Fiscal Policy

Tools of Fis­cal Pol­icy in India#

Fis­cal pol­icy tools are imple­mented through the annual bud­get, which out­lines the gov­ern­men­t's rev­enue and expen­di­ture plans. India employs var­i­ous tools of fis­cal pol­icy to achieve its eco­nomic objec­tives. These include:

1. Gov­ern­ment receipts#

Gov­ern­ment receipts are the funds received by the gov­ern­ment from var­i­ous sources, such as taxes, inter­est, invest­ment gains, and pay­ments for ser­vices. These receipts are essen­tial for the gov­ern­ment to finance its activ­i­ties and invest in dif­fer­ent sec­tors. Gov­ern­ment receipts can be clas­si­fied into cap­i­tal receipts and rev­enue receipts.

• Cap­i­tal receipts: The gov­ern­ment raises these funds through bor­row­ings or by sell­ing its assets. Cap­i­tal receipts involve mar­ket bor­row­ings and exter­nal bor­row­ings. Addi­tion­ally, cap­i­tal receipts include pro­ceeds from the sale of gov­ern­ment-owned assets, recov­er­ies of loans and advances, and repay­ments from for­eign gov­ern­ments. Cap­i­tal receipts are essen­tial for financ­ing the devel­op­ment and cap­i­tal expen­di­ture of the gov­ern­ment.
• Rev­enue receipts: The gov­ern­ment gen­er­ates these funds through non-debt sources, con­sist­ing of taxes and other earn­ings that do not cre­ate lia­bil­i­ties. These receipts are essen­tial for meet­ing the gov­ern­men­t's day-to-day oper­a­tional expenses. Rev­enue receipts are of two main types: tax rev­enue and non-tax rev­enue. Tax rev­enue is derived from direct and indi­rect taxes imposed on indi­vid­u­als and busi­nesses. Non-tax rev­enue includes earn­ings from sources such as inter­est on loans, div­i­dends from invest­ments, and fees for ser­vices pro­vided by the gov­ern­ment.

2. Rev­enue expen­di­ture#

These cover oper­at­ing expenses and rou­tine main­te­nance of the gov­ern­ment. They are nec­es­sary to sus­tain the gov­ern­men­t's day-to-day oper­a­tions.

3. Cap­i­tal expen­di­ture#

This involves invest­ments made by the gov­ern­ment to expand oper­a­tions and gen­er­ate more rev­enue. Cap­i­tal expen­di­tures often include pur­chas­ing long-term assets, such as machin­ery or infra­struc­ture, with a lifes­pan of at least a year.

4. Pub­lic Account of India#

The Pub­lic Account of India includes trans­ac­tions where the gov­ern­ment acts as a banker. Estab­lished by Arti­cle 266 of the Indian Con­sti­tu­tion, this account cov­ers flows related to small sav­ings, prov­i­dent funds, and other instances where the gov­ern­ment holds funds on behalf of indi­vid­u­als. The gov­ern­ment is oblig­ated to return these funds to their own­ers peri­od­i­cally, and expen­di­tures from the pub­lic account do not require par­lia­men­tary approval.

Fis­cal Man­age­ment: FRBM Act#

The Fis­cal Respon­si­bil­ity and Bud­get Man­age­ment (FRBM) Act was enacted to pro­mote fis­cal dis­ci­pline and fis­cal man­age­ment in India.

Enacted in 2003, the FRBM Act aims to bring trans­parency, account­abil­ity, and pru­dence in man­ag­ing gov­ern­ment finances.

The key pro­vi­sions include set­ting tar­gets for reduc­ing fis­cal deficits, con­trol­ling the rev­enue deficit, and man­ag­ing the over­all pub­lic debt.

The Act estab­lishes a frame­work for the gov­ern­ment to adhere to fis­cal man­age­ment prin­ci­ples to ensure macro­eco­nomic sta­bil­ity and long-term fis­cal sus­tain­abil­ity. Peri­odic reviews and reports on fis­cal per­for­mance are man­dated, pro­vid­ing a mech­a­nism for mon­i­tor­ing and adjust­ing fis­cal poli­cies as needed.

