Definition:

Fiscal policy is playing an important role on the economic and social front of a country.
Traditionally, fiscal policy in concerned with the determination of state income and
expenditure policy. But with the passage of time, the importance of fiscal policy has
been increasing continuously for attaining rapid economic growth.

Accordingly, it has included public borrowing and deficit financing as a part of fiscal
policy of the country. An effective fiscal policy is composed of policy decisions relating
to entire financial structure of the government including tax revenue, public
expenditures, loans, transfers, debt management, budgetary deficit, etc.

The policy also tries to attain proper balance between these aforesaid units so as to
achieve the best possible results in terms of economic goals. Harvey and Joanson, M.,
defined fiscal policy as “changes in government expenditure and taxation designed to
influence the pattern and level of activity.”

ADVERTISEMENTS:

According to G.K. Shaw, “We define fiscal policy to include any design to change the
price level, composition or timing of government expenditure or to vary the burden,
structure of frequency of the tax payment.” Otto Eckstein defined fiscal policy as
“changes in taxes and expenditure which aim at short run goals of full employment price
level and stability.”

Objectives of Fiscal Policy:

In India, the fiscal policy is gaining its importance in recent years with the growing
involvement of the government in developmental activities of the country.
The following are some of the important objectives of fiscal policy adopted by the
Government of India:

1. To mobilise adequate resources for financing various programmes and projects

adopted for economic development.

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2. To raise the rate of savings and investment for increasing the rate of capital
formation;

3. To promote necessary development in the private sector through fiscal incentive;

4. To arrange an optimum utilisation of resources;

5. To control the inflationary pressures in economy in order to attain economic stability;

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6. To remove poverty and unemployment;

7. To attain the growth of public sector for attaining the objective of socialistic pattern of
society;

8. To reduce regional disparities; and

9. To reduce the degree of inequality in the distribution of income and wealth.

ADVERTISEMENTS:

In order to attain all these aforesaid objectives, the Government of India has been
formulating its fiscal policy incorporating the revenue, expenditure and public debt
components in a comprehensive manner.

Fiscal Policy and Economic Development:

One of the important goals of fiscal policy formulated by the Government of India is to
attain rapid economic development of the country.

To attain such economic development in the country, the fiscal policy of the country has
adopted the following two objectives:

1. To raise the rate of productive investment of both public and private sector of the
country.

2. To enhance the marginal and average rates of savings for mobilizing adequate
financial resources for making investment in public and private sectors of the economy.

The fiscal policy of the country is trying to attain both these two objectives during the
plan periods.

Evaluation of Fiscal Policy:

Fiscal policy formulated by the Government of India has been creating considerable
impact on the economy of the country. Taxation, public expenditure and public debt
have been increasing at a considerable proportion. Public sector of the country has also
been expanded considerably.

The country has been able to attain significant development of its industrial and
infrastructural sector. But the burden of taxation in our country is comparatively heavy
and thereby it has been affecting the saving capacity of the people.

Moreover, the fiscal policy of the country has also failed to check the extent of inequality
in the distribution of income and wealth and has also failed to solve the problem of
unemployment and poverty even after 50 years of planning. The fiscal policy has also
failed to maintain stability in price level of the country. It would now be better to study
the advantages and shortcomings of the fiscal policy of the country in a brief manner.

I. Merits or Advantages of Fiscal Policy of India:

The following are some of the important merits or advantages of fiscal policy of
Government of India:

1. Capital Formation:

Fiscal policy of the country has been playing an important role in raising the rate of
capital formation in the country both in its public and private sectors. The gross
domestic capital formation as per cent of GDP in India has increased from 10.2 per cent
in 1950-51 to 22.9 per cent in 1980-81 and then to 24.8 per cent in 1997-98. Therefore,
it has created a favourable impact on the public and private sector investment of the
country.

2. Mobilisation of Resources:

Fiscal policy of the country has been helping to mobilize considerable amount of
resources through taxation, public debt etc. for financing its various developmental
projects. The extent of internal resources mobilisation for financing plan has increased
considerably from 70 per cent in 1965-66 to around 90 per cent in 1997-98. In India,
public debt refers to a part of the total borrowings by the Union Government which
includes such items as market loans, special bearer bonds, treasury bills and special
loans and securities issued by the Reserve Bank. It also includes the outstanding
external debt.
3. Incentives to Savings:

The fiscal policy of the country has been providing various incentives to raise the
savings rate both in household and corporate sector through various budgetary policy
changes, viz., tax exemption, tax concession etc. Accordingly, the saving rate has
increased from a mere 10.4 per cent in 1950-51 to 23.1 per cent in 1997-98.

4. Inducement to Private Sector:

Private sector of the country has been getting necessary inducement from the fiscal
policy of the country to expand its activities. Tax concessions, tax exemptions, subsidies
etc. incorporated in the budgets have been providing adequate incentives to the private
sector units engaged in industry, infrastructure and export sector of the country.

