- jaro education
- 14, July 2024
- 6:00 pm
The fiscal policy in India is a fundamental component of economic management and guides economic development. It is a crucial tool used by policymakers to accomplish various macroeconomic goals and promote sustainable growth. Recent fiscal policy of India involves a wide range of taxation, spending, and borrowing decisions.
Understanding Fiscal Policy: A Key Tool for Economic Management
Fiscal policy refers to using government taxation and spending to influence the economy. It is essential for achieving macroeconomic goals such as job growth, controlling inflation, and reducing unemployment. By altering the economy’s total demand, it impacts economic activity. The government can adjust spending levels or modify tax rates to achieve its desired financial outcomes.
Various policy tools, including changes in transfer payments, tax rates, and government spending, are used to implement fiscal policy. The effectiveness of it depends on several factors, such as the timing of implementation, the extent of the policy measures, and the overall health of the economy.
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How does Fiscal Policy operate?
Fiscal policy relies on two main instruments: taxes and government spending. When the economy is sluggish, it suggests that people are not investing money in purchasing goods. To address this, the government may reduce taxes, putting more money into the hands of consumers. With more disposable income, people are likely to spend more on goods and services, which boosts demand and creates more job opportunities.
Conversely, if the economy is overheating and citizens are overspending, the government can raise taxes to reduce consumer demand and help stabilise the economy. This policy’s essential goal is to maintain a balanced approach, ensuring economic stability and growth.
Tools of Fiscal Policy
The government employs several primary fiscal policy tools to manage the economy:
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1. Public Expenditure
Public expenditure encompasses subsidies, transfer payments (including welfare programs), public works projects, and government salaries. By adjusting its spending, the government can directly impact economic activity. For instance, increasing government spending can boost demand, leading to higher output and employment.
2. Taxation
The government influences economic activity through its taxation policies. Reducing taxes leaves individuals and businesses with more income to spend and invest, which can stimulate economic growth. Conversely, increasing taxes can help cool down an overheated economy by reducing disposable income and curbing excessive demand.
3. Public Borrowing
Public borrowing is the government’s process of financing expenditures that exceed tax revenues. The government raises funds from domestic or international sources through instruments like bonds, National Savings Certificates (NSC), and Kisan Vikas Patra. Public borrowing is commonly used to finance public services, infrastructure projects, and welfare programs and effectively