Impor­tance of Fis­cal Pol­icy in India#

The impor­tance of fis­cal pol­icy in India lies in its piv­otal role as a tool for eco­nomic man­age­ment and devel­op­ment.

• Fis­cal pol­icy serves as a means to stim­u­late eco­nomic growth by strate­gi­cally increas­ing pub­lic expen­di­ture and invest­ments in key sec­tors.
• More­over, fis­cal pol­icy is instru­men­tal in main­tain­ing price sta­bil­ity by reg­u­lat­ing demand and con­trol­ling infla­tion.
• It addresses social and devel­op­men­tal goals through edu­ca­tion, health­care, and infra­struc­ture allo­ca­tions, fos­ter­ing inclu­sive growth.
• It curbs fis­cal deficits and ensures long-term sus­tain­abil­ity.

India’s Fis­cal Pol­icy trends and tra­jec­tory#

In recent years, Indi­a's fis­cal pol­icy has been char­ac­ter­ized by a strate­gic focus on infra­struc­ture devel­op­ment, with increased bud­getary allo­ca­tions to sec­tors like trans­porta­tion, energy, and urban devel­op­ment.

The gov­ern­ment has embarked on tax reforms, notably the Goods and Ser­vices Tax (GST) intro­duc­tion in 2017, aimed at sim­pli­fy­ing and uni­fy­ing the coun­try's indi­rect tax sys­tem.

There has been a con­certed effort to ratio­nal­ize sub­si­dies, ensur­ing more tar­geted resource dis­tri­b­u­tion, par­tic­u­larly in areas such as fuel and food sub­si­dies.

Pub­lic debt man­age­ment remains a con­sis­tent con­cern, with efforts to bal­ance nec­es­sary bor­row­ing for expen­di­tures and main­tain­ing fis­cal dis­ci­pline.

Coun­ter­cycli­cal fis­cal poli­cies have been deployed to address eco­nomic down­turns, involv­ing increased gov­ern­ment spend­ing and stim­u­lus mea­sures to boost growth. Fis­cal deficit tar­gets are part of fis­cal con­sol­i­da­tion efforts, reflect­ing the ongo­ing chal­lenge of bal­anc­ing eco­nomic stim­u­la­tion with fis­cal pru­dence.

Indi­a's fis­cal pol­icy trends reflect a dynamic approach, respond­ing to evolv­ing eco­nomic con­di­tions and gov­ern­ment pri­or­i­ties.

Con­trac­tionary vs. Expan­sion­ary Fis­cal Pol­icy#

There are two kinds of fis­cal pol­icy: con­trac­tionary and expan­sion­ary.

Con­trac­tionary fis­cal pol­icy is said to be in action when the gov­ern­ment reduces spend­ing, raises taxes, or both.

As a result, less money is avail­able in the mar­ket. It leads to reduc­tion in the pur­chas­ing power which results in declin­ing con­sump­tion.

With less money being spent, the econ­omy slows and unem­ploy­ment can rise. Con­trac­tionary pol­icy is used to con­trol infla­tion.

Expan­sion­ary fis­cal pol­icy is said to be in action when the gov­ern­ment increases the spend­ing and low­ers tax rates for boost­ing eco­nomic growth. This increases con­sump­tion as there is a rise in pur­chas­ing power. Busi­nesses see more demand and invest in new projects, and the nation's Gross Domes­tic Prod­uct (GDP) rises.

Key terms#

Fis­cal Respon­si­bil­ity and Bud­get Man­age­ment Act (FRBM)

The Fis­cal Respon­si­bil­ity and Bud­get Man­age­ment Act, 2003 is an Act of the Par­lia­ment of India 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.

Com­mon ques­tions#

What is Fis­cal Pol­icy?#

Fis­cal pol­icy is the pol­icy that decides how much the gov­ern­ment will spend and how much tax cit­i­zens have to pay. These two things help the gov­ern­ment proac­tively mon­i­tor and influ­ence the econ­omy of the coun­try. The gov­ern­ment uses Fis­cal Pol­icy either to curb reces­sion and unem­ploy­ment or to decrease infla­tion.

Who pre­pares Fis­cal Pol­icy in India?#

Min­istry of Finance for­mu­lates the fis­cal pol­icy.