5. Reduction of Inequality:

Fiscal policy of the country has been making constant endeavor to reduce the inequality
in the distribution of income and wealth. Progressive taxes on income and wealth tax
exemption, subsidies, grant etc. are making a consolidated effort to reduce such
inequality. Moreover, the fiscal policy is also trying to reduce the regional disparities
through its various budgetary policies.

6. Export Promotion:

The Fiscal policy of the government has been making constant endeavor to promote
export through its various budgetary policy in the form of concessions, subsidies etc. As
a result, the growth rate of export has increased from a mere 4.6 per cent in 1960-61 to
10.4 per cent in 1996-97.
7. Alleviation of Poverty and Unemployment:

Another important merit of Indian fiscal policy is that it is making constant effort to
alleviate poverty and unemployment problem through its various poverty eradication
and employment generation programmes, like, IRDP, JRY, PMRY, SJSRY, EAS etc.

II. Shortcomings of Fiscal Policy of India:

The following are the main shortcomings of the fiscal policy of the country:

1. Instability:

Fiscal policy of the country has failed to attain stability on various fronts. Growing
volume of deficit financing has created the problem of inflationary rise in price level.
Disequilibrium in its balance of payments has also affected the external stability of the
country.

2. Defective Tax Structure:

Fiscal policy has also failed to provide a suitable tax structure for the country. Tax
structure has failed to raise the productivity of direct taxes and the country has been
relying much on indirect taxes. Therefore, the tax structure has become burdensome to
the poor.

3. Inflation:

Fiscal policy of the country has failed to contain the inflationary rise in price level.
Increasing volume of public expenditure on non-developmental heads and deficit
financing has resulted in demand-pull inflation. Higher rate of indirect taxation has also
resulted in cost-push inflation. Moreover, the direct taxes has failed to check the growth
of black money which is again aggravating the inflationary spiral in the level of prices.
4. Negative Return of the Public Sector:

The negative return on capital invested in the public sector units has become a serious
problem for the Government of India. In-spite of having a huge total investment to the
extent of Rs. 2,04,054 crore in 1998 on PSUs the return on investment has remained
mostly negative. In order to maintain those PSUs, the Government has to keep huge
amount of budgetary provisions, thereby creating a huge drainage of scarce resources
of the country.

5. Growing Inequality:

Fiscal policy of the country has failed to contain the growing inequality in the distribution
of income and wealth throughout the country. Growing trend of tax evasion has made
the tax machinery ineffective for the purpose. Growing reliance on indirect taxes has
made the tax structure regressive.

III. Suggestions for Necessary Reforms in Fiscal Policy:

The following are some of the important measures suggested for necessary reforms of
the fiscal policy of the country:

1. Progressive Taxes:

The tax structure of the country should try to infuse more progressive elements so that it
can put heavy burden on the rich and less burden on the poor. Necessary amendments
be made in respect of irrigation tax, sales tax, excise duty, land revenue, property taxes
etc.

2. Agricultural Taxation:

The tax net of the country should be extended to the agricultural sector for tapping a
huge amount of revenue from the rich agriculturists.
3. Broad-based Tax net:

Tax net of the country should be broad-based so that it can cover increasing number of
population having the taxable capacity.

4. Checking Tax Evasion:

Adequate measures be taken to check the problem of lax evasion in the country. Tax
laws should be made stricter for prosecuting the tax evaders. Tax machinery should be
made more efficient and honest to gear up its operations. Tax rate should be reduced to
encourage the growing trend of tax compliance.

5. Increasing Reliance on Direct Taxes:

Tax machinery of the country should attach much more reliance on direct taxes instead
of indirect taxes. Accordingly, the tax machinery should try to introduce wealth tax,
estate duty, gift tax, expenditure tax etc.

6. Simplified Tax Structure:

Tax structure and rules of the country should be simplified so that it can encourage tax
compliance among the people and it can remove the unnecessary harassment of the
tax payers.

7. Reduction of Non-development Expenditure:

The fiscal policy of the country should try to reduce the non-developmental expenditure
of the country. This would reduce the volume of unproductive expenditure and can
reduce the inflationary impact of such expenditure.

8. Checking Black Money:

The fiscal policy of the country should try to check the problem of black money. In this
direction schemes like VDIS should be repeated. Tax rates should be reduced.
Corruption and political interference should be abolished. Smuggling and other
nefarious activities should be checked.

9. Raising the Profitability of PSUs:

The government should try to restructure its policy on public sector enterprises so that
its efficiency and rate of return on capital invested can be raised effectively. PSUs
should be managed in rational manner with least government interference and on
commercial lines. Accordingly, the policy of budgetary provisions for maintaining the
PSUs should gradually be eliminated.

