India’s Fiscal Policy Framework

Fiscal policy refers to the government’s use of spending and taxation to influence the economy. It is important tool for managing economic stability, growth, and public welfare. By adjusting fiscal measures, the government can respond to economic fluctuations and promote a stable economic environment.

Historical Context

The fiscal policy framework in India has evolved over the years.

Pre-liberalization Era (Before 1991)

Before 1991, India followed a state-led growth model. The economy was heavily regulated and protectionist. The government controlled various sectors, leading to limited private sector participation.

Economic Liberalization (1991 Onwards)

The economic liberalisation in 1991 marked a turning point. The government shifted towards market-oriented reforms. This transition brought changes to fiscal policy, focusing on deregulation and encouraging foreign investment.

Objectives of Fiscal Policy

Fiscal policy aims to achieve several key objectives.

Economic Growth

One primary goal is stimulating investment and consumption. Increased government spending can lead to higher demand and economic expansion.

Price Stability

Another objective is controlling inflation. Fiscal measures can help stabilise prices by regulating demand in the economy.

Employment Generation

Creating jobs is vital. Public spending on infrastructure and services can lead to job creation and reduce unemployment rates.

Redistribution of Income

Fiscal policy also aims to reduce income inequality. Targeted welfare programs can help redistribute wealth and improve social equity.

Key Components of Fiscal Policy

Fiscal policy comprises two main components – government revenue and government expenditure.

Government Revenue

Revenue is generated through various means.

1. Tax Revenue:
   • Direct Taxes – Include income tax and corporate tax.
   • Indirect Taxes – Include Goods and Services Tax (GST) and customs duties.
2. Non-Tax Revenue:
   • Includes dividends from public sector enterprises, fees, and fines.

Government Expenditure

Expenditure can be classified into two categories.

1. Capital Expenditure:
   • Investment in infrastructure, education, and health services.
2. Revenue Expenditure:
   • Covers day-to-day operational costs, salaries, and subsidies.

Fiscal Policy Instruments

The government employs various instruments to implement fiscal policy effectively.

Budgetary Policy

The annual budget outlines the government’s revenue and expenditure. It serves as a roadmap for fiscal management.

Public Debt Management

This involves issuing government bonds and managing liabilities. Proper debt management is crucial for maintaining fiscal health.

Fiscal Responsibility and Budget Management (FRBM) Act

The FRBM Act promotes fiscal discipline and transparency. It sets targets for reducing fiscal deficit and controlling government borrowing.

Fiscal Deficit

Fiscal deficit is a critical concept in fiscal policy.

Definition

It is the difference between total expenditure and total revenue, excluding borrowings. A higher fiscal deficit can indicate financial distress.

Importance

The fiscal deficit reflects the government’s financial health. It influences investment decisions and economic stability.

Target

The FRBM Act sets targets for reducing fiscal deficit. These targets aim to ensure the sustainability of public finances over time.

Role of the Reserve Bank of India (RBI)

The Reserve Bank of India plays role in coordinating fiscal policy.

Coordination with Fiscal Policy

The RBI manages monetary policy to complement fiscal measures. This coordination helps maintain economic stability.

Impact on Inflation and Interest Rates

The RBI influences inflation and interest rates through liquidity management. Effective coordination can mitigate inflationary pressures.

Recent Developments

India’s fiscal policy has adapted to recent challenges.

COVID-19 Pandemic Response

The government increased spending to support the economy during the pandemic. This response led to a rise in fiscal deficit but aimed to protect livelihoods.

Atmanirbhar Bharat Abhiyan

This initiative promotes self-reliance in the economy. It includes various fiscal measures to boost growth and enhance resilience.

Challenges in Fiscal Policy

India’s fiscal policy faces several challenges.

High Fiscal Deficit

A high fiscal deficit raises concerns about sustainability. It can lead to increased borrowing and potential inflation.

Tax Compliance

Tax evasion remains issue. Expanding the tax base is essential for improving revenue collection.

Public Debt

Managing rising levels of public debt is crucial. High debt can have long-term implications for future generations.