Fiscal Policy of India

What do you mean by Fiscal Policy ( राजकोषीय नीति)?

Fiscal Policy means Government spending policy that influence macroeconomic conditions. These policies affect tax rates, interest rates and government spending, in an effort to control the economy.

In Simple Words the Fiscal Policy is: Fiscal policy deals with the taxation and expenditure decisions of the government.

Who Deals with Fiscal Policy?

In most modern economies, the government deals with fiscal policy.

What are the main objectives of Fiscal Policy of India?

1. Development by effective Mobilization of Resources by Taxation, Public Savings and Private Savings
2. Efficient allocation of Financial Resources
3. Reduction in inequalities of Income and Wealth
4. Price Stability and Control of Inflation
5. Employment Generation
6. Balanced Regional Development
7. Reducing the Deficit in the Balance of Payment
8. Capital Formation
9. Increasing National Income
10. Development of Infrastructure
11. Foreign Exchange Earnings

If Government Deals with Fiscal Policy than Who Deals with Monetary Policy (मौद्रिक नीति) and What is the Difference between Fiscal & Monetary Policy?

Where Fiscal policy deals with the taxation and expenditure decisions of the government, Monetary policy deals with the supply of money in the economy and the rate of interest. The government deals with fiscal policy while the central bank is responsible for monetary policy. Fiscal policy also feeds into economic trends and influences monetary policy.

What does Fiscal policy includes?

It include, tax policy, expenditure policy, investment or disinvestment strategies and debt or surplus management.

What are these terms - surplus, deficit and debt ?

When the government receives more than it spends, it has a surplus. If the government spends more than it receives it runs a deficit. To meet the additional expenditures, it needs to borrow from domestic or foreign sources, draw upon its foreign exchange reserves or print an equivalent amount of money. This tends to influence other economic variables. On a broad generalization, excessive printing of money leads to inflation. If the government borrows too much from abroad it leads to a debt crisis. If it draws down on its foreign exchange reserves, a balance of payments crisis may arise. Excessive domestic borrowing by the government may lead to higher real interest rates and the domestic private sector being unable to access funds resulting in the "crowding out" of private investment. Sometimes a combination of these can occur. In any case, the impact of a large deficit on long run growth and economic well-being is negative. Therefore, there is broad agreement that it is not prudent for a government to run an unduly large deficit. However, in case of developing countries, where the need for infrastructure and social investments may be substantial, it sometimes argued that running surpluses at the cost of long-term growth might also not be wise (Fischer and Easterly, 1990). The challenge then for most developing country governments is to meet infrastructure and social needs while managing the government's finances in a way that the deficit or the accumulating debt burden is not too great.

What are Revenue Deficit & Fiscal Deficit?

Revenue Deficit: There are various ways to represent and interpret a government's deficit. The simplest is the revenue deficit which is just the difference between revenue receipts and revenue expenditures.

Revenue Deficit = Revenue Expenditure – Revenue Receipts (that is Tax + Non-tax Revenue)

Revenue expenditures are fairly regular and generally intended to meet certain routine requirements like salaries, pensions, subsidies, interest payments, and the like. Revenue receipts represent regular „earnings‟, for instance tax receipts and non-tax revenues including from sale of telecom spectrums.

Fiscal Deficit: A more comprehensive indicator of the government‟s deficit is the fiscal deficit. This is the sum of revenue and capital expenditure less all revenue and capital receipts other than loans taken. This gives a more holistic view of the government's funding situation since it gives the difference between all receipts and expenditures other than loans taken to meet such expenditures.

Fiscal Deficit = Total Expenditure (that is Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Recoveries of Loans + Other Capital Receipts (that is all Revenue and Capital Receipts other than loans taken))

What are these terms: The gross fiscal deficit (GFD), Net Fiscal Deficit and Gross Primary Deficit?

“The gross fiscal deficit (GFD) of government is the excess of its total expenditure, current and capital, including loans net of recovery, over revenue receipts (including external grants) and non-debt capital receipts.” The net fiscal deficit is the gross fiscal deficit reduced by net lending by government (Dasgupta and De, 2011). The gross primary deficit is the GFD less interest payments while the primary revenue deficit is the revenue deficit less interest payments.

How are Central Taxes developed to the State Governments?

The Constitution provides for the formation of a Finance Commission (FC) every five years. Based on the report of the FC the central taxes are devolved to the state governments.