Impact of Fiscal System

Before further detail, let us analyze the two instruments in isolation and see what they mean. First, let’s get a basic gist of what monetary policy and fiscal policy mean. The central bank of a country manipulates monetary policy. The United States of America, has the Federal Reserve as its central Bank. In India, it is the Reserve Bank of India (RBI).The second tool is Fiscal policy which is controlled entirely by the government. These primarily hold the credit and physical cash in the economy and have separate tools for fulfilling the set objectives.

WHAT EXACTLY IS MONETARY POLICY

Monetary policy is more detailed, heavily assessed, and has a more complex working model. It is the quantity of money and its subsequent channels under the control of the monetary policies. Although both these types of policies affect an economy’s aggregate demand, the means vary vastly. In Monetary policy, the supply of money fluctuates as per the needs, which inevitably affects inflation, rate of inflation, employment, and other such macroeconomic variables. These further have a significant impact on business growth and consumption, which in turn affects the country’s total aggregate demand.

TOOLS FOR MONETARY POLICY

In India, RBI is the one that regulates the monetary policy in India, that is, the quantity of money, and it does so with some essential tools:

1. CASH RESERVE RATIO(CRR): This is the amount or percentage of cash that every bank needs to have with it. A high CRR means the banks have less money to lend, so it automatically reduces the cash flow in the country.
2. OPEN MARKET OPERATIONS (OMO): In this method, the RBI uses government bonds to increase or decrease the supply of money in the economy. If the cash supply improves, the RBI will buy government bonds to slip money into the economy. If the RBI wants to raise the amount of money in the economy, it will sell government bonds to banks and reduce the banks’ lending ability.
3. STATUTORY LIQUIDITY RATIO (SLR): This is similar to the previously mentioned CRR. However, the RBI decides a percentage of reserved securities that each bank must keep. The higher the SLR, the less the banks can lend to the public.
4. REPO RATE & REVERSE REPO RATE: It is defined as the rate at which the RBI lends the banks money to buy securities. If the Repo rate is high, the costlier it is for the banks. This cost is then translated to high borrowing rates for the customers, therefore discouraging borrowing.

FISCAL POLICY

The fiscal policy is entirely under the control of the government. These policies are implemented in order to influence the economic condition as well as the overall aggregate demand. The fiscal policy objects to the Laissez-Faire approach, which says no government interference must be made in terms of the country’s economic affairs. However, the financial crash of both 1929 and 2009 crashed.

In comparison to its counterpart, now Fiscal policy has fewer tools but is more effective in the long-term economic stability. It has two essential tools :

1. TAXES: The simplest to explain taxes refer to the fee the government charges for certain facilities. For traveling to hill stations, there is a road tax. The higher the tax levied on the public, the lesser they can spend, therefore the lesser money in the economy.
2. GOVERNMENT: On spending money for public projects on infrastructure, it gives widespread employment. Simply put, when governments pump in money for any projects, it increases the money supply in the economy.

TRENDS IN THE FISCAL POLICY OF INDIA

It is undeniable that the pandemic brought the world to a standstill. The Indian GDP fell by more than a quarter, and millions of jobs were lost. Once the pandemic began phasing out, the government had to step in and ensure that the economy did not collapse. Externally, there was a noticeable pattern.

• TAX CUTS TO STRENGTHEN PRIVATIZATION

• Central tax cuts to the private players to increase employment and induce development that would subsequently provide jobs without the government having to bear losses.
• The National Monetisation Pipeline states that nearly 2.4 lac crore public assets will be sold to private players by 2025.
• Reduce unnecessary government expenditure and let the private players handle the losses

E.g., Air India was in a debt of nearly 60,000 crores, which was bought by TATA, and the losses were incurred by them.

• GOVERNMENT SPENDING INCREASED

• The government allocated 5.5 lac crores for pumping into the investment sector.
• There is a massive rise in capital expenditure, 4.12 lac crores to 5.5 lac crores.
• To help boost employment and get people back on their feet, especially after the pandemic.
• Targeted six significant areas to invest in and subsequently increase the GDP.

CONCLUSION

It would be safe to say that how a country uses and manipulates its monetary and fiscal policy means its ability to prevent an economic crisis. It is safe to say that the covid pandemic was another eye-opener that reminded us of the importance of government interference in the economic sector. Though the end goal of both the policies is to fluctuate aggregate demand, Monetary policies are more short-term in nature, while fiscal policies are reliable in the long term.