ECONOMICS

Research Paper Topic- Fiscal Policy and its Impact on the Indian
Economy
 ECONOMICS

TABLE OF CONTENT

Serial No. TOPIC Page No.

1. ABSTRACT 3

2. INTRODUCTION 3

3. RESEARCH QUESTION 4

4. HYPOTHESIS 4

5. LITERATURE REVIEW 4-5

6. CONCEPT OF FISCAL POLICY 6-7

7. OBJECTIVES OF INDIAN FISCAL POLICY 7-9

8. IMPACT OF FISCAL POLICY ON INDIAN 10-12

ECONOMY

9. FINDINGS AND SUGGESTION 13-15

10. CONCLUSION 15

11. BIBLIOGRAPHY 16
 ECONOMICS

ABSTRACT

The administration's decisions about the total amount of governmental expenditures or taxes are
referred to as fiscal policy. In the longer term, fiscal policy has an impact on savings,
investments, and development. Fiscal policy largely influences aggregate demand in the near
run. In this research paper we have discussed about the objectives of fiscal policy and its role in
the development of Indian economy.

Keywords- Fiscal Policy, Economy, Capital account, Current account, Inflation, Unemployment

INTRODUCTION

The concept "fiscal policy" relates to the administration's taxation and expenditure, suppling and
leasing, and purchase and sale operations. The role of fiscal policy in influencing economic
patterns, whether in pricing or hiring, revenue creation or allocation, is a phenomena of the
previous 60 years. In previous generations, government activities were driven by the idea of
noninterference and stable finances with minimal taxation and little expenditure.

Asper Arthus Smithies, “Fiscal Policy is a policy under which the government uses its
expenditure and revenue program to produce desirable effects and avoid undesirable effects on
national income, output and unemployment.” To put it another way, fiscal policy relates to how
governments expend, tax, invest, and control liabilities in order to achieve and sustain economic
growth. The administration of sovereign India has depended largely on fiscal policy to achieve
socioeconomic goals from its inception.

Fiscal policy is the usage of governmental earning collected (mostly taxes) and spending to
affect the economic sector. The sum of taxes and government spending that the government
adjusts has an impact on aggregate demand for economic activities. Throughout the period of the
volatility, fiscal policy will be used to stabilize the economic growth. The basic foundation of
fiscal policy is tax strategy, spending strategy, investment or disinvestment strategies, and deficit
or overflow control. Economic policy is highly important since the state has a significant amount
of accountability for appropriately distributing income and spending.
 ECONOMICS

RESEARCH QUESTION

1. What are the objectives of Fiscal policy?

2. What are the tools used to implement the Fiscal policy?
3. How fiscal policy helps in the development of Indian Economy?

HYPOTHESIS

 Fiscal policy has a great impact on Indian Economy.

LITERATURE REVIEW

( RABIA NAJAF, 2016) The primary study examines the influence of fiscal policies on India's
growth in the near and longer term. There is indeed a strong relationship in both fiscal policy and
the economic system of any nation, and the results indicate that there is a long - term relationship
between fiscal policy and the economy of India, with market volatility among the factors. Thus,
it indicates that fiscal policy really does have a long run effect on the economic development.

( UPINDER SAWHNEY, 2018) Fiscal contraction combined with a macroeconomic growth job
can be a powerful driver for the shift to a revolutionary innovation economic sector. Fiscal policy
should strive for fiscal consolidation that considers the present commercial and societal
framework and builds its content appropriately, rather than focusing solely on quantitative
objectives. This constrains and confines growth of policies, preventing the national state's role in
advancement from emerging in the pursuit of budgetary equilibrium. However, through period of
acute budgetary hardship, a shortage of revenue generation resulted in a significant reduction in
 ECONOMICS

upfront investment. Increasing capital spending be combined with organizational changes to

establish an appropriate socioeconomic capital structure for delivering further development push.
Authorities must aim for a particular level of fiscal equilibrium before enacting fiscal regulations
to ensure long-term monetary sustainability.

( SRINIDHI.R, RAGU BALAN.P, 2018) Fiscal policy that promotes economic progress,
financial sustainability, and societal fairness, is accomplished when regulatory measures such as
public spending, tax, lending, and imbalance funding are employed efficiently. Despite the fact
that India's economic strategy has flaws, there is a pressing need to make it more logical and
economic expansion. Macroeconomic policy's effectiveness relies on prompt action and good
management during its execution.

