Fiscal Policy: Dr. A.K.Panigrahi

Fiscal Policy
Dr. A.K.Panigrahi
Government in the Economy
Nothing arouses as much controversy as

the role of government in the economy.
Government can affect the

macroeconomy in two ways:
Fiscal policy is the manipulation of
government spending and taxation.
Monetary policy refers to the behavior of
the Reserve Bank regarding the nations
money supply.
What is Fiscal Policy?
Fiscal policy is the

deliberate manipulation
of government purchases,
transfer payments, taxes,
and borrowing in order to
influence macroeconomic
variables such as
employment, the price
level, and the level of
GDP
Fiscal Policy
It refers to the Revenue and Expenditure policy of the

Govt. which is generally used to cure recession and
maintain economic stability in the country.
The fiscal policy is concerned with the raising of
government revenue and incurring of government
expenditure.
To generate revenue and to incur expenditure, the
government frames a policy called budgetary policy or
fiscal policy.
So, the fiscal policy is concerned with government
expenditure and government revenue.
Importance of Fiscal Policy
Fiscal policy has to decide on the size and pattern of flow of

expenditure from the government to the economy and from the
economy back to the government.
So, in broad term fiscal policy refers to "that segment of national
economic policy which is primarily concerned with the receipts
and expenditure of central government." In other words, fiscal
policy refers to the policy of the government with regard to
taxation, public expenditure and public borrowings.
The importance of fiscal policy is high in underdeveloped
countries. The Government has to play active and important
role. In a democratic society direct methods are not approved.
So, the government has to depend on indirect methods of
regulations.
The Fiscal Deficit
A governments fiscal deficit is the difference

between what it spends (G) and what it collects in
taxes (T) in a given period:
If G exceeds T, the government must borrow

from the public to finance the deficit. It does so
by selling Treasury bonds and bills. In this case,
a part of household saving (S) goes to the
government.
Main Objectives of Fiscal Policy

In India
1. Development by effective
Mobilization of Resources
The principal objective of fiscal policy is to ensure rapid

economic growth and development. This objective of
economic growth and development can be achieved by
Mobilisation of Financial Resources.
The central and the state governments in India have used fiscal
policy to mobilise resources.
The financial resources can be mobilised by :Taxation : Through effective fiscal policies, the government
aims to mobilise resources by way of direct taxes as well as
indirect taxes because most important source of resource
mobilisation in India is taxation.
Public Savings : The resources can be mobilized through

public savings by reducing government expenditure and
increasing surpluses of public sector enterprises.
Private Savings : Through effective fiscal measures such
as tax benefits, the government can raise resources from
private sector and households. Resources can be mobilized
through government borrowings by ways of treasury bills,
issue of government bonds, etc., loans from domestic and
foreign parties and by deficit financing.
2. Efficient allocation of Financial

Resources
The central and state governments have tried to make efficient

allocation of financial resources. These resources are allocated
for Development Activities which includes expenditure on
railways, infrastructure, etc. While Non-development Activities
includes expenditure on defense, interest payments, subsidies,
etc.
But generally the fiscal policy should ensure that the resources
are allocated for generation of goods and services which are
socially desirable. Therefore, India's fiscal policy is designed in
such a manner so as to encourage production of desirable goods
and discourage those goods which are socially undesirable.
3. Reduction in inequalities of Income

Fiscal policy aims at achieving equity or social justice by
and
Wealth
reducing
income inequalities among different sections of the
society.
The direct taxes such as income tax are charged more on the rich
people as compared to lower income groups. Indirect taxes are
also more in the case of semi-luxury and luxury items, which are
mostly consumed by the upper middle class and the upper class.
The government invests a significant proportion of its tax
revenue in the implementation of Poverty Alleviation
Programmes to improve the conditions of poor people in society.
4. Price Stability and Control of Inflation
One of the main objective of fiscal policy is to

control inflation and stabilize price.
Therefore, the government always aims to
control the inflation by Reducing fiscal
deficits, introducing tax savings schemes,
Productive use of financial resources, etc.
5. Employment Generation
The government is making every possible effort to increase

employment in the country through effective fiscal measure.
Investment in infrastructure has resulted in direct and indirect
employment.
Lower taxes and duties on small-scale industrial (SSI) units
encourage more investment and consequently generates more
employment.
Various rural employment programmes have been undertaken
by the Government of India to solve problems in rural areas.
Similarly, self employment scheme is taken to provide
employment to technically qualified persons in the urban areas.
6. Balanced Regional Development
Another main objective of the fiscal policy is to

bring about a balanced regional development.
There are various incentives from the
government for setting up projects in backward
areas such as Cash subsidy, Concession in taxes
and duties in the form of tax holidays, Finance
at concessional interest rates, etc.
7. Reducing the Deficit in the Balance of

