Fiscal policy and its objectives in India

Fiscal policy refers to the overall effect of the budget outcome on

economic activity.
The idea of using fiscal policy to combat recessions was introduced
by John Maynard Keynes in the 1930s
Fisc : A French word means Treasure of Government.
Fiscal Policy= Revenue + Expenditure Policy by Government of India
Related to Development Policy of the Nation.
Fiscal policy deals with the taxation and expenditure decisions of the
government. These include, tax policy, expenditure policy, investment
or disinvestment strategies and debt or surplus management.
- Kaushik Basu ( Former Chief Economic Adviser )

Three Possible Stances

A Neutral position applies when the budget outcome has
neutral effect on the level of economic activity where the govt.
spending is fully funded by the revenue collected from the tax.
Where, G = T
An Expansionary position is when there is a higher budget
deficit where the govt. spending is higher than the revenue
collected from the tax. Where, G > T\
An Contractionary position is when there is a lower budget
deficit where the govt. spending is lower than the revenue
collected from the tax. Where, G < T

Methods of Funding
Governments spend money on a wide variety of things,
from the military to services like education and
healthcare, as well as transfer payments.
This expenditure can be funded in a number of different
ways:
Taxation Revenue
Seigniorage, the benefit from printing money
Borrowing money
Consumption of fiscal reserves

Post Independence
Post-independence, the country adopted a federal
Constitution with strong unitary features giving the central
government primacy in terms of planning for economic
development.
Stimulating and accelerating growth (through public
enterprises) was one of the primary objectives of fiscal policy.
In the then nascent economy where the income levels and
financial savings were low, the fiscal assumed the
responsibility of creating the capital base in the form of
infrastructure to stimulate growth.
Thus, India embarked on a planning process since 1950 (the
year of establishment of Planning Commission of India.

To transfer private
savings

To cater growing
consumption &
Investment needs

To cover social
welfare schemes

To transfer private savings

Main Role of Fiscal Policy

Post Independence

To cater growing
consumption &
Investment needs

To cover social
welfare schemes

Post Independence

1960-70
High
1957-58 Personal
&
Wealth
Marginal
Tax,
ExpenditurIncome
1953
e Tax, GiftTax Rates
Taxation
Tax
Enquiry
Commissi
on

1960-80
Tax
Revenue
to GDP
Ratio
Improved
from 6.3
% to 16.1
%

Excise
Duty &
Customs
Duty,
Cascadin
g Effect
of such
taxes

 During the period 1950-51 to 1961-62, the Central Government

revenue expenditure showed a broad pattern of increase, followed by
the prevailing accent on social and developmental services.
The focus of government expenditure were education and health.

Post Independence: Indias Fiscal Policy

All capital expenditures were treated as developmental and all
expenditure on civil works were treated as non-developmental.
The developmental expenditure increased more rapidly than nondevelopment expenditure. The Government draft on real resources of
the economy had not only increased in absolute terms but also in
terms of GDP.
During this phase, expenditure policy was shaped to achieve
reduction in income inequality and counter inflation. On the issue of
price stability, the emphasis was on long-term price stability through
large expenditure on production of goods and services.
Doubling of the plan outlay in the second plan and the subsequent
increases in successive plans necessitated generation of resources
both internally and externally, to meet the financing needs.
Deficit financing was used as a means to cover the gap between
ambitious investment plans and the low levels of savings in an
underdeveloped economy.
10

Post Independence: Indias Fiscal Policy

1
2
3

Highly Redistributive Income Tax Rates

High Import Tariffs
Numerous Excises Besides the Sales
Tax
Administrative Controls on Various
Industries
Exemptions & Preferential Treatments
Aiming At Channelling Resources
Towards Priority Sectors

This system turned out to be inefficient and unfair and

also led to
widespread tax evasion. Growth remained
11
anaemic.

Indias Fiscal Policy: 1970-1990

1974-75: Based on
committees
recommendationpersonal tax was
brought down.

The Direct
Taxes Enquiry
Committee of
1971 found
that the high
tax rates
encouraged
tax evasion.

1978 -85: Number

of Income Tax
brackets were
reduced from 11 to
8 and finally to 4.

Highest Income Tax

rate was brought
down from
97.5% to 50%. 12