Learn all about fiscal policy in India, from objectives to tools to trends. Further, we discuss the critical differences between monetary and fiscal policy
Fiscal policy in India refers to the government's use of taxation and public spending to influence the overall economy. It is a tool for economic management and involves government revenue and expenditure decisions to achieve specific economic objectives.
Fiscal policy is employed alongside monetary policy (controlled by central banks) to achieve macroeconomic stability and promote economic growth.
The primary objectives of fiscal policy in India include:
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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:
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.
These cover operating expenses and routine maintenance of the government. They are necessary to sustain the government's day-to-day operations.
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.
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.
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.
The importance of fiscal policy in India lies in its pivotal role as a tool for economic management and development.
In recent years, India's fiscal policy has been characterised 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 rationalise 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.
Monetary and fiscal policy are two distinct approaches governments and central banks employ to regulate and stabilise economies.