Payment
Fiscal policy attempts to encourage more exports by way of fiscal

measures like Exemption of income tax on export earnings,
Exemption of central excise duties and customs, Exemption of
sales tax and octroi, etc.
The foreign exchange is also conserved by Providing fiscal
benefits to import substitute industries, Imposing customs duties
on imports, etc.
The foreign exchange earned by way of exports and saved by way
of import substitutes helps to solve balance of payments problem.
In this way adverse balance of payment can be corrected either by
imposing duties on imports or by giving subsidies to export.
8. Capital Formation
The objective of fiscal policy in India is also to

increase the rate of capital formation so as to
accelerate the rate of economic growth.
An underdeveloped country is trapped in vicious
(danger) circle of poverty mainly on account of
capital deficiency. In order to increase the rate of
capital formation, the fiscal policy must be
efficiently designed to encourage savings and
discourage and reduce spending.
9. Increasing National Income
The fiscal policy aims to increase the national

income of a country. This is because fiscal
policy facilitates the capital formation. This
results in economic growth, which in turn
increases the GDP, per capita income and
national income of the country.
10. Development of Infrastructure
Government has placed emphasis on the

infrastructure development for the purpose of
achieving economic growth. The fiscal policy
measure such as taxation generates revenue to
the government. A part of the government's
revenue is invested in the infrastructure
development. Due to this, all sectors of the
economy get a boost.
11. Foreign Exchange Earnings
Fiscal policy attempts to encourage more exports

by way of Fiscal Measures like, exemption of
income tax on export earnings, exemption of
sales tax and octroi, etc. Foreign exchange
provides fiscal benefits to import substitute
industries.
The foreign exchange earned by way of exports
and saved by way of import substitutes helps to
solve balance of payments problem.
Conclusion On Fiscal Policy
The objectives of fiscal policy such as economic

development, price stability, social justice, etc. can be
achieved only if the tools of policy like Public Expenditure,
Taxation, Borrowing and deficit financing are effectively
used.
Though there are gaps in India's fiscal policy, there is also an
urgent need for making India's fiscal policy a rationalized and
growth oriented one.
The success of fiscal policy depends upon taking timely
measures and their effective administration during
implementation.
How is the Monetary Policy different
The Monetary Policy regulates the supply of money and the cost
from
the Fiscal Policy?
and availability of credit in the economy. It deals with both the
lending and borrowing rates of interest for commercial banks.

The Monetary Policy aims to maintain price stability, full
employment and economic growth.
The Monetary Policy is different from Fiscal Policy as the
former brings about a change in the economy by changing
money supply and interest rate, whereas fiscal policy is a
broader tool with the government.
The Fiscal Policy can be used to overcome recession and control
inflation. It may be defined as a deliberate change in government
revenue and expenditure to influence the level of national output
and prices.
Thank You

Fiscal Policy: Dr. A.K.Panigrahi

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Fiscal Policy: Dr. A.K.Panigrahi

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Fiscal Policy

Government in the Economy

Nothing arouses as much controversy as

Government can affect the

What is Fiscal Policy?

Fiscal policy is the

It refers to the Revenue and Expenditure policy of the

Importance of Fiscal Policy

Fiscal policy has to decide on the size and pattern of flow of

The Fiscal Deficit

A governments fiscal deficit is the difference

If G exceeds T, the government must borrow

Main Objectives of Fiscal Policy

The principal objective of fiscal policy is to ensure rapid

Public Savings : The resources can be mobilized through

2. Efficient allocation of Financial

The central and state governments have tried to make efficient

3. Reduction in inequalities of Income

4. Price Stability and Control of Inflation

One of the main objective of fiscal policy is to

The government is making every possible effort to increase

6. Balanced Regional Development

Another main objective of the fiscal policy is to

7. Reducing the Deficit in the Balance of

Fiscal policy attempts to encourage more exports by way of fiscal

The objective of fiscal policy in India is also to

9. Increasing National Income

The fiscal policy aims to increase the national

10. Development of Infrastructure

Government has placed emphasis on the

11. Foreign Exchange Earnings

Fiscal policy attempts to encourage more exports

Conclusion On Fiscal Policy

The objectives of fiscal policy such as economic

How is the Monetary Policy different

lending and borrowing rates of interest for commercial banks.

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