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Fiscal Policy Of India

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Fiscal Policy Of India

Fiscal policy refers to the policy related to revenue and expenditure of the government with a view to correcting the situations of excess demand or deficient demand in the economy. The  instruments  of  fiscal  policy are

  • Fiscal Instruments Related to Government Expenditure: The government  of a country incurs various types of expenditure such as expenditure on public works (construction of roads, dams, bridges etc), education and public welfare, defence, maintenance of law and order, various types of subsidies, and transfer payments to the public. Government corrects the situations of excess demand or deficient demand  in  the  economy by varying any or all types of
  • Fiscal Instruments Related to Financing of Government Expenditure: Taxation, public debt and deficit financing are the three fiscal instruments related to financing of government Government can correct the situations of excess demand or deficient demand in the economy by using above mentioned instruments.
  • Fiscal Policy and Deficient Demand: Following fiscal measures to correct the situation of deficient demand:
    • Decrease in Taxes: Government decreases taxes, which leaves the households with more purchasing power and the firms with more cash reserves. Direct taxes like income  tax, corporation tax etc are reduced. As a result both households as well as investors will be encouraged to spend more. Consequently, demand  will
    • Increase in Public Expenditure: To stimulate the demand the government increases expenditure over public health, education, subsidies and transfer payments, and public Public expenditure causes the level of income to increase in economy. Higher level of income causes  high  level  of demand.
    • Increase Deficit financing: Deficit financing (by way of printing more notes for additional expenditure) is increased during times of deficient demand so that the overall level of purchasing power is enhanced in the
    • Public Borrowing: Public borrowing is reduced so that people are left with greater disposable
  • Fiscal Policy and Excess Demand : Excess demand generates inflationary pressures in the system. Following fiscal measures are taken to  correct  the  inflationary
  • Increase in taxes: Tax rates are increased progressively to mop up additional purchasing power within  the
  • Decrease in Government Expenditure: Government expenditure is reduced so as to cause the  demand  to
  • Reduce Deficit Financing: Deficit financing is greatly restricted. The printing of more notes would only increase the rate of
  • Public Borrowing: The situation demands less purchasing power with the So, the government takes resort to increased public borrowing.

Main Objectives of Fiscal Policy in   India

The fiscal policy is designed to achieve certain  objectives  as follows

  1. Development by effective Mobilization of Resources : The principal objective of fiscal policy is to ensure rapid economic growth and This objective of economic growth and development can be achieved by Mobilization of  Financial Resources. The central and the state governments in India have used fiscal policy to mobilize resources.

The financial  resources  can be mobilized  by

  • Taxation: Through effective fiscal policies, the government aims to mobilize resources by way of direct taxes as well as indirect taxes because most  important  source of  resource  mobilization  in  India  is
  • Public Savings: The resources can be mobilized through public savings by reducing government expenditure and increasing surpluses of  public  sector.
  • Private Savings: Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilized through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign  parties  and  by  deficit financing.
  1. Efficient allocation of Financial Resources: The central and state governments have tried to make efficient allocation of financial These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc, whereas 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.
  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 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.
  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,
  4. Employment Generation: The government is making every possible effort  to increase employment in the country through effective  fiscal measure.
  5. 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,
  6. 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, 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.
  7. Development of Infrastructure: Government has placed emphasis on the infrastructure development for the purpose of achieving economic growth. The fiscal policy measures such as taxation generates revenue to the government. A part of the government’s revenue is invested in the infrastructure Due to this, all sectors of the economy get  a boost.

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