( N R BHANUMURTHY, 2019) The federal administration and provincial authorities must

work together to put the economic system on a budgetary course that is both viable and fair.
Given India's present severe downturn in total economic development, the goal of strong
development with a fiscal consolidation trajectory is even more important. Restrictions on
revenue deficit and fiscal deficit objectives were set with the goal of achieving sustainable
development in fiscal policy and money management while maintaining fiscal stability. It
suggests that India use the community debt to GDP ratio as a moderate anchor for fiscal policy,
rather than the existing structure, which specifies the fiscal policy route and uses the budget
deficits as a moderate goal of fiscal policy.
 ECONOMICS

CONCEPT OF FISCAL POLICY

Fiscal refers to everything that has to do with public funds or taxes. Fiscal policy is a forecast of
how much taxes and administrative expenditure will affect the economy. Either it will be
expanding or contracting. It is utilized to drive a nation's economic priorities, together with RBI
regulation that impacts a nation's supply of money.

The fiscal sector is associated with the administration of public spending, the evaluation of the
public economic needs, money generating mechanisms, and, eventually, the amount and
structure of public spending. The purposeful utilization of state spending in the manner of
adjustments in taxes and spending to accomplish specific macroeconomic objectives is referred
to as fiscal policy.

When the economy is in a downturn, an expansionary fiscal policy is implemented. To stimulate

commercial development, the government has reduced taxes. A contractionary fiscal policy, on
either hand, aims to control inflation by decreasing the concentration of cash by increasing
taxation and cutting expenditure.

The national budgeting is a forecast of the country's income and expenditures for a certain fiscal
year. The current and capital accounts are used to present the national budget. The current
accounts keep track of all receivables and payables linked to the government 's existing revenue
and spending. Receipts of current account's include both tax income and non-tax money.

Government spending on the current account relates to recurrent expenses linked to economical
operations that do not result in the development of useful or revenue resources. All asset-related
activities are processed in the capital account. Any capital account activity generates be it
holdings or debts.

Capital account revenues basically reflect government loans, and each capital account operation
raises the administration's loan payback responsibilities. All constructive or revenue activities are
recorded in the capital account expenditures.

Fiscal policy has generally been focused with determining the state's revenue and spending
policies. However, as years has passed, fiscal policy has become increasingly important in
achieving rapid economic growth. The administration's fiscal policy aids in the creation of an
 ECONOMICS

equilibrium between income received and income expansion. When the government gets more
money than it uses, there is a surplus. When the government's spending exceeds its revenue, it is
certain to fall into a deficit. As a result, during the development of fiscal policy, the government
does not expect to run a shortfall or an excess.

Changes in tax rates can impact aggregate demand, as per Keynesian economics. The objective
of the fiscal cycle in the corporate world is to keep the country's economic growth stable. These
are two crucial methods for controlling the structure of taxes. These instruments have had an
impact on aggregate demand and savings. Fiscal policy, as per William, may be deduced from
monetary policy. The primary goal of fiscal policy is to manage with taxes, whereas monetary
policy aids in the regulation of the monetary base. Fiscal policy may be divided into three
categories: neutral fiscal policy, expansionary fiscal policy and contractionary fiscal policy . The
business cycle is the path to success.

OBJECTIVES OF INDIAN FISCAL POLICY

Considering the administration's increased engagement in the nation's developing efforts in

recent times, fiscal policy has become more important in India. Below are few of the main fiscal
policy goals pursued by the Indian government:

1. Economic Development Acceleration:

Ever since commencement of the Initial Five-Year Strategy, the Government of India's financial
activities have been driven by the goal of economic growth. The government has specified the
desired levels of productivity in the nation's Gross National Product in succeeding five-year
strategies. Strategies include not just investing in the nation's wealth development in the manner
of factory, apparatus, reservoirs, highways, electrical plants, and other hard property, but also
social assets such as teaching, healthcare, and family service. Strategies also specify how the
funds for the projected invested capital will be raised. The most important weapon for promoting
economic development is fiscal policy.
 ECONOMICS

2. Motivation to do savings:

In lesser established nations like India, capital development involves increasing the stock of
deposits in the economy. Several exclusions from direct and indirect taxation are used in fiscal
policy to encourage savings in the economy. Plans such as depreciation allowances and
development refunds stimulate saves in business sector.

3. Inevitable Resource Direction:

Fiscal policy aims to encourage the allocation of funds to important markets and industries while
prohibiting their usage for non-essential economic activity through the usage of tax, grants, and
controls.

4. Income Redistribution:

In its strategic plans, the Government of India has prioritized the elimination of earnings and
asset disparities. Progressive tax, focused on the fiscal concept of "capacity to pay," is an
important key of fiscal policy.

5. Job Creation:

It is the root of the nation's impoverishment. The employment opportunities through different
workplace generating programs have been a significant goal of the Indian govt 's fiscal strategy.

6. Price Constancy:

For real economic progress, steady pricing is required. On pricing, the path of economic growth
through a shortfall finance-based investing plan is visible. Controlling rising inflation in the
market has been a primary goal of the Government of India's financial policy in overall and fiscal
policy specifically.
 ECONOMICS

7. Export Promotion and Import Substitution:

The fiscal policy of the Government of India has been designed to safeguard local industries
from international rivalry while also encouraging exports. Recent fiscal policy initiatives have
gain put more heed to import substitution and stressed export promotion, with a concentration on
freedom.

8. Raising the National Income:

The goal of economic policy is to increase a nation's worth. This is frequently because fiscal
policy encourages capital development. This leads to monetary development, which raises the
nation's GDP, per person income benefit, and overall worth.

9. Infrastructure Development:

The government has set a high priority on building infrastructural changes in order to stimulate
sustainable growth. Taxing is a fiscal policy instrument that creates money for the government.
Infrastructure development is funded using a portion of the tax budget. As a result, all areas of
the economic sector are benefited.

The tools used by the policy makers to bring all these objectives into action are:

 Government spending is being cut.

 Tax will be raised.
 Additional taxes are being imposed.
 Controlling Wages
 Investments have increased.
 Exports are down.
 Efficiency Improvements
 Incentives are provided.
 Using the Most Up-to-Date Technologies
 ECONOMICS

IMPACT OF FISCAL POLICY ON INDIAN ECONOMY

According to economics, Fiscal policy is the country's use of income and spending gathering to
impact the economy. Fiscal policy will interact with the most important type of small-scale
strategy, monetary policy.

 The primary influence of fiscal policy or modifications in government spending and taxes
on the economy's tier and usage of tax and government spending factors.
 The primary effects of aggregate demand and productivity levels.
 The distribution structure of resources
 The revenue allocation

A study was done on how fiscal policy affects the Indian economy and it states that – “In long
run a relationships exist; 100% increase in Total Government Spending will improve the GDP by
59% in Indian economy. Total tax revenue will increase the GDP by 57%. In the short run, there
is significant impact of fiscal policy variables on economic growth in Indian as economy grows
with the expansionary fiscal policy in the short run. According to the results, when an external
shock affects the total government spending level, Indian economy is strong enough to handle
the external shocks which affect the country’s spending level.”

So now we will be discussing few of the impacts that fiscal policy has made on Indian economy:

1. Increase Job Possibilities:

Because population growth in less advanced nations is quite rapid, the goal of economic policy
in these countries is to generate large amounts of spending that will help to increase work
possibilities. Typically, underdeveloped economies are harmed by the government. The

There are two forms of unemployment:

(I) “Cyclical unemployment”

(II) “Disguised unemployment”

External factors generate cyclical unemployment, which is exacerbated by monetary policy. In

developing nations, there are a variety of issues to consider. Raw resources are primarily
exported from these nations. When demand for these raw resources diminishes due to alternating
 ECONOMICS

depressions, developing nations are forced to deal with a condition of flux in their core sectors.
To address this type of unemployment, the government may boost public spending.

As a result, spending on importation failed to create jobs within the nation. Noticeable consumer
spending might increase expenses rather than increase productivity and jobs. It is due to the fact
that manufacturing capacity in developing nations is limited. It's not up to the task of fulfilling
growing demands. As a result, economic policy should be aimed towards modernizing and
diversifying the economy. It means that governmental funds should be focused on the
establishment of new sectors, the expansion of private businesses, and the agricultural sector.
Furthermore, the government should provide tax breaks and exemptions. Vacations, bonuses,
and incentives, among other things, may help to reduce unemployment.

