Fiscal policy - Economics, UPSC, IAS. | Indian Economy (Prelims) by Shahid Ali PDF Download

Fiscal policy

Fiscal policy

• The fiscal policy is concerned with the raising of government revenue and incurring of government expenditure.
• To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy.
• So, the fiscal policy is concerned with government expenditure and government revenue
• Fiscal policy has to decide on the size and pattern of flow of expenditure from the government to the economy and from the economy back to the government.
• So, in broad term fiscal policy refers to "that segment of national economic policy which is primarily concerned with the receipts and expenditure of central government."
• In other words, fiscal policy refers to the policy of the government with regard to taxation, public expenditure and public borrowings.
• The importance of fiscal policy is high in underdeveloped countries.
• The state has to play active and important role. In a democratic society direct methods are not approved.
• So, the government has to depend on indirect methods of regulations.
• In this way, fiscal policy is a powerful weapon in the hands of government by means of which it can achieve the objectives of development

Main Objectives of Fiscal Policy In India

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 the state governments in India have used fiscal policy to mobilise resources.

–  The financial resources can be mobilised by:

1. 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.
2. Public Savings : The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises.
3. Private Savings : Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing.

Efficient allocation of Financial Resources

• The central and state governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc.
• But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable.

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.

Price Stability and Control of Inflation

• One of the main objective 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

Employment Generation

• The government is making every possible effort to increase employment in the country through effective fiscal measure.
• 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 generates more employment.
• Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas.
• Similarly, self employment scheme is taken to provide employment to technically qualified persons in the urban area

Balanced Regional Development

• Another main objective of the fiscal policy is to bring about a balanced regional development.

• There are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc

Reducing the Deficit in the Balance of Payment

• Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption of income tax on export earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc.

• The foreign exchange is also conserved by Providing fiscal benefits to import substitute industries, Imposing customs duties on imports, etc.

• The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or by giving subsidies to export

Reducing the Deficit in the Balance of Payment

• Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption of income tax on export earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc.

• The foreign exchange is also conserved by Providing fiscal benefits to import substitute industries, Imposing customs duties on imports, etc

• The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or by giving subsidies to export

Capital Formation

• The objective of fiscal policy in India is also to increase the rate of capital formation so as to accelerate the rate of economic growth.
• An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of capital deficiency.
• In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to encourage savings and discourage and reduce spending

Increasing National Income

• The fiscal policy aims to increase the national income of a country.
• This is because fiscal policy facilitates the capital formation.
• This results in economic growth, which in turn increases the GDP, per capita income and national income of the country.

Development of Infrastructure

• Government has placed emphasis on the infrastructure development for the purpose of achieving economic growth. The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is invested in the infrastructure development. Due to this, all sectors of the economy get a boost.

Foreign Exchange Earnings

• Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax and octroi, etc.
• Foreign exchange provides fiscal benefits to import substitute industries.
• The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem.