<<–2/”>a >a href=”https://exam.pscnotes.com/fiscal-policy-2/”>Fiscal Policy is that part of Government policy which is concerned with raising revenues through Taxation and other means along with deciding on the level and pattern of expenditure it operates through budget. However, generally the expenditure exceeds the revenue income of the Government. In order to meet this situation, the Government imposes new taxes or increases rates of taxes, takes internal or external loans or resorts to Deficit Financing by issuing fresh currency.
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 generalisation, excessive printing of money leads to Inflation. If the government borrows too much from abroad it leads to a debt crisis. If it draws down on its foreign exchange reserves, a Balance of Payments crisis may arise. 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.
Various instruments of Fiscal Policy are:-
- Reduction of Govt. Expenditure
- Increase in Taxation
- Imposition of new Taxes
- Wage Control
- Rationing
- Public Debt
- Increase in Savings
- Maintaining Surplus Budget
- Increase in Imports of Raw materials
- Decrease in Exports
- Increase in Productivity
- Provision of Subsidies
- Use of Latest Technology
- Rational Industrial Policy
Taxation policy of the government has witnessed major changes. In the last ten years, there has been considerable Growth in Direct Tax collection. The collection has increased from 33.8% in 1999-2000 to 55.5 % in 2008-09. GDP-tax ratio has also been improved from 2.97% in 1999-2000 to 16.6% in 2015-16. Direct tax collection has been dramatically improved because of the following initiatives taken by the government; Moderate tax rates have been structured in order to eradicate vagueness in tax structures Information technology has been implemented in Income tax departments in order to deliver Services like e-filing of returns, electronic tax collection reporting, issue of refunds etc. This measure has improved functional efficiency of the department; Tax administration has been improved so that deterrence levels may be enhanced and better tax services may be provided.
The Fiscal Responsibility and Budget Management Act or the FRBM Act, 2003 is an Act mandating Central Government to ensure intergenerational Equity in fiscal management and long term macro-economic stability. The Act also aims at prudential Debt Management consistent with fiscal sustainability through-
- Limits on the Central Government borrowings, debt and deficits,
- Greater transparency in fiscal operations of the Central Government
- Conducting fiscal policy in a medium term framework and
- Other matters connected therewith or incidental thereto
Role Of Finance Ministry In Monetary And Fiscal Policy
Fiscal role of ministry of finance
The Ministry of Finance plays a very crucial role in development Planning in India. It supervise the financial institution and is responsible for the overall financial management of the country.
The Ministry of Finance is responsible for the fiscal administration of the country. It has three departments, Department of Economic Affairs, Department of Expenditure and Department of Revenue. The Department of Economic Affairs has a Budget Division and it prepares the budget of the Government. The role of the Ministry of Finance is based on ‘Financial Control’ by the Finance Ministry particularly by its Department of Expenditure. It has three main parts, control exercised during the preparation of the budget, control exercised during the execution of the budget and control on miscellaneous matters.
It scrutinises all proposals emanating from the spending department in so far as they have financial implications. This enables the Ministry to have a free hand in the formulation of policies of other departments. Generally, the scrutiny exercised by the Ministry of Finance in very broad and is more concerned with the over-all financial implications of the proposals and its impact on the expenditure”.
The Cabinet attaches considerable weight to the opinion of the Ministry. After all the proposals have been received from the spending ministries, it proceeds to determine the priorities in the larger interests of the nation. It’s main concern is to obtain “Proper balance of expenditure between services, so that greater value could not be obtained for the total expenditure by reducing the money spent on one service and increasing expenditure on another”3 and to secure a uniform standard in the measurement of the financial sacrifice involved in the activities of all departments”.
The Ministry of Finance, thus, plays an important role in development planning in India. It monitors the financial institution, which is responsible for the entire fiscal administration of the country. The focus purpose of these financial institution is on the socio-Economic Development of the country. The role of Ministry of Finance extents to every department, directly or indirectly and its impact is writ large on the entire administration. It maintains financial discipline in the country. As the economic development of India is linked with the successful implementation of the Five Year Plans, the Ministry of Finance cannot remain aloof from it. It plays a vital role in the formulation of plans. In a word, the Ministry constitutes the backbone of development, financial stability and Good Governance.
