Fiscal policy in India: Fiscal policy in India is the

guiding force that helps the government decide how much

money it should spend to support the economic activity, and
how much revenue it must earn from the system, to keep the
wheels of the economy running smoothly. In recent times, the
importance of fiscal policy has been increasing to achieve
economic growth swiftly, both in India and across the world.
Attaining rapid economic growth is one of the key goals of
fiscal policy formulated by the Government of India. Fiscal
policy, along with monetary policy, plays a crucial role in
managing a country’s economy.
What is meant by Fiscal Policy in India? Example of
Fiscal Policy in India:
Through the fiscal policy, the government of a country
controls the flow of tax revenues and public expenditure to
navigate the economy. If the government receives more
revenue than it spends, it runs a surplus, while if it spends
more than the tax and non-tax receipts, it runs a deficit. To
meet additional expenditures, the government needs to borrow
domestically or from overseas. Alternatively, the government
may also choose to draw upon its foreign exchange reserves
or print additional money. For example, during an economic
downturn, the government may decide to open up its coffers
to spend more on building projects, welfare schemes,
providing business incentives, etc. The aim is to help make
more of productive money available to the people, free up
some cash with the people so that they can spend it elsewhere,
and encourage businesses to make investments. At the same
time, the government may also decide to tax businesses and
people a little less, thereby earning lesser revenue itself.

Main objectives of Fiscal Policy in India:

• Economic growth: Fiscal policy helps maintain the
economy’s growth rate so that certain economic goals
can be achieved.
• Price stability: It controls the price level of the country
so that when the inflation is too high, prices can be
regulated.
 • Full employment: It aims to achieve full employment,
or near full employment, as a tool to recover from low
economic activity.

What is the difference between fiscal policy and monetary

policy?
The government uses both monetary and fiscal policy to meet
the county’s economic objectives. The central bank of a
country mainly administers monetary policy. In India, the
Monetary Policy is under the Reserve Bank of India or RBI.
Monetary policy majorly deals with money, currency, and
interest rates. On the other hand, under the fiscal policy, the
government deals with taxation and spending by the Centre.

Fiscal Policy
The means by which the government adjust its spending levels
along with tax rates to influence and monitor the nation’s
economy it is known as fiscal policy. Let us learn the Fiscal
Policy of India here.

Fiscal Policy of India

Fiscal Policy

There are several component policies or a mix of policies that

contribute to the fiscal policy. These include subsidy, taxation,
welfare expenditure, etc. Also, there are a certain investment
and disinvestment policies and debt and surplus management
that contributes to fiscal policies.
Objectives of a Fiscal Policy
• In order to stabilize the pricing level in the economy.
• The main objective is to achieve and maintain the level of
full employment in the country.
• Also, to stabilize the growth rate in the economy.
• Also, promote the economic development in a country.
• In order to maintain the level of balance of payment in the
economy.
Various Types of Fiscal Policies
Contractionary Fiscal Policy
This involves cutting government spending or raising taxes.
Thus, the tax revenue generated is more than government
spending. Also, it cuts on the aggregate demand in the
economy. So, the economic growth leading to the reduction in
inflationary pressures of the economy.

Expansionary Fiscal Policy

This is generally used to give a boost to the economy. Thus, it
speeds up the growth rate of the economy. Also, during the
recession period when the growth in national income is not
enough to maintain the current living of the population.

So, a tax cut and an increase in government spending would

boost economic growth and decrease the unemployment rates.
Although this is not a sustainable solution. Because this can
lead to a budget deficit. Thus, the government should use this
with caution.
Neutral Fiscal Policy
This policy implies a balance between government spending
and Furthermore, it means that tax revenue is fully used for
government spending. Also, the overall budget outcome will
have a neutral effect on the level of economic activities.

Types of Fiscal Policy

There are major components to the fiscal policies and they are

Expenditure Policy
Government expenditure includes capital expenditure and
revenue expenditure. Also, the government budget is the most
important instrument that embodies government expenditure
policy. Furthermore, the budget is also for financing the deficit.
Thus, it fills the gal between income and government spending.

