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FISCAL POLICY

Fiscal Policy MeaningFiscal policy is composed of policy decisions relating to entire financial structure of the government, including tax revenue, public expenditures, loans, transfers etc.

It attempts to stabilize the economy by controlling interest rates and the money supply.

It has to decide on the size or pattern of flow of expenditure from the government to the economy & from the economy back to the government. So, in broad term fiscal policy refers to "The segment of national economic policy which is primarily concerned with the receipts & expenditure of central government In other words, fiscal policy refers to the policy of government with regard to taxation, public expenditure & public borrowings.

OBJECTIVESTo mobilize adequate resources for financing various programs and projects adopted for economic development.

To raise the rate of savings and investment for increasing the rate of capital formation.

To promote necessary development in the private sector through fiscal incentive.

To arrange an optimum utilization of resources.

To control the inflationary pressures in the economy in order to attain economic stability.

To remove poverty and unemployment.

To attain the growth of public sector for attaining the objective of socialist pattern of society.

To reduce the regional disparities.

To reduce the degree of inequality in the distribution of income and wealth.

Techniques of Fiscal PolicyTAXATIONPUBLIC EXPENDITUREDEFICIT FINANCINGPUBLIC DEBT

TAXATION One of the important sources of revenue for the government of India is the Tax Revenue Taxation is the most effective instrument of fiscal policy in curbing the increased demand of consumer goods. It should not only aim at obtaining larger revenue but should also act as an incentive to save and invest. Taxes are the most efficient way of transferring resources to the government for more productive utilization.

Examples Of TaxesINCOME TAXSERVICE TAXPROPERTY TAXCORPORATE TAXVALUE ADDED TAX

PUBLIC EXPENDITUREThe expenditure incurred by Public Authorities like Central, State and Local Governments to satisfy the wants of the people is known as Public Expenditure.

Public Expenditure is Developmental & Non-Developmental in nature.

Developmental Expenditure is one in which Govt. spends on the Infrastructure, Technology, etc.

Non-Developmental is one which includes expenditure on Health, Education, etc.

Govt. spends more during Recession & reduces the expenditure during Inflation.

DEFICIT FINANCINGDeficit financing is the planned expenditure by the government.

The deficit financing in India indicates loan taking by the government from the RBI in the form of issuing fresh dose of currency.

Deficit financing helps the country by providing necessary funds for meeting the requirement of economic growth but, at the same time, it also create the problem of inflationary rise in prices.

PUBLIC DEBTThe central government has been raising a good amount of public debt regularly in order to mobilize a huge amount of resources for meeting its developmental expenditure.

The total public debt of the central government includes Internal and External Debt . . .

Internal DebtThe internal debt indicates the amount of loan raised by the government from within the country .

External Debt The govt. is also collecting loan from external sources like from abroad, in the form of foreign currency, technical know-how and capital goods.

Advantages of Fiscal PolicyCapital formation

Mobilization of resources

Incentives to savings

Inducement to private sector

Reduction of inequality

Export promotion

Alleviation of poverty and unemployment

Limitations of fiscal policyInstability

Defective tax structure

Inflation

Negative return of the public sector

Growing inequality

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