Role of ministry of finance in Monetary Policy
Monetary Policy is the process by which monetary authority(an authority that controls all matters relating to money) of a country, generally a central bank controls the Supply of Money in the economy by exercising its control over interest rates in order to maintain price stability,reduce inflation and achieve high economic growth. A Sound monetary policy ensures that various sectors of the economy have sufficient tokens/authority to carry out their transactions. It provides the basis to the fiscal policy and the fiscal policy influences the monetary policy and gives it a direction to proceed in. Monetary policy helps in keeping the Money Supply and economy of a nation stable whereas the fiscal policy is more involved in development and infrastructural work and policy making and enactment of budget. A monetary policy is changed from time to time to combat inflation,Deflation,price rise,imbalance in demand and supply,etc by mopping up excess money or infusing money in the market as the requirement may be. A sound monetary policy helps the government determine its fiscal policy and how much it will collect as revenue and spend as expenditure. The fiscal policy helps bring money into the market whereas the monetary policy helps in managing that money supply and keeping it stable. In India the monetary policy is managed by the RBI which is the central bank as well as monetary authority of the country.
It was an open secret that the Union finance ministry did not see eye to eye with the Reserve Bank of India (RBI) on monetary policy. The rift is now out in the open.
The sequence of recent events is as follows. The finance ministry had summoned the members of the monetary policy committee (MPC) to New Delhi to discuss interest rate policy. The MPC members formally refused to attend the meeting. RBI governor Urjit Patel made this public in an interaction with journalists. The MPC also decided—rightly in our opinion—to not cut interest rates in their policy meeting on . Chief economic adviser Arvind Subramanian put out a statement on why he disagreed with the decision.
Such conflicts between finance ministries and central banks are not uncommon across the world. The question is how well the creative tension is managed. India itself provides starkly different examples.
There was excellent coordination between New Delhi and Mumbai when Manmohan Singh was finance minister and C. Rangarajan was RBI governor, even when the central bank went in for a brutal tightening of policy in response to double-digit inflation. We saw a similar smooth working relationship between Yashwant Sinha and Bimal Jalan.
Matters have been more Tense since then. The episodes of friction between the two masters of our financial universe are well known. Some of them were highlighted in the book written by former RBI governor D. Subbarao, Who Moved My Interest Rate?. These years of conflict also saw a concerted campaign from New Delhi to cut the RBI down to size, as when the Financial Stability and Development Council was set up in 2010 with the central bank as just one of several regulatory institutions who are its members. The rupee crisis of 2013 did act as a glue, but even here most of the coordination was done by officials rather than the finance minister and the governor.
Institutional coordination is as much an art as a science. The art comes from the ability of people to work together despite conflicting views. The science comes from the institutional rules that set out the specific areas of responsibility. Both need to be nurtured.
The MPC members did well to not attend the meeting in the finance ministry. We had argued in these columns earlier that such a meeting was in conflict with the clear provisions of the RBI Act. However, the finance ministry is also empowered under the revised Act to offer its views on interest policy in writing to the MPC. Subramanian has done precisely that, though in the public sphere.
Disagreement is not in itself a bad thing, as long as the legal provision that the MPC gets freedom to pursue the inflation target formally given to it by the government is respected. What matters more right now is the threat of a breakdown in Communication. It is not just about interest rate policy. The biggest risks to economic stability right now come from the Banking sector. Several policies have been tried out. Several ideas have been floated. The mountain of bad loans has kept getting bigger.
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The recent fiscal policy of India has been focused on stimulating economic growth and reducing the Fiscal Deficit. The government has taken a number of measures to achieve these goals, including:
- Increasing public spending on Infrastructure-2/”>INFRASTRUCTURE and social programs
The government has increased public spending on infrastructure, such as roads, bridges, and power Plants. This has helped to boost economic growth by creating jobs and improving the productivity of the economy. The government has also increased spending on social programs, such as Education and healthcare. This has helped to reduce POVERTY and inequality.
- Reducing taxes and Corporate tax rates
The government has reduced taxes and corporate tax rates. This has made it cheaper for businesses to operate in India, which has helped to attract investment and create jobs. The government has also simplified the tax system, which has made it easier for businesses to comply with Tax Laws.
- Allowing greater Foreign Direct Investment (FDI)
The government has allowed greater foreign direct investment (FDI) in India. This has helped to attract foreign investment, which has helped to boost economic growth. The government has also made it easier for foreign companies to do business in India.
- Reforming the tax system
The government has reformed the tax system. This has made the tax system more efficient and equitable. The government has also made it easier for businesses to comply with tax laws.
These measures have had a positive impact on the Indian economy. The GDP growth rate has increased, and the fiscal deficit has been reduced. However, there are still some challenges that need to be addressed, such as the high level of public debt and the need to improve the quality of public spending.
Fiscal deficit
The fiscal deficit is the difference between the government’s revenue and its expenditure. The government has been running a fiscal deficit for many years. The fiscal deficit has been increasing in recent years. This is due to the government’s increased spending on infrastructure and social programs. The fiscal deficit is a major concern for the Indian government. The government needs to reduce the fiscal deficit in order to maintain macroeconomic stability.
