India To Set Aside Fiscal Policies To Cope With COVID19 Pandemic

Relevancy

  • G.S. Paper 2
  • Fiscal policies- significance, effect
  • FRBM Act 2003

Why in news?

  • India is facing an economic shock as many parts of the country go into lockdown and the government will have to spend more and abandon fiscal deficit targets to cope.
  • Growth may weaken to 3% in the first three months of this year from 4.3% estimated previously, according to Oxford Economics
  • The readings about Asia’s third-largest economy come as policy makers are focused on ensuring Indians have cash in hand to buy essentials as more cities are locked down to prevent the spread of the virus, and countries around the world race to ease fiscal and monetary policies to shore up their economies

What is Fiscal policy?

  • Fiscal policy is the guiding force that helps the government decide how much money it should spend to support the economic activity, and how much revenue it must earn from the system, to keep the wheels of the economy running smoothly.
  • Through the fiscal policy, the government of a country controls the flow of tax revenues and public expenditure to navigate the economy.
  • If the government receives more revenue than it spends, it runs a surplus, while if it spends more than the tax and non-tax receipts, it runs a deficit.
  • To meet additional expenditures, the government needs to borrow domestically or from overseas.
  • Alternatively, the government may also choose to draw upon its foreign exchange reserves or print additional money.
  • While exercising fiscal policy, the government keeps primarily the following factors in mind:
    • Welfare of people
    • Financial condition of government
    • Inflation level in the economy

Objectives of Fiscal Policy

Development by effective Mobilisation of 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.
  • 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.
  • Public Savings:The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises.

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.

What is the difference between fiscal policy and monetary policy?

  • The government uses both monetary and fiscal policy to meet the county’s economic objectives.
  • The central bank of a country mainly administers monetary policy.
  • In India, the Monetary Policy is under the Reserve Bank of India or RBI.
  • Monetary policy majorly deals with money, currency, and interest rates. On the other hand, under the fiscal policy, the government deals with taxation and spending by the Centre.

Fiscal Responsibility And Budget Management (FRBM) Act, 2003

  • Originally, the FRBM Bill had given annual numerical targets as well.
  • But in the process of making it a law, the annual targets were dissolved and the act simply said that the centre would take appropriate measures to eliminate revenue deficit by 31 March 2008.
  • The FRBM Act 2003 was adopted to institutionalize the fiscal discipline at both the central and state levels.
  • The act left the annual numerical targets, to be formulated by the central government in the form of FRBM rules.

The key provisions of the act as well as FRBM rules are as follows:

  • Every year, the government will bring down the revenue deficit by 0.5% and eliminate it by 2007-08.
  • Total liabilities of the union government should not rise by more than 9% a year.
  • Every year, the government will bring down the fiscal deficit by 0.3% and bring it down to 3% by 2007-08.
  • State governments were asked to formulate their own FRBM acts. Those states that have formulated their own FRBM acts have been given autonomy to borrow further without the permission of the central government. Other states can undertake further borrowing only with the permission of Central Government.
  • The union government would not give guarantee to loans raised by PSUs and state governments for more than 0.5% of the GDP in aggregate.

Importance of Fiscal Policy in India:

  • Through taxation, the fiscal policy helps mobilise considerable amount of resources for financing its numerous projects.
  • In a country like India, fiscal policy plays a key role in elevating the rate of capital formation both in the public and private sectors.
  • The fiscal policy gives adequate incentives to the private sector to expand its activities.
  • Fiscal policy also helps in providing stimulus to elevate the savings rate.
  • Fiscal policy aims to minimise the imbalance in the dispersal of income and wealth.