Introduction :- 

Fiscal policy deals with the government policy concerning changes in the taxation and expenditure overheads and components, while Monetary policy, deals with the changes in the factors and instruments that affect the supply of money in the economy and the rate of interest. These are routinely used by governments world over in various policy mix or combinations to have desired effects and to steer the broader aspects of the economy. In case of India as with most other economies, the government of India deals with fiscal policy (through Annual Budget and other timely interventions), while there is central bank (Reserve bank of India), that is responsible for execution of monetary policy.

‘Fiscal policy is result of several component policies or mix of policy instruments. These include, policy on taxation, subsidy, welfare expenditure, etc; investment or disinvestment strategies; and debt or surplus management. Fiscal policy is an important constituent of the overall economic framework of a country and is therefore intimately linked with its general economic policy strategy.

Fiscal policy means the use of taxation and public expenditure by the government for stabilization or growth of the economy. According to Culbarston, “By fiscal policy we refer to government actions affecting its receipts and expenditures which ordinarily as measured by the government’s receipts, its surplus or deficit.” The government may change undesirable variations in private consumption and investment by compensatory variations of public expenditures and taxes.

Fiscal policy also feeds into economic trends and influences monetary policy. When the government receives more than it spends, it has a surplus. If the government spends more than it receives it runs a deficit. To meet the additional expenditures, it needs to borrow from domestic or foreign sources, draw upon its foreign exchange reserves or print an equivalent amount of money. This tends to influence other economic variables.

On a broad generalization, excessive printing of money leads to inflation. If the government borrows too much from abroad it leads to a debt crisis. Excessive domestic borrowing by the government may lead to higher real interest rates and the domestic private sector being unable to access funds resulting in the “crowding out” of private investment. So it can be said that the fiscal deficit can be like a double edge sword, which need to be tackled very carefully.

Types of Fiscal Policy :- 

• Neutral Fiscal Policy :- This implies a balanced budget where (Government spending = Tax revenue). It further means that government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
• Contractionary (restrictive) Fiscal policy :- This policy involves raising taxes or cutting government spending, so that (Government spending < Tax revenue) it cuts up on the aggregate demand (thus, economic growth) and to reduce the inflationary pressures in the economy.
• Expansionary Fiscal Policy :- It is generally used for giving stimulus to the economy ,i.e., to speed up the rate of GDP growth or during a recession when growth in national income is not sufficient enough to maintain the present standards of living. A tax cut and/or an increase in government spending would be implemented to stimulate economic growth and lower unemployment rates. This is not a sustainable policy, as it leads to budget deficits and thus, should be used with caution.

Main Objectives of Fiscal Policy in India :- 

• Development by effective Mobilisation 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 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 mobilised 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 mobilised through government borrowings by ways of treasury bills, issuance of government bonds, etc., loans from domestic and foreign parties and by deficit financing.

• Reduction in inequalities of Income and Wealth: Fiscal policy aims at achieving equity or social justice by 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.
• Price Stability and Control of Inflation: One of the main objectives 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.
• Employment Generation: The government is making every possible effort to increase employment in the country through effective fiscal measures. 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 generate 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.
• Balanced Regional Development: there are various projects like building up dams on rivers, electricity, schools, roads, industrial projects etc run by the government to mitigate the regional imbalances in the country. This is done with the help of public expenditure.
• Reducing the Deficit in the Balance of Payment: some time government gives export incentives to the exporters to boost up the export from the country. In the same way import curbing measures are also adopted to check import. Hence the combine impact of these measures is improvement in the balance of payment of the country.
•  Increases National Income: it’s the strength of the fiscal policy that is brings out the desired results in the economy. When the government want to increase the income of the country then it increases the direct and indirect taxes rates in the country. There are some other measures like: reduction in tax rate so that more peoples get motivated to deposit actual tax.
• Development of Infrastructure: when the government of the concerned country spends money on the projects like railways, schools, dams, electricity, roads etc to increase the welfare of the citizens, it improves the infrastructure of the country. A improved infrastructure is the key to further speed up the economic growth of the country.
• Foreign Exchange Earnings: when the central government of the country gives incentives like, exemption in custom duty, concession in excise duty while producing things in the domestic markets, it motivates the foreign investors to increase the investment in the domestic country.

Tools of fiscal policy :- 

Components of Spending :- 

• Maintenance (including staff salaries): This component can’t be altered in short-run and hence is hardly a part of policy making, however, in long-run, through VRS and reducing new jobs in public sector or vice versa, this expenditure can be altered.
• Loan payments: This again is a component, which can’t be touched in short-run, however, governments in long-run can reduce these payments or eliminate them by running the budget surplus.
• Subsidies: This component is a major part of policy as it can be altered in short-run, but unfortunately, subsidies as policy instrument, have been abused in India. These are used by politicians as poll promise and political instruments to gain more popular support. Ideally only meritorious subsidies shall be in operation and all the wasteful subsidies must be phased out, for example, fertilizer subsidy and power subsidy benefits the large farm holder and capitalist farmers instead of the needy ones. Similarly, the recent example of Aam Aadmi Party manifesto is a good example, how subsidies should not be used. In place of these, subsides for health programs, renewable energy, public transport shall be encouraged to ensure good health and sustainable growth.
• Welfare schemes: These are one of the policy options that once introduced can’t be removed due to their populist nature. Similarly, in most of the cases these are necessary too and important instrument of social welfare and economic growth. However, it is the implementation part, which is key, as these schemes generally suffer from poor implementation and massive corruptions and loopholes. Thus, despite being meritorious expenditure in nature, these at time appears as waste.
• Wasteful expenses: Needless to say these are the expenditures that must be curbed with immediate effect; however, no government in world has neither shown the intention to curb them, though there are efforts to reduce them from time to time under public pressure. For example, full page government advertisements in newspaper to generate favorable public opinion.

Components of Earning :- 

• Tax: Single most important source on government revenue is also a very important policy measure as elaborated in the policy combinations above.
• Borrowing: Borrowing is a necessary source of funds, though not a desirable one. Particularly, in developing countries, as tax/GDP ratio is low due to less per capita income. However, it becomes an important part of monetary policy as well due to its impact on interest rates and credit creation and thus, overall money supply.
• Proceeds from sale/lease of assets: This is a both a one-time and regular source of income. For example, lending government buildings for private use, or other assets such as telecom spectrum or lease of a mine block for certain years, is a regular source of income, whereas sale of PSUs is a onetime income. These however, are good sources of revenue, as they provide government more room to spend without increasing taxes.
• Profits from PSU: Profits from PSUs can also be a potential source of revenue, however, since most of PSUs are generating losses, Indian government usually ends up subsidizing them. At times PSUs are deliberately kept in losses to keep prices low and ensure wider outreach for social welfare, example, PSU banks in pre-reform era and post-offices. Similarly, at other times, they are in losses due to inefficiency and wasteful expenditure. Most striking case in India, is of ministerial corruption to keep PSUs in loss deliberately to benefit private sector, for example, CAG report says that, Indian Airlines was deliberately kept in losses by avoiding flights on profitable routes to benefit private airlines during UPA government’s rule. Similarly, in previous NDA government, BSNL was deliberately pushed into loss, by increasing tariffs to provide competitive edge to a newly launched company by one of the biggest business conglomerate in India.