Taxation Policy
The government generates its revenue by imposing both
indirect taxes and direct taxes. Thus, it is important for the
government to follow a judicial system for taxation and impose
correct tax rates. This is because of two reasons. The higher the
tax, the reduction in the purchasing power of the people.

This will lead to a decrease in investment and production.

Furthermore, the lower tax will leave more money with people
that lead to high spending and thus higher inflation.
Surplus and Debt Management
When the government receives more amount than it spends
than it is known as surplus. Also, when the spending is more
than the income than it is known as a deficit. In order to fund
the deficits, the government needs to borrow from domestic or
foreign sources.

Importance of Fiscal Policy in India:

• In a country like India, fiscal policy plays a key role in

elevating the rate of capital formation both in the public
and private sectors.
• Through taxation, the fiscal policy helps mobilise
considerable amount of resources for financing its
numerous projects.
• Fiscal policy also helps in providing stimulus to elevate
the savings rate.
• The fiscal policy gives adequate incentives to the private
sector to expand its activities.
Fiscal policy aims to minimise the imbalance in the dispersal
of income and wealth.

Fiscal Policy Tools and the Economy

Imagine that Sam is sick. He's at home right now, and the
doctor's been called. All of a sudden, the doorbell rings, and
standing at the front door is a doctor carrying a medical kit.
Now, the doctor comes in the patient's bedroom, opens up the
kit and finds three tools inside. I'll bet you're curious about
what's in the kit, huh? The doctor chooses one or two of the
tools in his toolkit and uses them on the patient.
Now imagine the patient is the whole economy. The economy
has entered a slowdown that has now turned into a full-blown
recession. Unemployment is high, and people are fearful of
their financial future. The government uses its own fiscal
policy toolkit, like a doctor, to administer fiscal policy tools -
like government spending, taxes and transfer payments - to
help strengthen aggregate demand when it's weak. On the
other hand, when the economy is overheating by growing
beyond its capacity, fiscal policy does the opposite and slows
down economic growth to address the problem of inflation.
Now, the word 'fiscal' means 'budget' and refers to the
government's budget. Fiscal policy, therefore, is the use of
government spending, taxation and transfer payments to
influence aggregate demand and, therefore, real GDP. If you
imagine the government as the doctor carrying the medical
kit, these three things are in the toolkit: government
spending,taxes and transfer payments.
Government Spending
Government spending includes the purchase of goods and
services - for example, a fleet of new cars for government
employees or missiles for national defense. Government
spending is a fiscal policy tool because it has the power to
raise or lower real GDP. By adjusting government spending,
the government can influence economic output.
In addition to the primary effect of government spending on
the economy, this spending multiplies through the economy as
it affects businesses who sell the goods and services bought
by the government. Consumers then go on to spend the
paychecks they earn from those businesses, stimulating real
GDP even more.
For example, when Larry's Limos receives a large order for
more government vehicles, his sales increase, and he hires
more employees who earn a paycheck from the company.
Once they cash their paycheck, they spend this money on
goods and services, and the effect of a single increase in
government spending now leads to a much greater result - an
effect that economists call the multiplier effect.
Taxes
Alright, let's talk about taxes. Taxes are a fiscal policy tool
because changes in taxes affect the average consumer's
income, and changes in consumption lead to changes in real
GDP. So, by adjusting taxes, the government can influence
economic output. Taxes can be changed in several ways.
Firstly, marginal tax rates can be raised or lowered. Secondly,
they can be eliminated entirely, or the tax rules can be
modified.
Transfer Payments
Alright. We've talked about government spending, then we
talked about taxes - now let's talk about transfer payments.
Transfer payments include things like Social Security, welfare
or unemployment checks. These checks go out all over the
country on a monthly basis and serve as the income for tens of
millions of consumers. Transfer payments are fiscal policy
tools in the same way that taxes are because changes in
transfer payments lead to changes in consumer income, and
when consumers spend more of their income.