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Fiscal Policy

Budget And Taxation - Concepts
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Concept Explanation
 

Fiscal Policy

FISCAL POLICY: Fiscal policy is result of several component policies or mix of policy instruments. These include policy on taxation, subsidy, welfare expenditure, etc; investment or disinvestment strategies; and debt or surplus management. Fiscal policy is an important constituent of the overall economic framework of a country and is therefore intimately linked with its general economic policy strategy.

Public borrowing and Deficit Financing are a part of Fiscal Policy of the country. An effective fiscal policy is composed of policy decisions relating to 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.

Objectives of fiscal policy adopted by the Government of India:

  • To mobilise adequate resources for financing various programmes and projects adopted for economic development.
  • To raise the rate of savings and investment for increasing the rate of capital formation.
  • To promote necessary development in the private sector through fiscal incentive.
  • To arrange an optimum utilisation of resources.
  • To control the inflationary pressures in economy in order to attain economic stability.
  • To remove poverty and unemployment.
  • To attain the growth of public sector for attaining the objective of socialistic pattern of society.
  • 8. To reduce regional disparities.
  • To reduce the degree of inequality in the distribution of income and wealth.

    • In order to attain all these aforesaid objectives, the Government of India has been formulating its fiscal policy incorporating the revenue, expenditure and public debt components in a comprehensive manner. One of the important goals of fiscal policy formulated by the Government of India is to attain rapid economic development of the country .

    To attain such economic development in the country, the fiscal policy of the country has adopted following two objectives:

  • To raise the rate of productive investment of both public and private sector of the country.
  • To enhance the marginal and average rates of savings for mobilising adequate financial resources for making investment in public and private sectors of the economy.

    • The fiscal policy of the country is trying to attain both these two objectives during the plan periods.

    Techniques of Fiscal Policy

  • 1. Policy of Taxation of Government of India: One of the important sources of revenue of the Government of India is the tax revenue. Both the direct and indirect taxes are being levied by the Government of India. Direct taxes are progressive by nature and most of indirect taxes are regressive in nature. Taxation plays an important role in mobilising resources for plan.

    • Main objectives of taxation policy in India include:

  • (a) Mobilisation of resources for financing economic development
  • (b) Formation of capital by promoting saving and investment through time deposits, investment in government bonds, in units, insurance etc.;
  • (c) Attainment of equality in the distribution of income and wealth through the imposition of progressive direct taxes;
  • (d)  Attainment of price stability by adopting anti-inflationary taxation policy.
  • 2. Public Expenditure Policy of Government of India: Public expenditure is playing an important role in the economic development of a country like India. With increase in responsibilities of the government and with the increasing participation of government in economic activities of the country, the volume of public expenditure in a highly populated country like India is increasing at a galloping rate. Public expenditure is of two different types, ie., developmental and non-developmental expenditure. Developmental expenditure of the Government is mostly related to the developmental activities viz., development of infrastructure, industry, health facilities, educational institutions etc. The non-developmental expenditure is mostly a maintenance type of expenditure and which is related to maintenance of law and order, defence, administrative services etc. The public expenditure incurred by the Government of India has been creating a serious impact on the production and distribution pattern of the economy.
  • (iii) Policy of Deficit Financing of Government of India: Following the policy of deficit financing as introduced by J.M. Keynes, the Government of India has been adopting the policy for financing its developmental plans since its inception. The deficit financing in India indicates taking loan by the Government from the Reserve Bank of India in the  form of issuing fresh dose of currency. Considering the low level of income, low rate of savings and capital formation, the Government is taking recourse to deficit financing in increasing proportion. Deficit financing is a kind of forced savings.
  • (iv) Public Debt Policy of the Government of India: As the taxation has got its limit in a poor country like India due to poor taxable capacity of the people, thus the Government is taking recourse to public debt for financing its developmental expenditure. In the post-independence period, the Central Government has been raising a good amount of public debt regularly in order to mobilise a huge amount of resources for meeting its developmental expenditure. Total public debt of the Central Government includes internal debt and external debt.

    • Internal Debt: Internal debt indicates the amount of loan raised, by the Government from within the country. The Government raises internal public debt from the open market by issuing bonds and cash certificates and 15 years annuity certificates. The Government also borrows for a temporary period from RBI (treasury bills issued by RBI) and also from commercial banks.

    External Debt: As the internal debt is insufficient thus the Government is also collecting loan from external sources, i.e., from abroad, in the form of foreign capital, technical know-how and capital goods. Accordingly, the Central Government is also borrowing from international financing agencies for financing various developmental projects.These agencies include World Bank, IMF, IDA, IFC etc. Moreover, the Government is also collecting inter-governmental loans from various developed countries of the world for financing its various infrastructural projects.

    Merits or Advantages of Fiscal Policy of India:

  • (i) 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.
  • (ii) Mobilisation of Resources: Fiscal policy of the country has been helping to mobilise considerable amount of resources through taxation, public debt etc. for financing its various developmental projects.
  • (iii) 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.
  • (iv) 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.
  • (v) Reduction of Inequality: Fiscal policy of the country has been making constant endeavor to reduce the inequality in a distribution of income and wealth. Progressive taxes on income and wealth tax subsidies, grant etc. are making a consolidated effort to reduce such inequality. Moreover, the 6 policy is also trying to reduce the regional disparities through its various budgetary policies policies.
  • (vi) Export Promotion: The Fiscal policy of the Government has been making constant endeavor to promote export through its various budgetary policy in the form of concessions, subsidies etc.
  • (vii) 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, NREGA etc
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