Public Finance and Budget

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 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.

Practice Questions on Fiscal Policy

Q. Who/What formulates the fiscal policy in India?

A. The planning commission

B. Finance ministry

C. The reserve bank of India


Answer: B. Finance ministry

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