance,
the government spends more money than it collects in taxes.
• Contractionary: This type of policy is undertaken to pay down
government debt and to cap inflation. In this case, government
spending is lower than tax revenue.

5. THE FISCAL IMBALANCE AND DEFICIT FINANCE IN
INDIA
• In 1980s fiscal imbalance was seen in terms of the overall
budget deficit measured by the gap between the expenditure
and the receipts under the revenue and capital accounts
• Gap was sought to be filled by deficit financing which in India is
defined as borrowings from the RBI against the issue of
Treasury bills and running down of accumulated cash balances

6. THE FISCAL IMBALANCE AND THE NEW FISCAL
APPROACH
• High and continuous fiscal deficits are unsustainable and need to
be corrected
• Since 1997-98, two factors contributed to increasing fiscal
deficit;
a) Reduction in taxes affected tax revenue adversely
b) Non-development expenditure continued increasing
• Interest payments contribute most to fiscal imbalance
• Growth of all major categories of non-interest expenditure has
to be slowed down

7. THEMES OF THE ‘NEW FISCAL POLICY’
1. A systematic effort to simplify both the tax structure and the
tax laws
2. A deliberate shift to a regime of reasonable direct tax rates,
combined with better administration and enforcement to
improve compliance and raise revenues
3. Fostering of a stable and predictable tax policy environment
4. Greater recognition and weight given to the resource
allocation and equity consequences of taxation

8. 5. More reliance on non-discretionary fiscal and financial
instruments in managing the economy as compared to ad-
hoc, discretionary physical controls
6. Concerted efforts to improve tax administration and reduce
the scope for arbitrary harassment
7. Growing appreciation of the links between fiscal and
monetary policy
8. Fresh initiative to strengthen the methods of expenditure
control

9. FISCAL RESPONSIBILITY
• In the 1990s, balanced budget received axiomatic acceptability
at the international level
• It was suggested that fiscal balance should be restored by
imposing legal responsibility on the Government
• India opted for legal course in 2000 after having failed to
restore fiscal balance for about a decade

10. FRBM ACT, 2003
• FRBM bill 2000 was introduced in Lok Sabha in Dec., 2000
• FRBM Act became effective from July 5, 2004
• Aim: to institutionalize financial discipline, reduce India's fiscal
deficit, improve macroeconomic management and the overall
management of the public funds by moving towards a balanced
budget and strengthen fiscal prudence
• The main purpose was to eliminate revenue deficit and bring
down the fiscal deficit to a manageable 3% of the GDP by March
2009 and subsequently build a revenue surplus

11. • Provides greater transparency in fiscal operations
• Quarterly review of fiscal situation
• Regulating direct borrowing from the RBI in a bid to check
borrowing and control expenditure
• The FRBM legislation has made it mandatory for the Finance
Minister to make an annual statement to the Parliament on the
fiscal situation besides explaining any deviation in meeting the
fiscal obligations cast on the Centre
• Responsibility of the Central Government to ensure inter-
generational equity in financial management and long-term
macroeconomic stability by achieving sufficient revenue surplus

12. IMPLEMENTATION
• The Act specifies annual targets for reduction of fiscal and
revenue deficits
• The rules also prescribe the formats for medium term fiscal
policy statement, the fiscal policy strategy statement and the
macroeconomic framework statement to be presented to
Parliament along with the annual financial statement.

13. APPRAISAL OF THE FRBM LEGISLATION
• Misgivings about the revenue deficit target
• Low levels of capital Expenditure
• Neglect of equity and economic growth
• Lack of seriousness about financing public expenditure

14. • Flawed assumptions of the FRBM legislation
-Lower fiscal deficits lead to higher and more sustained growth
-Large fiscal deficits necessarily lead to higher inflation
-Large fiscal deficit increases external vulnerability of the
economy

15. REFERNCES
• https://courses.lumenlearning.com/boundless-
economics/chapter/introduction-to-fiscal-policy/
• Pdf