IV. Recent Fiscal Policy Reforms:

In the mean time, the Government of India has introduced various fiscal policy reforms
which constitute the main basis of the stabilization policy of the country.

The following are some of the important measures of fiscal policy reforms adopted by
the Government of India in recent years:

1. Reduction of Rates of Direct Taxes:

The peak rate of income tax was reduced to 30 per cent in 1997-98 budget. This has
resulted an increase in the share of direct taxes in total revenue of the country from 19
per cent in 1990-91 to around 30 per cent in 1996-97.

2. Simplification of Tax Procedure:

In recent years as per the recommendation of Raja Chelliah or Taxation Reform

Committee, several steps have been taken to simplify the tax procedure in the
successive budgets. The 1998-99 budget has introduced a series of tax simplification
measures, viz., “Saral”, “Samadhan” and “Samman”, which is considered as an
important step in right direction. The 2003-04 budget introduced filing of return through
e-mail.

3. Reforms in Indirect Taxes:

These include introduction of ad-velorem rates, MODVAT scheme etc.

4. Fall in the Volume of Government Expenditure:

Several measures were undertaken recently by the government. Accordingly, total

expenditure of the government under various heads has been reduced. As a result, total
public expenditure as per cent of GDP has declined from 19.7 per cent of GDP in 1990-
91 to 16.4 per cent in 1996-97.

5. Reduction in the Volume of Subsidies:

Central Government has been making huge payments in the form of subsidies, i.e., food
subsidies, fertilizer subsidies, export subsidies etc. Steps have been taken to reduce
these subsidies phase-wise.

6. Reduction in Fiscal Deficit:

The Central Government has been trying seriously to contain the fiscal deficit in its
annual budget. Accordingly, it has reduced the extent of fiscal deficit from 7.7 per cent
of GDP in 1990-91 to 5.1 per cent in 1998-99. But fiscal stabilisation necessitates
containing the fiscal deficit at least to 3 per cent of GDP.

7. Reduction in Public Debt:

Recently, the Central Government has been trying to reduce the burden of public debt.
Accordingly, the external debt as per cent of GDP which was 5.4 per cent in 1990-91
gradually declined to 3.2 per cent in 1998-99 (BE). The internal debt as per cent of GDP
has declined from 48.6 per cent in 1990-91 to 49.8 per cent in 1998-99. Similarly, the
total outstanding loan or liabilities as per cent of GDP has also declined from 54.0 per
cent to 49.1 per cent during the same period.

8. Disinvestment in Public Sector:

Another important fiscal policy reforms introduced by the Government of India is to

disinvest the shares of the public sector enterprises. The government has disinvested
as part of its stake in 39 selected PSUs since the disinvestment process began in 1992.
Till 2002-03, it has raised around Rs. 29,440 crore through disinvestment of share of
PSUs. In the mean time, the government has constituted a Disinvestment Commission
to advise it on how to go about disinvesting the shares of PSUs. A separate Ministry of
Disinvestment has also been formed.

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15 effective steps Taken by Govt. to Increase Employment in India

The following steps have been taken by Govt, to increase employment opportunities:

1. Integrated Rural Development Programme (IRDP):

In 1978-79, government of India introduced IRDP to create full employment

opportunities in rural areas. Under this programme agriculture, animal husbandry,
forests, fisheries, small and cottage industries, construction of roads and canals etc. are
to be developed in all the 5111 development blocks.

Moreover, to provide more employment, in the Seventh Plan a sum of Rs. 312 crores
was spent on this programme. It benefited 182 lakh families. In 1995- 96 about 21 lakh
families have been benefited.

2. Drought Prone Area Programme (DPAP):

This programme was launched in 70 such districts of 13 states as were prone to

drought. The programme has proved fruitful particularly in removing seasonal
unemployment. In Sixth Plan, the programme provided 17 crore and 70 lakh man-days
of employment.

In the same period, a sum of Rs. 301 crores was made on the programme. In Seventh
Plan, Rs. 474 crores has been spent for the programme.

3. Training for Self-Employment:

This programme was launched on 15th August, 1979 by the Government of India. It is
called National Scheme of Training of Rural Youth for Self Employment (TRYSEM). The
main objective of this programme is to reduce unemployment among the youth. During
Seventh Plan about 11.6 lakh youth were imparted training under the programme.

During training period, young men are given financial assistance. On completion of
training, they are asked to prepare project report. Arrangements are made to get them
financial assistance from the banks. Every trained youth is given a financial help varying
from Rs. 3,000 to Rs. 5,000 to start his work.

In the Seventh Plan, under this programme, Composite Rural Training and Technical
Centres (CRTTC) were set up to impart training to rural youth. In 1995-96 training was
to be provided to 2.8 lakh rural youth under this programme.

