Fiscal policies are the principal driving force of the Indian economy that helps the government to make decisions about financial matters like expenditures and savings. It is utilized to assess the amount of financial assistance needed to increase economic activity, as well as the amount of revenue that needs to generate to fund the same. Fiscal policies help smoothly manage the economy.
In recent times the importance of fiscal policies has increased because it aids in boosting economic growth. Accelerating economic growth is the primary goal of the fiscal policies formulated by the Government of India. Fiscal policy, when combined and monetary policy, aids in governing the economy of a nation by ensuring that it is planned and diligent. Let us explore the idea of Fiscal policy and its underlying aspects.
Meaning of Fiscal Policy and Examples
With the aid of tax policy, governments can manage the flow of tax revenue and the outflows of public expenditure within the economy. If the government can generate more revenue than the expenditure, it is a surplus. However, if it has more expenses than tax and other revenues and a deficit, it is becoming indebted. In order to cover the additional costs, the government will need to take out loans from the market in its own country as well as from foreign institutions. The government may also decide to tap into its foreign exchange reserves or inject additional cash into the economy by printing more money.
Let us look at an example to understand fiscal policy better. If there is a recession, the government can start using its reserves to develop more projects, invest in welfare programs, and provide incentives for businesses and other incentives. The goal is to make dormant cash available to the people, to take some of the money, and then put it in the hands of individuals so they have enough money to spend. It also aids in encouraging companies to invest more. At the same time, the government may decide to tax businesses and reduce the tax burden for individuals, reducing their income.
What is the point of fiscal policy?
Here are a few main goals in any fiscal strategy formulated by the federal government.
- Economic growth Fiscal policy assists the growth rate of the economy to be stable in order to meet specific goals in the economy.
- Stability of prices The HTML0 code assists in regulating the cost levels across the country, particularly during times of inflation, where prices may rise substantially.
- Full employment Fiscal policy can aid in achieving full or close to full employment. This, in turn, helps the economy recover quickly from a slump.
Types of Fiscal Policies
Fiscal policy is generally divided into three distinct kinds or categories. Each is according to the current economic situation and the government’s objectives.
- Expanding Policy – Governments adopt an expansionary fiscal policy whenever the need to boost growth is a significant factor because of the economic slump. The expansionary fiscal policy demands more spending compared to the tax revenues generated. It is focused on measures that assist in creating jobs (like building new buildings) and reducing taxes. The principal goal is to boost the demand for goods and services by injecting cash into the economic system.
- The Contractionary policy If an economy is experiencing abnormally large growth and total employment, the government may decide to adopt to implement a contractionary fiscal policy. The intention is to put the brakes on an expanding economy, mainly if rising inflation is a significant problem. A fiscal policy geared toward contraction calls for a decrease in government spending and the taxation of higher rates.
- Neutral policy Fiscal policy may be characterized as neutral if the amount of government expenditure compared to tax revenue remains constant. It could be regarded as the “default” policy when an economy is not expanding or shrinking, and the government does not intend to interfere in the economy.
Are fiscal policies the same as monetarist policies?
The government must employ a combination of fiscal and monetary policy to achieve the goals of economic development for the nation. The primary responsibility for implementing the monetary policy of a nation is the central bank. In India, the RBI is accountable for the formulation and execution of Monetary Policy. The policy is primarily focused on currency as well as interest rates. However, fiscal policy focuses on the expenditure and taxation controlled and implemented by the government.
What are the reasons why fiscal policy is essential for India’s economy? Indian economy?
1. Capital Formation:
It is important to note that the Fiscal policy of any nation is a critical factor in capital formation within both the private and public sectors. India witnessed a growth in Gross domestic capital creation rate as a percentage of GDP total from 10.2 percent in the 1950-51 period to 22.9 percent in 1980-81. Then, it soared to 24.8 percent in 1997-98. So, over the years, the rate has positively impacted both private and public investment across the country. In the year 2019, the capital formation rate was 30.21 percent.
2. Mobilisation of Resources:
Fiscal policy has greatly assisted in the mobilization of more significant amounts of resources through taxation, public debt, and so on. This also has made it easier to finance various development projects envisioned by the government. Internal resource mobilization has significantly grown from 70 percent in 1965-1966 to almost 90 percent in 1997-98.
3. Promotes Savings:
The fiscal policy gives various incentive programs to promote savings within households and the corporate sector. This is done primarily through diverse policy changes, such as exempting taxes, holidays, etc. So, saving rates have risen from 10.4 percent in 1950-51 to 23.1 percent in 1997-98. In recent times it has increased to nearly 30.1 percent.
4. Support to the Private Sector:
The private sector can enjoy a constant incentive from the fiscal policy policies of the nation. This aids in the expansion of the economy. Tax holidays, tax exemptions, subsidies, etc., are all included in budgets to give adequate incentives for the private sector, infrastructure agencies, and exporters in India.
5. Reduction of Inequality:
Fiscal policy has always focused on reducing inequality, particularly regarding the distribution of income and wealth. The progressive income tax, wealth tax exemptions and grants, subsidies, and more. Are designed to reduce this inequality. Fiscal policies also help reduce regional disparities through various budgetary strategies.