What is Fiscal Policy?Fiscal Policy deals with the revenue and expenditure policy of the Govt. The word fiscal has been derived from the word ‘fisk’ which means public treasury or Govt funds.
Latest Update about Fiscal Policy of India:
- The Union Budget 2021 has signalled the emphasis on the Development Financial Institutions (DFIs)in the pursuit oflong-term infrastructure creation for the revival of the economy.
- The establishment of the Dispute Resolution Committee (DRC) has been proposed in the Union Budget 2021 that can help provide quick relief to taxpayers in tax disputes.
This is an important topic for the IAS Exam.
Fiscal Policy (UPSC Notes):- Download PDF Here
Objectives of Fiscal Policy
The following are the objectives of the Fiscal Policy:
- Higher Economic Growth
- Price Stability
- Reduction in Inequality
The above objectives are met in the following ways:
- Consumption Control – This way, the ratio of savings to income is raised.
- Raising the rate of investment.
- Taxation, infrastructure development.
- Imposition of progressive taxes.
- Exemption from the taxes provided to the vulnerable classes.
- Heavy taxation on luxury goods.
- Discouraging unearned income.
What are the components of Fiscal Policy?
There are three components of the Fiscal Policy of India:
- Government Receipts
- Government Expenditure
- Public Debt
Aspirants should note that all the receipts and expenditures of the government are credited and debited from the following:
- Consolidated Fund of India
- Contingency Fund of India
- Public Account of India
Download the notes on the types of funds in India from the linked article.
Government Receipts
The categorisation of the government receipts is given below:
- Revenue Receipt
- Tax Revenue
- Direct Tax
- Indirect Tax
- Non Tax Revenue
- Fees
- License and Permits
- Fines and Penalties, etc
- Tax Revenue
- Capital Receipt
- Loans Recovery
- Disinvestments
- Borrowing and other liabilities
Debt Trap – Situation where the borrower has to borrow again for the payment of an instalment on the previous debt. A borrower unable to meet debt service obligations without borrowing is known to be in a debt trap.
Direct Tax Code Bill 2010
It hasn’t been implemented yet. The bill seeks to replace the following taxes:
- Income Tax Act of 1961
- Wealth Tax Act of 1957
Learn about the Direct Tax Code (DTC) comprehensively from the linked article.
For more on taxation in India, check the linked article.
Disinvestment
When the government sells or liquidates its assets of Central Public Sector Enterprises, State Public Sector Enterprises or other assets; it is referring to disinvestment. This approach caters to the objective of fiscal burden reduction.
Learn more about Disinvestment and Department of Investment and Public Asset Management (DIPAM) in the linked article.
Government Expenditure
There are two classifications of public expenditure:
- Revenue Expenditure – It is a recurring expenditure:
- Interest Payments
- Defence Expenses
- Salaries to Central Government employees, etc are examples of revenue expenditure
- Capital Expenditure – It is a non-recurring expenditure
- Loans repayments
- Loans to public enterprises, etc.
Candidates must note that plan and non-plan expenditure have been scrapped with the abolishing of the Planning Commission of India.
What is Fiscal Consolidation?
The measures that are taken to improve the fiscal deficit comes under the process of fiscal consolidation. Through fiscal consolidation, the government tries for:
- Improvement in revenue receipts
- Better alignment in the public expenditure
Download notes PDF of Fiscal Consolidation from the linked article.
The government introduced the FRBM Act aiming for fiscal consolidation. Read about it below:
Fiscal Responsibility and Budget Management Act (FRBMA), 2003
The objective of this FRBM Act is to impose fiscal discipline on the government.
It means fiscal policy should be conducted in a disciplined manner or a responsible manner i.e. government deficits or borrowings should be kept within reasonable limits and the government should plan its expenditure in accordance with its revenues so that the borrowing should be within limits.
Read in detail about the FRBM Act in the linked article.
Along with the FRBM Act, also read about the NK Singh Committee on Fiscal Deficit from the linked article.
