Three Elements that Make up Fiscal Policy

Government spending and tax policies are used to impact economic conditions, particularly macroeconomic variables such as collective demand for goods and services, inflation,  employment, and economic growth. This is referred to as fiscal policy. It is sometimes linked with monetary policy, which is implemented by central bankers rather than elected leaders. Read on to understand more about fiscal policy in India. 

Before we attempt to understand the fiscal policy in India, it’s important to have an overview of monetary policy.  

Monetary policy

The federal bank’s macroeconomic policy is referred to as monetary policy. It is a demand-side economic strategy in which the government of a nation manages the supply of money and interest rate to accomplish macroeconomic goals such as inflation,  growth, consumption and liquidity.

India’s Monetary Policy: Key Elements and Goals!

The Reserve Bank of India formulates and implements India’s monetary policy to attain specified goals. 

• To Control Supply Of money in the economy: Money supply refers to the amount of money in circulation as well as the amount of credit created by banks. Credit expansion or contraction is used in monetary policy to manage the money supply in the economy. 

• Maintaining Price Stability: Maintaining price stability in India is a significant goal of monetary policy. It means that inflation is under control. Money supply has an impact on price levels. To preserve price stability, monetary policy controls the money supply.

• To Stimulate Economic Growth: One of the most important goals of monetary policy is to provide the appropriate amount of money and loans for the country’s economic growth. Credit is made available in sufficient amounts to those industries that are critical to economic growth.

• To Encourage Saving and Investment: Monetary policy encourages saving and investment through regulation of interest rates and controlling inflation. Higher interest rates encourage investment and saving.

• To Encourage Exports & Substitute Imports: Monetary policy stimulates export-oriented and import-substitute businesses by granting concessional loans. This enhances the balance of payments situation.

• To Guarantee Greater Credit for Priority Sectors: Monetary policy attempts to maximise money available to priority sectors by decreasing interest rates. Agriculture, small-scale industries, and the weakest parts of society are examples of priority sectors.

• To Encourage Employment: Monetary policy supports employment by offering loan facilities to profitable ventures, small and medium firms, and special credit schemes for unemployed youth.

• Banking Regulation and Expansion: The Reserve Bank of India (RBI) oversees the economy’s financial system. RBI sends guidelines to various banks for the establishment of rural branches to promote agricultural lending through monetary policy. Apart from that, the government has established  regional rural banks and cooperative banks 

Fiscal policy in India

The government of the country manages the flow of tax income and public expenditure to guide the economy by fiscal policy. A surplus occurs when the government collects more income than it spends, whereas a deficit occurs when the government is spending more than tax & non-tax collections. The government will have to borrow money from inside the country or from outside to cover increased expenses. Alternatively, the government might tap into foreign exchange reserves or create more currency.

During a recession, for example, the government may opt to spend more on infrastructure projects, social programmes, and corporate incentives, among other things. The goal is to assist in making greater productive money accessible to individuals, freeing up some income for consumers to spend elsewhere, and encouraging companies to invest. simultaneously, the government may opt to tax firms and individuals less, resulting in lower income for the government.

The three main elements/objectives of fiscal policy in India

1. Price stability: It regulates the country’s price level so that prices can be adjusted when inflation becomes too high.
2. Full employment: It tries to reach 100 % employment, or near 100 % employment, as a means of regaining economic activity following a period of low activity.
3. Economic growth: It aids in the maintenance of the economy’s growth rate, allowing specific economic goals to be met.

The following methods are used to achieve the stated objectives:

• Consumption Control — This raises the savings-to-income ratio.
• Increasing the investment rate.
• Building infrastructure and its development as well as taxation.
• Progressive taxation.
• The underprivileged groups are exempt from paying taxes.
• Excessive VAT on high-end items.
• Preventing unearned income.

Fiscal Policy’s Significance in India:

• Fiscal policy, in a nation like India, is critical in increasing capital formation in both the private and public sectors. 
• The fiscal policy is intended to mobilise a significant amount of resources towards financing its varied programmes through taxes.
• Fiscal policy also contributes to raising the savings rate by providing stimulation.
• Fiscal policy strives to reduce the imbalance in the distribution of income and wealth by providing enough incentives to the private sector to grow its operations.

Conclusion

Fiscal policy in India aims to raise a considerable quantity of money to fund the government’s various programmes through taxes. It aims to eliminate inequality in income and wealth distribution by giving sufficient incentives to the private sector. The objective is to boost both industry and government capital formation.