MEANINGfiscal policy is the policy concerning the revenue expenditure and debt of the government for achieving certain objectives like control of inflation , public expenditure etc.According to pro. D. C. Rowan, "fiscal policy is defined as the discretionery action by the government to change the level of government expenditure on goods and services and transfer payments. And the yield of taxation at any given level of output".
Objectives of fiscal policy FULL EMPLOYMENT it simply means that man power is ready to work at a prevailing wage rate without any dispute. PRICE STABILITY another objective is price stability when price rises i.e. inflation exists in an economy , fiscal policy aims at decrease in demand and aggregate expenditure and tax rate is also raised. extra purchasing power of people goes into hands of general public and demand decreases because of excess supply, prices automatically go down because of fear of stocks.
REDUCTIO N IN ECONOMIC ACTIVITY to remove economic inequlity progressive direct taxes like income tax , property tax are levied at a higher scale because of burden of such taxes falls upon rich people.ECONOMICDEVELOPMENT to achieve economic devolopment of a country, fiscal policy acts as a source of capital formation because as capital formation is increased , production and employment also increases. Appropriate fiscal policy is requried for devolopment of country like India.
TOOLS OF FISCAL POLICY • TAXTION POLICY every government earn through taxes. Taxes are very important and major source of government revenues. the effects of taxes on demand depends upon taxation multiplier • GOVERNMENT EXPENDITURE public expenditure bears an important effect on aggregate demand. if government expenditure increases, aggregate demand increases and vice versa. These are two types. • =for attainment of goods and services. • =public expenditure for pension, education, health etc. it is also known as transfer expenses.
PUBLIC DEBT POLICY public are maonly two types :a)internal debt b)external debtif there is no decrease in private demand then debt debt can be used for increase in aggregate demand and on the other hand if with public debt private spending is curtailed , then it is uncertain effect on aggregate demand.DEFICIT FINANCING when the government lends from central bank to cover its deficit in its budget, this is called deficit financing, or simply means issuing of more currency or notes at the time of emergencies. This increase in currency creates extra purchasing power and as a result the total circulation of currency increases, demand increases and as result price increases.
Advatages of fiscal policy in India • =Fiscal policy has played a very important role in raising the rate of capital formation in country in private as well as public sector. • =It has mobilized resources through taxes, savings, public debt etc. • =Tax concession, cash subsidies exemption in taxes have been given as incentives to private sectors unit set up in backward areas and export oriented units. • =Various incentives have been given to raise the rate of savings in households and corporate sectors.
=To fullfil one of its major abjectives of providing full employment, allocation of huge amount has been made in fiscal policy to eradicate poverty and generate employment.=Resourses have been moblized from rich class to poor by way of proggesive tax, corporation tax and capital gains.and this money is utilized for the wellfare of poor section.=Export have been encourged by the way of providing subsidies, concession , tax exmemption, cash subsidies etc.
Drawbacks of fiscal ploicy • + Tax system was not so much elastic to earn more revenue because of huge tax evasion. • + Although each and every part is not awarded in terms of money, but still a major part of economy of UDC’s like India is not monetized. In the part fiscal policy remains unaffected. • + Because of non availability of reliable and accurate data, the area of fiscal policy is not judged properly. • + Due to illiteracy • + Fiscal policy affected in few sectors of the economy.
+Fiscal policy need to be approval by the government , that is why decisions are not taken as time. +Strutural unemploynment cannot be tackled by the fiscal policy.+The country have been depend on the more on idirect tax, ultimately affecting poor person , so it is defective tax structure.+Increase in public expenditure on non development heads and deficit financing demand pull inflation has taken place.+Huge investment in public sectors have become sunk money now because of failure of public sectors, returns are becoming very low.
Suggestions for reforms in fiscal policy • 1) Improving tax administration to raise larger revenues. • 2)Reducing subsidies • 3) Downsizing of government • 4) Privatization • 5) Reprioritize plan schemes • 6) Changes to the agricultural taxation • 7) Check on black money • 8) Public sector performance to be improved.