Fiscal Policy

Fiscal policy is that part of government policy which is concerned with raising revenue through taxation and other means and deciding on the level and patter of expenditure. In India, the fiscal policy is gaining its importance in recent years with the growing involvement of the government in developmental activities of the country. The following are some of the important objectives of fiscal policy: 1) To mobilize adequate resources for financing various programs and projects adopted for economic development. 2) To raise the rate of savings and investment for increasing the rate of capital formation. 3) To promote necessary development in the private sector through fiscal incentive. 4) To arrange an optimum utilization of resources. 5) To control the inflationary pressures in economy in order to attain economic stability. 6) To remove poverty and unemployment. 7) To reduce regional disparities. 8) To reduce the degree of inequality in the distribution of income and wealth.

Techniques of fiscal policy:

The following are the four important techniques of fiscal policy of India: 1) Public expenditure policy: Public expenditure influences the economic activities of a country very much. It can be of 2 types i.e. developmental and non developmental. Developmental expenditure is of great importance to the economic growth of the country. It requires huge amount of capital. So much capital cannot be made available by private sector alone. It requires increase in public expenditure. Public expenditure may be made in the following ways:

a) Development of public enterprises: Underdeveloped countries lack basic and heavy

industries. Establishment of these industries requires huge capital investment. They involve great deal of risk. Also private sector cannot set up these industries because of more risk and huge capital investment. b) Support to Private Sector: In order to accelerate the rate of economic growth in the country, government should encourage private sector. For this government gives various subsidies, concessional loans etc. c) Development of infrastructure: Government spends huge amount for development of infrastructure, which is must for economic development of any nation. Infrastructure of a country mainly includes power projects, railways, roads, airports, hospitals, dams, etc. d) Social Welfare: Government spends huge amount on public health, education, safe drinking water, sanitation, welfare of weaker sections of society, etc. 2) Taxation Policy: Taxes are the main sources of revenue of government. Government levies both direct and indirect taxes in India. Direct taxes are those that are paid directly by the assessee to the government e.g.: income tax, wealth tax etc. Indirect taxes are paid indirectly by

the public to the government, i.e., these taxes are charged by trader/manufacturer from the public and then paid to the government e.g., excise duty, custom duty, VAT, etc. Main objectives of taxation policy in India are as follows:

a) Mobilization of Resources: Taxes are the major sources of government revenue. Tax
revenue in India has been rising every year. Government mobilizes resources through taxation for economic development. b) To promote savings: One of the important objectives of taxation policy is to promote savings. For this purpose various tax concessions, tax deductions are given on savings e.g.: savings in provident funds, savings in national saving certificate, etc. c) To promote Investment: To promote investment in remote and backward areas, rural areas, various tax rebates, tax concessions, tax deductions are given for investment in these areas. d) To bring Equality of Income and Wealth: To achieve this objective different kinds of progressive direct taxes are levied e.g.: income tax, wealth tax, etc., rate of tax is increase with the increase in income.

3) Public Debt Policy: Government needs lot of funds for the economic development of country.
No government can mobilize so many funds by way of taxes alone. Public debt is obtained from 2 kinds of sources: a) Internal debt: It should be mobilized in a manner that it has no adverse effect on private investment. It is more beneficial to collect small savings as it encourages the people to save more. b) External debt: When funds are borrowed from abroad it is called external debt. The main advantage of this is that foreign loans are received in foreign currency.

4) Deficit Financing: It refers to financing the budgetary deficit. Budgetary deficit here means
excess of government expenditure over government income. Deficit financing in India means, Taking loans from RBI by the government to meet the budgetary deficit. RBI gives this loan by issuing new currency notes. Consequently, money supply increases. Increase in money supply leads to fall in the value of money. Fall in the value of money in turn leads to increase in price level. So deficit financing should be kept as low as possible as it leads to price rise in the economy.

Advantages of Fiscal Policy:

1) 2) 3) 4) 5) 6) Plays significant role in capital formation. Provides incentives to private sector for investment and production of several measures. Helps in mobilization of resources. Provides several incentives for savings to households and corporate sectors. Leads to social welfare. Reduction in inequality of income and wealth.

Drawbacks:
1) Deficit financing has proved to be inflationary. 2) In India share of direct taxes is less than the share of indirect taxes. Such tax structure proves burdensome for poor. 3) Indian tax administration has been very poor. 4) It has failed to check inequality of income. 5) It has also failed in checking regional disparities.