Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply. This topic is part of UPSC mains GS paper 3
- India's fiscal policy
- Objectives of Fiscal policy
- Importance of Fiscal policy
- Management of debts
FISCAL POLICY OF INDIA
Fiscal policy is based on the theories of British economist John Maynard Keynes. Also known as Keynesian economics, this theory basically states that governments can influence macroeconomic productivity levels by increasing or decreasing tax levels and public spending. This influence, in turn, curbs inflation (generally considered to be healthy when between 2% and 3%), increases employment, and maintains a healthy value of money. Fiscal policy plays a very important role in managing a country's economy.
Fiscal policy in India 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. In recent times, the importance of fiscal policy has been increasing to achieve economic growth swiftly, both in India and across the world. Attaining rapid economic growth is one of the key goals of fiscal policy formulated by the Government of India. Fiscal policy, along with monetary policy, plays a crucial role in managing a country’s economy.
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.
OBJECTIVES OF FISCAL POLICY
- Economic growth: Fiscal policy helps maintain the economy’s growth rate so that certain economic goals can be achieved.
- Price stability: It controls the price level of the country so that when the inflation is too high, prices can be regulated.
- Full employment: It aims to achieve full employment, or near full employment, as a tool to recover from low economic activity.
IMPORTANCE OF FISCAL POLICY
- Fiscal policy plays a key role in elevating the rate of capital formation both in the public and private sectors.
- Through taxation, the fiscal policy helps mobilise considerable amount of resources for financing its numerous projects.
- Fiscal policy also helps in providing stimulus to elevate the savings rate.
- The fiscal policy gives adequate incentives to the private sector to expand its activities.
- Fiscal policy aims to minimise the imbalance in the dispersal of income and wealth.
The Reserve Bank of India (RBI) is responsible for managing India's public debt, especially debt denominated in the domestic currency. The management of the central government's debt is conducted by RBI under statutory provisions that oblige the central government to delegate its debt management to the RBI. As part of international sound practice, Reserve Bank of India, in consultation with Government of India, had placed in public domain Medium-Term Debt Management Strategy (MTDS) articulated for a period of three years
SIGNIFICANCE OF MANAGING DEBTS
The level of Government debt affects investor confidence, impacts fiscal capabilities of the government, leads to crowding out effect on private sector, fiscal repression of commercial banks alongside other impacts like inflationary pressure, exchange rate risk and higher taxes in the future.
Approach of the Central Government towards sustainable debt management
- Dedicated agency to manage debt: Government has decided to set up a statutory Public Debt Management Agency (PDMA) to bring both, India's external and domestic debt under one roof.
- The first step towards this direction was the establishment of a Public Debt Management Cell (PDMC) as an advisory body within Budget Division, Ministry of Finance in 2016.
- Government’s Medium-Term Debt Management Strategy (2019-2022): Several steps will be taken by the government under it based on three broad pillars viz.,
- Low cost of borrowingü Elongating maturity profile of the debt portfolio.
- Rationalization of interest rates on small savings schemes and other instruments like PF, special securities, etc.
- Advising other Divisions of Department of Economic Affairs with a view to help them arrive at the best terms for external loans.
- Risk mitigation
- Setting benchmarks for certain indicators such as external debt, to ensure minimal risk in terms of Roll-over Risk.
- Market development
- Maintaining transparency in the market borrowing programme, conducting regular investor interaction with stakeholders and issuing a variety of instruments to help investors manage their portfolio more efficiently.
- Creating benchmarks of desired tenors to enhance investor participation and liquidity.
- Supporting development of domestic investor base and calibrated opening of the Government securities market to foreign investors.
For similar notes on Economy topics, refer to the linked article.