Public debt
Public debt is the total amount of money that the government owes. The public debt has been increasing in recent years. This is due to the government’s increased spending and the fiscal deficit. The high level of public debt is a major concern for the Indian government. The government needs to reduce the public debt in order to maintain macroeconomic stability.
Taxation
The Indian tax system is complex and inefficient. The government has been trying to simplify and reform the tax system. The government has introduced the Goods and Services Tax (GST), which is a single tax on goods and services. The GST has helped to simplify the tax system and reduce the cost of doing business in India.
Public spending
The government has been increasing public spending on infrastructure and social programs. This has helped to boost economic growth by creating jobs and improving the productivity of the economy. The government has also increased spending on social programs, such as education and healthcare. This has helped to reduce poverty and inequality.
Foreign direct investment (FDI)
The government has allowed greater foreign direct investment (FDI) in India. This has helped to attract foreign investment, which has helped to boost economic growth. The government has also made it easier for foreign companies to do business in India.
Infrastructure
The government has increased public spending on infrastructure, such as roads, bridges, and power plants. This has helped to boost economic growth by creating jobs and improving the productivity of the economy.
Social programs
The government has increased spending on social programs, such as education and healthcare. This has helped to reduce poverty and inequality.
Economic growth
The Indian economy has been growing at a rapid pace in recent years. The GDP growth rate has been increasing. This is due to the government’s reforms and the increase in public spending. The economic growth has helped to reduce poverty and improve the standard of living of the people.
Challenges
There are still some challenges that need to be addressed, such as the high level of public debt and the need to improve the quality of public spending. The government needs to reduce the fiscal deficit and the public debt in order to maintain macroeconomic stability. The government also needs to improve the quality of public spending in order to ensure that it is effective in reducing poverty and improving the standard of living of the people.
What is fiscal policy?
Fiscal policy is the use of government spending and taxation to influence the economy. The goal of fiscal policy is to promote economic growth, full EMPLOYMENT, and price stability.
What are the tools of fiscal policy?
The main tools of fiscal policy are government spending and taxation. Government spending can be used to stimulate the economy by increasing demand. Taxation can be used to reduce demand or to raise revenue.
What are the effects of fiscal policy?
Fiscal policy can have a significant impact on the economy. When the government increases spending, it puts more money into the hands of consumers and businesses. This can lead to increased demand and economic growth. When the government decreases spending, it takes money out of the economy. This can lead to decreased demand and economic contraction.
What are the limitations of fiscal policy?
Fiscal policy is not always effective in achieving its goals. One limitation of fiscal policy is that it can take time to have an impact on the economy. Another limitation is that fiscal policy can be difficult to implement.
What is the recent fiscal policy of India?
The recent fiscal policy of India has been expansionary. The government has increased spending on infrastructure and social programs. This has helped to stimulate the economy and create jobs.
What are the effects of the recent fiscal policy of India?
The recent fiscal policy of India has had a positive impact on the economy. It has helped to boost growth and create jobs. However, it has also led to an increase in the fiscal deficit.
What are the challenges facing the Indian economy?
The Indian economy is facing a number of challenges, including high inflation, a large fiscal deficit, and a slowdown in growth. The government is working to address these challenges, but it is a difficult task.
What are the opportunities for the Indian economy?
The Indian economy has a number of opportunities, including a large Population, a growing middle class, and a rapidly developing infrastructure. The government is working to capitalize on these opportunities, and the economy is expected to continue to grow in the future.
Sure, here are some MCQs on the topics of fiscal policy, monetary policy, and the Indian economy:
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Which of the following is not a tool of fiscal policy?
(A) Taxation
(B) Spending
(C) Monetary policy
(D) Borrowing -
Which of the following is not a tool of monetary policy?
(A) Open market operations
(B) DISCOUNT rate
(C) Reserve requirement
(D) Fiscal policy -
The Reserve Bank of India is the central bank of India. It was established in 1935.
(A) True
(B) False -
The Indian economy is the world’s sixth-largest economy by Nominal GDP and the third-largest by purchasing power parity.
(A) True
(B) False -
The Indian economy is a Mixed Economy, with both private and public sectors.
(A) True
(B) False -
The Indian government has been pursuing a policy of economic Liberalization-2/”>Liberalization since the 1990s.
(A) True
(B) False -
The Indian economy has been growing at a rapid pace in recent years.
(A) True
(B) False -
The Indian economy is facing a number of challenges, including high levels of poverty and inequality.
(A) True
(B) False -
The Indian government has been taking steps to address the challenges facing the economy, such as investing in infrastructure and education.
(A) True
(B) False -
The Indian economy is expected to continue to grow in the coming years.
(A) True
(B) False