Fiscal Policy in India

Overview

Fiscal policy in India refers to the use of government spending and taxation to influence the overall level of economic activity.

Objectives

• To achieve high and sustainable economic growth
• To reduce poverty and inequality
• To promote economic stability and reduce inflation

Instruments

• Fiscal Deficit: The difference between the government's expenditure and its revenue. India's fiscal deficit is around 3-4% of GDP.
• Revenue Deficit: The difference between the government's revenue expenditure and its revenue receipts.
• Primary Deficit: The difference between the government's fiscal deficit and the interest payment.

Fiscal Policy Tools

• Government Expenditure: Increase in government expenditure to stimulate economic growth.
• Taxation: Reduction in taxes to increase disposable income and stimulate consumption.
• Subsidies: Provision of subsidies to support specific industries or groups.

Fiscal Policy in India: Challenges

• Fiscal Discipline: India has struggled to maintain fiscal discipline, with high fiscal deficits.
• Revenue Mobilization: India's tax-GDP ratio is low, making it challenging to generate revenue.
• Subsidy Reform: India's subsidy regime is complex, and reform is essential to ensure efficient allocation of resources.

Recent Developments

• ** Goods and Services Tax (GST)**: Introduced in 2017 to simplify the tax system and increase revenue.
• Fiscal Responsibility and Budget Management (FRBM) Act: Introduced in 2003 to ensure fiscal discipline and reduce fiscal deficits.
• Union Budget: Presented annually, outlining the government's fiscal policy and expenditure plans.

Impact of Fiscal Policy on the Economy

• GDP Growth: Fiscal policy can stimulate or contract economic growth, depending on the tools used.
• Inflation: Fiscal policy can influence inflation, with expansionary policies potentially leading to higher inflation.
• Employment: Fiscal policy can impact employment, with government expenditure and subsidies influencing job creation.

Fiscal Policy in India

• Fiscal policy uses government spending and taxation to influence economic activity.
• Objectives include achieving high economic growth, reducing poverty and inequality, and promoting economic stability and reducing inflation.

Fiscal Deficits

• Fiscal deficit is the difference between government expenditure and revenue, currently around 3-4% of GDP.
• Revenue deficit is the difference between revenue expenditure and revenue receipts.
• Primary deficit is the difference between fiscal deficit and interest payment.

Fiscal Policy Tools

• Government expenditure can be increased to stimulate economic growth.
• Taxation reduction increases disposable income and stimulates consumption.
• Subsidies support specific industries or groups.

Challenges

• India struggles with fiscal discipline, resulting in high fiscal deficits.
• The tax-GDP ratio is low, making revenue generation challenging.
• Subsidy reform is essential for efficient resource allocation.

Recent Developments

• Goods and Services Tax (GST) was introduced in 2017 to simplify the tax system and increase revenue.
• The Fiscal Responsibility and Budget Management (FRBM) Act was introduced in 2003 to ensure fiscal discipline.
• The Union Budget outlines the government's fiscal policy and expenditure plans.

Impact on the Economy

• Fiscal policy can stimulate or contract GDP growth, depending on the tools used.
• Fiscal policy can influence inflation, with expansionary policies potentially leading to higher inflation.
• Fiscal policy impacts employment, with government expenditure and subsidies influencing job creation.