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Household economic decisions may have a huge influence on an economy. Business investment decisions may have a significant influence on the actual economy and company profitability. Individual firms, on the other hand, seldom have the ability to influence huge economies on their own; the spending decisions of a single-family have a limited impact on the overall economy.
Government policies, on the other hand, may have a huge influence on even the largest and most sophisticated economies for two basic reasons. First, in most developed countries, the public sector employs a sizable proportion of the population and accounts for a sizable amount of the economy’s spending. Second, governments are the world’s greatest loan debtors.
The borrowing and spending operations of the government eventually convey government policy. There are two forms of government policy that can impact the macroeconomy and financial markets, which have been recognized and discussed: fiscal and monetary policies
What is fiscal policy
The use of government expenditure and taxation to influence the economy is referred to as fiscal policy. Governments often try to employ fiscal policy in ways that foster robust, long-term growth while reducing poverty.
Benefits of fiscal policy in India
Inequality Reduction
The country’s fiscal policy has made a concerted effort to alleviate inequality in the distribution of income and wealth. Progressive taxes on income and wealth, as well as tax exemptions, subsidies, and grants, among other things, are making a concerted attempt to minimize such disparity. Furthermore, fiscal policy is attempting to decrease regional imbalances through various budgetary strategies.
Reduced Unemployment
When unemployment is so high, the government uses an expansionary fiscal policy. This entails increasing expenditure or purchases while decreasing taxation. Tax cuts might result in greater expendable cash, which should raise demand for products and services. To accommodate growing demands, the private industry will boost output, resulting in additional job possibilities.
Increased Economic Growth
The numerous fiscal policies implemented by a country aid in the growth of the national economy. When the government lowers tax rates, firms and individuals will have a stronger incentive to invest and propel the economy ahead.
Reduced Budget Deficit
A country has a budget shortfall when its expenses exceed its receipts. Because the economic consequences of this imbalance include rising public debt, the government can seek fiscal contraction. As a result, it will decrease government expenditure and boost tax rates in order to earn more income and, ultimately, reduce the budget deficit.
Formation of Capital
The country’s fiscal policy has played an essential influence in increasing the rate of capital creation in both the public and private sectors. In India, gross domestic capital creation as a percentage of GDP climbed from around 10 percent in 1950-51 to approx 23 percent in 1980-81 and subsequently to 24.8 percent in 1997-98. As a result, it has had a positive influence on the country’s governmental and private sector investment.
Objectives of Monetary Policy
Neutrality of Money
One of the objectives of monetary policy is neutral money. All economic variations are caused by monetary changes. Neutralists think that if a neutral monetary policy is implemented, the economy will experience no cyclical oscillations, trade cycles, inflation, or deflation. The monetary authority maintains the stability of money in this system.
Price stability
The goal of price stability was emphasized. Price stability is seen as the most genuine goal of monetary policy. A little increase in the price level is a stimulant to economic growth. However, it is acknowledged that price stability does not imply ‘price rigidity’
Exchange stability
The goal of monetary policy is to maintain the country’s external balance. This was the primary goal of the Gold Standard across various countries. It should be emphasized that if exchange rates are unstable, there will be an outflow or influx of gold, resulting in an adverse balance of payments.
Employment
During the Great Depression, the problem of unemployment grew significantly. It was seen to be socially harmful, economically wasteful, and morally repugnant. Full employment, according to classical economists, was a natural element of an economy. Keynes believed that in order to raise income, production, and employment, both consumption and investment must be increased at the same time. Given that the consumption function is more or less steady in the short run, monetary policy should strive to increase investment spending.
The goal of full employment should be combined with other goals such as price and exchange rate stability. The most appropriate and advantageous monetary policy should be pursued in order to achieve full-employment through greater investment, which has multiplier and acceleration effects. This approach, to a large part, overcomes the problem of business swings. It is a valuable instrument for ensuring the community’s economic and social well-being.
Economic growth
Economic growth is the process through which a country’s actual per capita income grows over time. It denotes a rise in overall physical or real output or the creation of things to satisfy human desires. In other words, the monetary authority should pursue a loose or tight monetary policy in response to the needs of growth.
Fiscal and monetary policies
Monetary and fiscal policies are both used to exert long-term control over economic activity. Monetary policy affects the amount of money and credit in an economy. Fiscal policy refers to the decisions made by the government on taxation and spending. The overriding purpose of both is to create an economic climate in which growth and inflation are stable.
Conclusion
In terms of business patterns of foreign exchange reserves, as well as the volume and maturity profile of external debt, the external position is rather robust, but its fiscal condition needs immediate attention. High growth and low-interest rates will not solve the problem of long-term debt sustainability, nor will they address the dangers of a crisis in the near or medium term.
