Meaning of Fiscal Policy
Tax policy, expenditure policy, investment or disinvestment strategies and debt or surplus management is the core basis of the Fiscal policy. Fiscal policy is the policy of the government which includes taxation, public expenditure and public borrowings. Fiscal policy is an vital part of the economic framework of a country and so it is closely linked with its overall economic policy strategy. In contemporary economic scenario the government is in trusted t deals with fiscal policy while the central bank is held responsible for monetary policy. In underdeveloped countries the importance of fiscal policy is very high. The state is loaded with responsibility in order to play active role for allocating the revenue and expenditure properly. Hence, fiscal policy is a powerful tool in the hands of government with the help of which it can attain the objectives of development. Fiscal policy help government to create a balance between revenue generated and revenue expend. Surplus occurs when the government receives more than what it spends. Likely when he government expenditure turns to be more than what it receives it runs into a deficit. So while formulation of fiscal policy government see it neither run into deficit nor have surplus. Planning is made to achieve best use of received revenue.
Main Objectives of Fiscal Policy In India
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The Indian Constitution gives the balanced fiscal policy framework for the country. India constitutes federal form of government which is having divided responsibility of imposing taxes and spending between the central and the state governments. The Indian constitution provides for the formation of a Finance Commission (FC) every five years which provides medium term guidance on all the fiscal matters. It is with help of report of the FC that the central taxes are delegated to the state governments. The Constitution also says that for every financial year, the government shall prepare its proposal of taxation and spending execution and place them before the legislature for legislative debate and approval. This is known as the Budget. Both the central and the state governments have their own budgets.The various objectives of Indian fiscal policy are as follows-
Development by effective allocation of Resources
The primary objective of fiscal policy is to produce rapid and sustainable economic growth and development. By Mobilization of Financial Resources this objective of economic growth and development can be attained. Both the central and the state governments in India have been empowered to mobilize financial resources in order to bring effective financial planning and its uses. In India financial resources are mobilized by following three means :-Taxation : Through fiscal policies, the government generated revenue. It aims to allocate resources by means of direct taxes as well as indirect taxes. Direct taxes involves income tax which each working citizen of India pays form his salary.Public Savings : By reducing government expenditure and increasing surpluses of public sector enterprises is one of the emerging tool of fiscal policy. Hence financial resources can be mobilized well through public savings. Private Savings : With the help of effective fiscal policy such as tax benefits, the government can bring resources from households and private sector. Resources can be allocated and managed through government borrowings by means of loans from domestic and foreign parties, treasury bills, issue of government bonds, deficit financing etc.
Expenditure of Financial Resources
The central and state governments have worked to make efficient allocation of financial resources. These resources are utilized mainly to increase production of necessary and desirable goods and discourage socially undesirable goods. The central theme of fiscal policy includes development Activities which are expenditure on railways, infrastructure, etc. While other part of non-development activities includes expenditure on interest payments defense, subsidies, etc. Planning is made systematically at end of every financial year and action is taken accordingly.
Reduction of Income and Wealth inequalities
Fiscal policy by reducing income inequalities among different sections of the society leads to strive equity or social justice. The direct taxes play crucial role in this, income tax are charged on all salaried person which is directly proportion to the income of the person. More the person earns more he is entitled to pay tax. Hence direct tax applied more on the higher income groups as compared to lower income groups. Likely indirect taxes are also more in the case of semi-luxury and luxury items than that of necessary consumable items. In this way government generates good amount of revenue which is on significant proportion is implemented on Poverty Alleviation Programmes which improves the conditions of poor people in society and consequently leads to reduction of income and wealth inequalities.
Price Stability and Control of Inflation
One of the major objective of fiscal policy is to have stabilize price and control inflation. Inflation and price instability have hazardous impact on over all economy. If inflation increses at high rate in any country then it can finally lead to overall collaspe of country. Hence, the government being particular about this and always tries to control the inflation by various means such as bringing reduction in fiscal deficits, introduction of tax savings schemes, induce correct use of financial resources, etc.
The government is inducing every possible effort for increasing employment throughout the country with help of effective fiscal measure. Direct and indirect employment are one of the outcome of various investments in infrastructure of the country. Small-scale industrial (SSI) units are encouraged to bring in more investment by providing lower taxes and duties which consequently creates more employment. Government of India in order to solve problems in rural areas initiated various rural employment programmes to generate employment and cope up with increasing poverty. Likely, self employment schemes have been taken up in order to generate employment for persons in the urban areas who are technically qualified.
Balanced Regional Development
Balanced regional development is very important for any nation. Government key responsibility is to see that all states and its sub units whether urban or rural develop equally and no part of country be away from development. So fiscal policy planning occupies larger portion for regional development. Government in order to accomplish its aim provides various incentives such as Finance at concessional interest rates, Cash subsidy, Concession in taxes and duties in the form of tax holidays etc for setting up projects in backward areas.
Reducing the Deficit in the Balance of Payment
Fiscal policy aims to encourage more exports by means of various fiscal measures such as exemption of central excise duties and customs, exemption of income tax on export earnings, exemption of sales tax etc. The foreign exchange is also protected by giving import substitute industries fiscal benefits, applying customs duties on imports etc. The problem of balance of payment is solved since foreign exchange received by means of exports and saved by way of import substitutes. With the help of this method the adverse balance of payment is rectified either by applying duties on imports or by providing subsidies to export.
The aim of fiscal policy in India is also to improve and increase the rate of capital formation so as to increase the overall economic growth. An underdeveloped country is badly trapped with the problem of increasing poverty which is mainly an outcome of capital deficiency. In order to defeat poverty and increase the capital formation generation, the fiscal policy must be systematically prepared to encourage savings and decrease spending.
Increasing National Income
National income growth of any country shows its efficiency and overall development. Any activities of development closely have impact on national income. If production and services within a country increases the overall national income also increases. National income is calculated by addition of contribution from all the sectors in a country. So government with the help of fiscal policy tries to increase capital formation which in turn increases GDP, per capita income and national income of the country.
Development of Infrastructure
Development of infrastructure is the core element that is seen in fiscal policy. Infrastructure development benefits is enormous, it help to provide boost in all the sector of the economy. So government always see which area needs new or further infrastructural development and accordingly investment is put in from the revenue to bring desired result.
The fiscal policy is the first step towards efficient and profound nation. It is a jest and planning of all the sect oral development along with it carter the need of common people and inducing the social justice. It’s a great tool in the hands of government and if effective fiscal policy is applied then the growth of any nation is inevitable. The proper investment in different program and policy can bring great results in the long terms. In context of developing nation the importance of fiscal policy is just too much because a developing nation have limited resources and many responsibility and needs that require urgent attention. So mobilization of recourses towards most urgent requirement is the prerequisite of any developmental action. India has achieved to utilize benefit with help of fiscal policy but certain gaps in the implementation is still exists which need a corrective measure to bring over all sustainable economic growth.
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