Fiscal policy | Lucent for GK - UPSC PDF Download

Introduction

Fiscal policy refers to the strategic use of government spending and taxation to influence various economic conditions, especially macroeconomic factors such as aggregate demand, employment, inflation, and economic growth. The primary objective of these measures is to stabilize the economy and steer it towards prosperity. Fiscal policy is often combined with monetary policy to achieve broader macroeconomic goals effectively.

Objectives of Fiscal Policy

Attainment of Full Employment

In developing countries like India, achieving full employment is of paramount importance. The government endeavors to generate employment opportunities by investing in social and economic infrastructures.

Price Stability

Fiscal policy measures are deployed to control inflationary tendencies in the economy, ensuring that prices remain stable and do not spiral out of control.

Accelerating Economic Development

Through effective fiscal measures like taxation, public borrowing, and deficit financing, the government aims to enhance production, consumption, distribution, and subsequently elevate the national per capita income.

Optimum Allocation of Resources

Fiscal policy interventions guide public expenditure towards equitable distribution and enhanced social security for vulnerable sections of society. Examples include spending on subsidies and incentives.

Economic Stability

The budgeting system must possess built-in flexibility, ensuring that changes in the government's income and expenditures automatically offer a compensatory effect on the nation's income, safeguarding the economy from external shocks.

Capital Formation and Growth

Capital formation is pivotal for a developing economy like India. The country's fiscal policy prioritizes investing in capital to uplift the nation from poverty and facilitate sustainable growth.

Tools of Fiscal Policy Regulations

Government Spending

The government's expenditure has a significant impact on economic output. It can redirect fiscal priorities by investing in specific sectors and projects that drive economic growth.

Transfer Payments

Transfer payments involve government payments to individuals through social welfare programs, student subsidies, and Social Security benefits.

Taxes

Taxes serve as a crucial fiscal policy tool since they can be adjusted to influence economic conditions. Changes in taxation can impact the economy in various ways.

Components of Fiscal Policy

Government Receipts

Government receipts encompass the income acquired by the government from various sources, including taxes, interests, earnings on investments, and fees for services rendered. Government receipts are categorized into two groups: Revenue Receipts and Capital Receipts.

• Revenue Receipts: These receipts do not create liabilities or reduce assets. They can be further subdivided into tax and non-tax revenues. Tax revenues include direct and indirect taxes, while non-tax revenues comprise interest, dividends, fees, permits, fines, penalties, etc.
• Capital Receipts: Capital receipts represent funds raised by the government through borrowings, loans, or asset disposals. These funds can either lead to government liabilities or be utilized to generate revenue in the future.

Government Expenditures

Government expenditures are classified into two types: Revenue Expenditures and Capital Expenditures.

• Revenue Expenditures: These are short-term expenses utilized within the current fiscal year. Revenue expenditures cover ongoing operational costs of the government, such as salaries, utilities, and taxes on government-owned properties.
• Capital Expenditures: Capital expenditures involve government investments in long-term assets to maintain or expand its businesses and generate additional revenue. These include purchases of infrastructure, equipment, and fixed assets.

Public Accounts of India (Public Debt)

The Public Account of India manages transactions in which the government acts as a banker. This includes funds like provident funds and small savings, which do not belong to the government but must be repaid to their rightful owners eventually.

Fiscal Consolidation

Fiscal consolidation refers to the measures taken to reduce the fiscal deficit. India adopted institutional measures, such as the FRBM Act, to control the rising fiscal deficit and sustainably manage debt. Some strategies for fiscal consolidation include better targeting of subsidies, direct benefit transfer schemes, improving tax administration efficiency, and widening the tax base while minimizing concessions and exemptions.

• The Fiscal Responsibility and Budget Management (FRBM) Act: The FRBM Act was introduced in 2003 to ensure financial discipline, efficient management of public funds, enhanced fiscal prudence, and reduced fiscal deficits.

Conclusion

Fiscal policy plays a pivotal role in shaping India's economic progress and stability. Through strategic management of income and expenditure, the government strives to achieve full employment, price stability, economic growth, and equitable resource allocation. With carefully designed tools and components, fiscal policy serves as a powerful mechanism to steer the country towards prosperity and development.