Types of Indian fiscal policy

A segment of the economic infrastructure that keeps the economy functioning smoothly. While you’re undoubtedly most acquainted with the taxes paid on each paycheck, fiscal policy at its foundation is any legislative action made by the government to manage the economy.

The Great Depression and the Great Recession are both examples of the federal government of the United States acting aggressively on fiscal policy. The basic purpose of fiscal policy is to help the economy avoid running at extremes.

 Define Fiscal Policy?

The government can use fiscal policy to manage the inflow of tax revenue and outflow of government spending in the economy. If the government collects more income than it spends, it has an excess. It has a deficit if its spending exceeds its tax and other earnings. To cover increased expenses, the government may loan from either the local market or international organisations. The government can also opt to spend its foreign exchange reserves or print new currency to inject more money into the economy.

Types of Fiscal policy

Government expenditure is a crucial element of fiscal policy. It is frequently used by governments to boost economic growth. It accomplishes this by financing now in the aim of stimulating the economy and increasing tax collections later. As a result, short-term spending is offset by long-term taxation plus economic development. This might be done to avoid a deep and destructive recession that would throw millions out of work.

1.   Neutral Fiscal Policy

Fiscal policy is also considered to be neutral when the ratio of government expenditure to tax collection remains consistent over time. Fiscal policy is an economic instrument. To stimulate economic development, a government may boost its borrowing and expenditure.

When an economy is neither fast expanding nor rapidly declining, and the government does not plan to aggressively participate in the economy, this may be termed the “default” approach.

2.   Expansionary Fiscal Policy

Expansionary fiscal policy necessitates a higher level of expenditure than tax revenue. It focuses on initiatives that serve to increase employment (such as new building projects) and tax cuts.

By pumping money into the economy, the primary purpose is to stimulate consumer demand. During recessions, governments are required to provide greater unemployment as well as other welfare benefits, resulting in increased government spending.

3.   Contractionary Fiscal Policy

Governments may pursue a contractionary fiscal strategy if an economy achieves particularly strong growth rates and full employment. This entails a decrease in government spending as well as the imposition of greater taxes. Consumers have less discretionary money when governments tax them more. This, in turn, decreases aggregate demand, which may appear to be a bad thing, but actually aids in the reduction of inflation.

What is monetary policy and its tools?

While reading regarding fiscal policy there might be a question: what is monetary policy? So, Monetary policy refers to the instruments used by central banks, which are centralised financial companies of nations or regional organisations, to control the money supply, or the quantity of money in a country. Central banks utilise these powers to create inflation rising prices in an economy—under line while also maximising employment.

Tools used in monetary policy?

1. Quantitative tools

• Bank Rate Policy

The Bank Rate refers to the rate wherein the banking system rediscounts invoices and arranges or advances financial firms. The Bank Rate has an effect on the real availability and price of loans. If the RBI lowers the bank rate, commercial banks are expected to borrow more easily and at a lower cost. This will increase credit creation.

• Variation in the reserve ratio

Commercial banks are required to hold a specified percentage of the amount wealth in the form of Cash Reserves. A few of these excess cash must also be stored with the RBI in order to preserve liquidity and manage lending in a market. Any modification in the Reserve Ratios (VRR) causes a change in the reserves holdings of commercial banks.

2. Qualitative tools

• Fixing Margin Requirement 

The margin is the percentage of a credit that a lender must raise in order to acquire financing for his objective. A shift in the margin suggests a shift in the loan size. This strategy is utilised to boost supply of credit for the needed industry while discouraging credit provision for other non-essential sectors.

• Publicity

It’s another technique for selective credit control. It is via it that the Central Bank (RBI) issues numerous reports outlining what is good and poor in the system. This publicly available information will assist commercial banks in directing loan supply to the appropriate sectors. The data is revealed publicly throughout its weekly / daily briefings, and banks can utilise it to achieve monetary policy goals.

Define fiscal policy and monetary policy

Monetary policy refers to central bank measures that try to influence the amount of money and credit in an economy. Fiscal policy, on the other hand, refers to the government’s taxes and spending policies. Monetary policy and fiscal policies are both employed to control economic activity levels. Fiscal and monetary policy can be used to either boost growth when an economy is slowing or to reduce growth and the development of an economy when overheating. Fiscal policy can also be used to redistribute wealth and income.

Types of Monetary policy

1.   Expansionary Monetary Policy

An expansionary monetary policy seeks to boost the economy’s money supply through lowering interest rates and acquiring national assets. An expansionary strategy reduces unemployment while increasing corporate activity and consumer expenditure. However, it may also result in increased inflation. Since the financial crisis of 2008, several leading economies throughout the globe have maintained an expansionary stance.

2.   Contractionary Monetary Policy

A contractionary monetary policy raises interest rates to restrict the expansion of the supply of money and drive inflation down. This can delay economic development and even raise unemployment, but it is frequently regarded as vital to chill the market and keep costs to a minimum. With inflation in the double digits in the early 1980s, the Fed hiked its key interest rate to a high 20 percent.

Conclusion

Fiscal and Monetary policy Both may have a considerable influence on economic activity, and financial experts must be knowledgeable of the instruments of both monetary and fiscal policy, as well as the aims of the monetary and fiscal institutions and, most importantly, the monetary policy and fiscal policy conveyance channels.