Money and Banking - UPSC CSC

MONEY AND BANKING PART 11

FISCAL POLICY The Fiscal Policy implies the decisions taken by the government with respect to its revenue collection (through taxation), expenditure and other financial operations to accomplish certain national goals. 1. 2. It is an economic policy by the government that is related to government income and expenditure.It deals with taxation, borrowing, deficit financing, and government expenditure. 3. It is also called income and Expenditure policy Budgetary policy and Tax and Expenditure policy.

OBJECTIVES Fiscal policy has 8 different objectives. Full employment 2. Price stability Economic development Optimum resource allocation Equitable distribution of income Economic stability 7. Capital formation Encouraging investment

FULL EMPLOYMENT The first objective is to acheive full employment. Even if this is not acheived, it is important to reach the near full employment situation or to remove maximum unemployment and underemployment. So, proper investment must be done in economic and social overheads. In this way, public expenditure and public sector investment have a special role to play in a modern state.

According to Keynes, the following recommendations to achieve full employment in an economy: (a) To capture the excessive purchasing power and to curb private spending: (b) Compensate the deficiency in private investment through public investment; (c) Cheap money policy or lower interest rates to attract more and more private entrepreneurs.

PRICE STABILITY In a developing country, inflation is manifested leading to economic instability. The prices often rise due to increasing public expenditure. With increase in income, AD> AS, consumer and capital goods fail to keep pace with the rising income. This leads to an inflationary gap. Fiscal policy tries to remove the shortcomings that arise when and cause imbalances in the sectors of economy. It strengthens physical controls of essential commodities, granting of concessions, subsidie protection in the economy

ECONOMIC DEVELOPMENT The main aim of any developing country is to accelerate it's economic development. But this cannot be acheived without stability in the economy. So, it is important that fiscal measures such as taxation, public borrowing and deficit financing must be used efficiently.

OPTIMUM RESOURCE ALLOCATION The national income and per capital income of under developed countries very low. The economy can be be pushed forward through the proper use of social infrastructure. Public expenditure, subsidies and incentives can favorably influence the allocation of resources in the desired channels. Tax exemptions and tax concessions may help a lot in attracting resources towards the favored industries.