4. Jawahar Rozgar Yojana:

The Jawahar Rozgar Yojana was started on 28th April 1989. The objective of this
Yojana is to provide employment to at least one member of each poor rural family for
fifty to a hundred days a year at a work place near his residence. A special feature of
the scheme is that 30% of the employment generated will be reserved for women.

The Central government will finance 80% of the programme and the state government
will have to bear only 20% of the expenditure of this scheme. In 1989, National Rural
Employment Programme and Rural Landless Employment Guarantee Programmes
were merged in the yojana.

5. Employment in Foreign Countries:

Government also helps people to get employment abroad. Special agencies have been
set up to recruit people to serve in gulf countries like Kuwait, etc.

6. Self-employment to Educated Unemployed Youth:

In 1983, a scheme namely self-employment of educated unemployed was initiated.
Under this scheme, loans up to Rs. 25,000 are given to those educated unemployed
who have no other financial resources.

This scheme is enforced by District Industries Centers. Government will give 25 percent
as subsidy of the loans given by the banks under this scheme.

7. Nehru Rozgar Yojana (NRY):

This Yojana was started in 1989. There are three schemes under it. (1) Under the first
scheme, subsidy is given to urban poor to set up micro enterprises. In 1995, under this
programme, 1.25 lakh families have been benefited. (2) Under the second scheme
arrangements have been made for wage-employment to labourers in cities with less
than 10 lakh population by providing Indian Economic Development and Elementary
Statistic 'them basic facilities.

In 1995, under this scheme 93 lakhs man-days of employment have been provided. (3)
Under the third scheme, urban poor in the cities are to be provided employment
opportunities in jobs like house repairing etc.

8. Small and Cottage Industries:

In order to reduce unemployment, government if has made special efforts to develop

small and cottage industries. In 1995-96 about 33 lakh persons were employed in these
industries.

9. Development of Organized Sector:

Many people are getting employment in organized public and private sectors. In 1995-
96, nearly 340 lakh persons got employment in large industries.
In 1961, organized public sector provided employment to 70 lakh persons; now it
provides employment to 1 crore and 92 lakh persons. Likewise, in 1961 organized
private sector provided employment to 50 lakh persons; in 2000 it provided employment
to 89 lakh persons.

10. Employment Exchanges:

Government has set up about 890 employment exchanges offering information on the
possible vocational avenues. These exchanges do not provide employment directly but
are of great assistance in directing the job-seeker to the possible areas of employment.

11. Employment Guarantee Scheme:

This Scheme has been launched in man; states, such as, Maharashtra, West Bengal,
Kerala, Rajasthan etc. Under the scheme unemployed persons are given economic
assistance.

12. Employment Assurance Scheme:

The Employment Assurance Scheme (EAS) was launched in 1994 in 1752 backward
blocks in the country. The main objective was to provide 100 days of unskilled manual
work to the rural poor who are seeking employment.

13. Prime Minister's Integrated Urban Poverty Eradication Program (PMIUPEP):

This programme has been implemented in 1995-96. This programme aims at to provide
employment to the urban poor. It will cover 50 lakh urban poor living in 345 towns. The
central government will incur an expenditure of Rs. 800 crores this programme during a
period of Five years.

14. The Swaran Jayanti Rozgar Yojana:

This plan began on December 1, whereas launching of this yojana, previous
programmes meant for providing employment to urban unemployed like Nehru Rozgar
Yojana and Prime Minister Integrate Urban Poverty Eradication Programme were
merged into it.

It aims at providing self-employment or wage employment to urban unemployed and

under- employ persons. It comprises of two plans: (i) Urban Self- Employment
Programme-(USE and (ii) Urban Wage Employment Programme-(UWEP). Of the total
expenditure on "Yojana, 75 percent will be borne by the centre and 25 percent by the
state governments. In the year 1997-98, a sum of Rs. 125 crore was spending on this
yojana.

15. Jawahar Gram Samridhi Yojana:

Jawahar Rozgar Yojana has been restructured as Jawahar Gram Samridhi Yojana with
effect from April 1999. This Yojana has been formulated to improve the quality of life of
the rural poor by providing the additional gainful employment.

16. Other Programmes:

Govt, of India launched other employment and poverty alleviation programme as under:

(i) Pradhan Mantri Gramodaya Yojana (PMGY)

(ii) Pradhan Mantri Gramodaya Yojana (Gramin Awas)

(iii) Pradhan Mantri Gramodaya Yojana-Rural Drinking water project.

(iv) Pradhan Mantri Gram Sadak Yojana (PMGSY)

(v) Autyodya Anna Yojana.

(vi) Jai Prakash Rozgar Guarantee Yojana (JPRGY).

(vii) Valmiki Ambedkar Awas Yojana (VAMBAY).

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