Objectives of Indian Fiscal System

Fiscal policy refers to the process through which the administration modifies its level of expenditure and taxation policies in order to impact and regulate the economic growth of the country.

There are various constituent strategies or a combination of measures that make fiscal policy. Subsidies, taxes, welfare expenditures, and so forth are examples of these. Additionally, some disinvestment and investment strategies, as well as surplus and deficit budget management, assist towards fiscal policies. The following are among some of the primary fiscal policy components: Budget, Public Expenditure, Public Debt, Taxation, Fiscal Deficit, and Public Revenue are all aspects of the economic system. The government can influence negative changes regarding investment and private consumption by adjusting taxation and public expenditures. 

Fiscal Policy and its Importance

• To guide the economy, the elected government regulates the flow of income tax revenue as well as public expenditures using fiscal policy. 
• If somehow the government collects more income than it invests, it has a surplus. On the other hand, in case it consumes more than it receives in non-tax and tax revenue, it leads to a budget deficit. 
• To cover increased expenses, the government must borrow either locally or internationally. Additionally, the government might use its forex reserves or create more currency.
• When in an economic slump, for instance, the government might opt to release its treasuries in a way to finance more on infrastructure projects, social programmes, corporate incentives, and so on. 
• The goal is to create additional productive capital accessible to consumers, allocate some funds for people to invest otherwise, and encourage firms to invest.
• Simultaneously, the government could elect to tax firms and individuals less, resulting in less income for the government.

Fiscal Policy and Its Different Types

• Contractionary Fiscal Policy – 

This entails either decreasing government expenditure or increasing taxes. As a result, the tax income produced exceeds the amount spent by the government. It also reduces aggregate demand (and consequently economic development) in the economy, causing a reduction in the nation’s economic inflationary pressures.

• Expansionary Fiscal Policy – 

The expansionary fiscal policy is most commonly employed to stimulate the economy. As a result, the pace of economic growth accelerates. Moreover, throughout an economic downturn, while national income expansion is insufficient to keep the population’s standard of living stable, this strategy is implemented. As a result, lowering taxes and increasing government expenditure would enhance economic growth as well as lower unemployment. This, however, is not really a long-term answer as it might result in a fiscal deficit. As a result, the government must exercise prudence while implementing this.

• Neutral Fiscal Policy – 

This strategy suggests an equilibrium between both government expenditure and tax income. In addition, the total budget outcomes would have little influence on the amount of economic activity.

Primary Objectives Under Fiscal Policy

Full Employment – 

• The primary goal of fiscal policy in a growing economy should always be to attain and sustain full employment. 
• However, in case, full employment is failed to accomplish in such nations, the fundamental objective is to minimize unemployment as well as reach a level of relatively close full employment. 
• As a result, in order to eliminate underemployment and unemployment problems, the government should invest enough money on economic and social overhead expenses. 
• These investments would contribute to the creation of new job opportunities as well as an enhancement in the economy’s productivity gains.

Price Stability – 

• There is widespread consensus that poor nations should pursue both economic development as well as stability. 
• Economic insecurity manifests itself in the form of inflationary effects in a developing economy.
• Fiscal policy must aim to eliminate obstacles as well as structural rigidities that contribute to imbalances in various areas of the economy. 
• Furthermore, physical restrictions over critical goods, subsidies, concessions, and economic safety should be strengthened. 
• In summary, monetary and fiscal policies work in tandem to accomplish economic development and stability goals.

To Quicken Economic Growth:

• In a developing country, fiscal policy must primarily attempt to boost economic development. 
• A high pace of economic growth in the economy, on the other hand, cannot be attained or sustained in the absence of economic stabilization. 
• As a result, fiscal policies including taxes, and deficit budget financing among others, should be utilised appropriately to ensure that production, as well as distribution, are not negatively impacted. It should contribute to the overall economic development, hence increasing national income.

Optimal Resource Allocation:

• Fiscal policies such as taxes and public spending programmes may have a significant impact on resource distribution in different industries.
• Impoverished nations have very low domestic as well as per capita incomes. To rebalance economic growth, the government might use budgetary policies to encourage the expansion of social infrastructure. 

Economic Stability – 

• Fiscal policies, to a greater extent, foster economic stabilization in the light of short-run global seasonal fluctuations. These changes produce variances in trade arrangements, providing the most beneficial to industrialised countries and unfavourable to emerging economies. 
• Thus, in order to achieve economic stabilization, fiscal procedures including expansionary fiscal policy should have built-in adaptability in the budget system, because then government income as well spending would naturally offer a compensating impact on the increase or decline of the country’s total income.

Conclusion

Fiscal policy impacts monetary policy as well as economic developments. A fiscal deficit is created when the government invests more than it collects. In such cases, it must finance from local or international sources, rely on its forex reserves, or it can also print an equal amount of currency to cover the higher expenses. Other economic factors are influenced as a result. This causes inflation. A financial meltdown occurs when the government borrows excessively from outside. The government’s massive domestic indebtedness may result in increased interest rates. As a result, the budget deficit might be compared to a two-edged sword that must be handled with extreme caution.