A Simple Note on Fiscal Situation

What is fiscal policy?

When government expenditures and taxation is used for influencing the economy, it is known as fiscal policy. Fiscal policy is typically used by governments to promote robust, long-term growth and poverty reduction.

Fiscal policy, as defined in economics and political science, is the use of government revenue collection (taxes) and expenditure to improve a country’s economy. The use of government revenue expenditures to impact macroeconomic variables arose as a response to the Great Depression of the 1930s when the prior laissez-faire approach to economic management proved ineffective. Fiscal policy was first founded on the theories of British economist John Maynard Keynes, who proposed that changes in government taxation and spending affect aggregate demand and economic activity. 

Fiscal deficit

When any government spends more than that of its total income, then such a condition is known as a fiscal deficit.

Here, we are going to discuss the fiscal deficit of India.

• India’s fiscal situation is concerning. The issue is primarily structural rather than cyclical.

• According to the central government, India’s budgetary deficit at the end of January worked out at 58.9% of the annual budget policy for 2021-22.

• According to the CAG of India, the fiscal deficit was 66.8% of the Revised Estimate (RE) for 2020-21, corresponding to the previous year’s fiscal. The deficit was Rs 9,37,868 crore at the end of January 2022, compared to an upwardly revised annual forecast of Rs 15.91 lakh crore.

• The fiscal deficit, or the gap between total revenue and total government spending, was expected to be 6.8% of the GDP in the fiscal year ending in March 2022.

• India is seeking a fiscal deficit of 6.3 percent to 6.5 percent of GDP in the arriving fiscal year, which is lesser than what was intended earlier. The reason is the COVID-19 infections that are disturbing the country’s economic recovery.

• On February 1, Finance Minister Nirmala Sitharaman presented the federal budget for the FY 2022-2023, and officials have cautioned that severe cuts in government spending could damage economic forecasts.

Components of fiscal policy 

In many developing countries, fiscal policy has become increasingly crucial. Fiscal policy decisions may smoothen business cycles, provide enough public investment, and redistribute incomes, especially if they are correctly synchronised with the monetary policy.

The primary components of fiscal policy are:

• Spending

• Budget reform

• Revenue (especially tax revenue) mobilisation

• Deficit containment/financing

Aggregate demand and aggregate supply are both avenues via which fiscal policy acts. Changes in total taxes and government spending affect the economy’s aggregate demand. 

In contrast, tax structure and government spending influence, among other things, the incentives to save and invest (both at home and abroad), take risks, and export and import goods and services.

There are three components of the fiscal policy in India:

1. Government receipt

• Tax Revenue

  • Direct Tax

  • Indirect Tax

• Non Tax Revenue

  • Fees

  • License and Permits

  • Fines and Penalties, etc

• Capital Receipt

  • Loans Recovery

  • Disinvestments

  • Borrowing and other liabilities

2. Government expenditure

There are two types of public expenditure:

• Capital Expenditure: A non-recurring expenditure

• Loans repayments

• Loans to public enterprises.

• Revenue Expenditure: A recurring expenditure

• Interest Payments

• Defence Expenses

• Salaries to Central Government employees.

3. Public Debt

Conclusion

The use of government spending and tax policies to impact economic conditions, particularly macroeconomic variables, is called fiscal policy. Fiscal policy has its prolonged-run effect on savings, investments, growth and the trade balance.

With the help of fiscal policies, the Indian government is very successful in various fields, such as the mobilisation of resources for the development of the economy. However, when a country spends more on government expenditures than it receives in taxes and borrowing, it is said to have a fiscal deficit.