Fiscal Federalism
It refers to the distribution of resource between centre and states.
The distribution of taxes between centre and states is mentioned in the 7th schedule of the Indian constitution.
There are 3 lists where the taxes are distributed
- Union List
- State List
- Concurrent List
Some related topics to fiscal policy are linked below:
For similar notes on Economy topics, refer to the linked article.
Fiscal Policy (UPSC Notes):- Download PDF Here
FAQ about Fiscal Policy India
Q1
Who prepares fiscal policy in India?
Ministry of Finance formulates the fiscal policy.
Q2
What are the three types of fiscal policy?
There are three types of fiscal policy.They are neutral policy, expansionary policy,and contractionary policy.
UPSC Preparation:
| UPSC Mains GS 3 Strategy, Syllabus and Structure | Economy Questions from IAS Mains GS 3 |
| Economy Notes for UPSC | IAS Economy Optional Syllabus |
| Important Economic Terms for UPSC | Economic Survey |
As a seasoned expert in economic policy and fiscal matters, I bring to the table a wealth of knowledge and a track record of staying abreast of the latest developments in the field. My expertise is grounded in a comprehensive understanding of fiscal policy, economic growth strategies, and government financial management.
Now, delving into the provided article on Fiscal Policy, let's break down the key concepts covered:
Fiscal Policy:
Definition: Fiscal Policy involves the revenue and expenditure policies of the government. The term "fiscal" is derived from "fisk," which denotes public treasury or government funds.
Latest Update (Union Budget 2021 - India): The article highlights the emphasis on Development Financial Institutions (DFIs) for long-term infrastructure creation, and the proposal for a Dispute Resolution Committee (DRC) for quick relief in tax disputes.
Objectives: The Fiscal Policy aims for higher economic growth, price stability, and reduction in inequality. This is achieved through consumption control, raising the rate of investment, taxation, infrastructure development, progressive taxes, exemptions for vulnerable classes, heavy taxation on luxury goods, and discouraging unearned income.
Components: The three components of India's Fiscal Policy are Government Receipts, Government Expenditure, and Public Debt. These transactions occur in the Consolidated Fund of India, Contingency Fund of India, and Public Account of India.
Government Receipts: Categorized into Revenue Receipt and Capital Receipt, which includes taxes (direct and indirect), fees, licenses, permits, fines, penalties, loans recovery, disinvestments, borrowing, and other liabilities.
Direct Tax Code Bill 2010: A proposed bill seeking to replace the Income Tax Act of 1961 and the Wealth Tax Act of 1957.
Disinvestment: The sale or liquidation of government assets to reduce fiscal burden.
Government Expenditure: Classified into Revenue Expenditure (recurring) and Capital Expenditure (non-recurring), covering interest payments, defense expenses, salaries, loans repayments, and loans to public enterprises.
Fiscal Consolidation: Measures taken to improve fiscal deficit, aiming for better revenue receipts and public expenditure alignment. The article mentions the Fiscal Responsibility and Budget Management Act (FRBMA), 2003, as a tool for fiscal consolidation.
Fiscal Federalism: Refers to the distribution of resources between the central and state governments, with tax distribution outlined in the 7th schedule of the Indian constitution.
Related Topics: Fiscal Deficit, Central Board of Direct Taxes (CBDT), Value-Added Tax (VAT), Goods and Services Tax (GST), Minimum Alternate Tax (MAT), Tax Policy Council & Tax Policy Research Unit, Monetary Stimulus vs. Fiscal Stimulus, and Monetary Policy vs. Fiscal Policy.
FAQs: Answers questions about who prepares fiscal policy in India (Ministry of Finance) and the three types of fiscal policy (neutral, expansionary, and contractionary).
In summary, this article provides a comprehensive overview of fiscal policy, covering its objectives, components, recent updates, and related topics, making it a valuable resource for those preparing for exams like the IAS.
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