2. Stabilization of the Economy

In emerging nations, economic policy also plays the function of ensuring sustainable inner and
exterior financial balance. A growing nation is, in generally, subject to global cyclical swings.
These nations mostly exporting basic products while importing processed and capitalized goods.
Economic policy, on the other hand, should be considered from a broad viewpoint in order to
mitigate the effects of worldwide cyclical oscillations. Diversity of all aspects of the economy
should be a goal. Throughout a recession, a development program funded by deficits yields
positive effects. Injecting more purchasing power would almost certainly lead to rising inflation,
which could be managed with preventative measures. Instead, such a strategy should be
accompanied with reasonable budgetary measures.

3. To Promote Socially Beneficial Investment

Fiscal strategy in developing nations supports investments in meaningful terms that are seen
morally and financially beneficial. This recommends optimal investing that supports economic
growth while avoiding ineffective and inefficient expenditure. In summary, the goal of fiscal
strategy should be to encourage investing in socioeconomic expenses such as mobility,
communications, vocational schools, medical care, and environmental protection. They have a
 ECONOMICS

proclivity for increasing production and expanding the business to entice other economies.
Simultaneously, inefficient investing is curtailed and redirected towards profitable and socially
beneficial endeavors.

4. Subsidies in Production and Consumption

In emerging economies, fiscal mechanisms are also used to provide basic foodstuffs and
manufacturing materials to the needy. Public services such as the community distributing plan,
subsidized strategy, staple food procurement, promotional services for manufacturers, inputs
offering programs, and so on are all aimed at assisting the weaker sectors to improve their
productivity and therefore improve their economic benefit. Within India, for example, numerous
poverty reduction programs such as “IRDP”, “NREP”, “RLEGP”, and others are aimed at
improving the situation of the poorest parts and creating long-term communal resources so that
global and per capita monetary benefits rise over period.
 ECONOMICS

FINDINGS AND SUGGESTIONS

In the economy of India, fiscal policy is extremely crucial. Because it is beneficial in utilizing
assets in the most efficient manner, eliminating disparities, utilizing profit in the most efficient
allocation, and also giving economic business rewards to the non-public sphere, the
administration is capable of achieving sustainable growth of the nation.

Government expenditures are entirely covered by income, and the final financial result has no
effect on the quantity of economic growth. Government expenditure of exceptional tax income is
associated with an expansionary approach of economic policy. A contractionary monetary policy
is implemented when the expenditures made by government are more than the revenue.

Some of the graphs depicting the current statistics-

GOVERNMENT REVENUE-

GOVERNMENT SPENDING-

1
https://tradingeconomics.com/india/government-revenues
 ECONOMICS

FISCAL EXPENDITURE-

As a suggestion, one of the really important aims of the Indian government's economic strategy
is to attain rapid financial growth. To accomplish such economic growth inside the nation, the
nation's financial strategy must choose two goals:

2
https://tradingeconomics.com/india/government-spending
3
https://tradingeconomics.com/india/fiscal-expenditure
 ECONOMICS

1. To increase the rate of constructive investing in each of the nation's governmental and
private sectors.
2. To increase optimum and median saving rates to mobilize sufficient financial means for
investing in the governmental and private segments of the economic sector.

CONCLUSION

As a result, fiscal policy entails two distinct but connected choices: governmental spending and
taxation and structures. It is the most important factor in preserving high employment in the
absence of inflation tendencies in the economic sector. It has an impact on a country's economic
stability through its different mechanisms. The Indian government's fiscal strategy has been
highly effective in a number of areas, including mobilizing assets for socioeconomic growth,
boosting capital accumulation creation, expanding handicraft and smaller companies, and
decreasing illiteracy.

The importance of fiscal policy in India is as difficult as it is vital. India has the onerous job of
increasing financial development in order to decrease poverty in a brief period, even as they
confront more ambiguity regarding important components of their fiscal policy, such as the tax
revenue, as a result of globalization. Moreover, the execution of fiscal policy is frequently
constrained by rising constraints from existing regulation and currency exchange frameworks, as
well as exterior characteristics such as tax rates in rival nations. It would be hard for an emerging
nation to have business taxes that vary significantly from those of its rivals, or to overburden
fiscal system with large fiscal deficits that may contribute to inflation to a severe decline of the
currency exchange rate. Nonetheless, fiscal policy bears a significant burden.
 ECONOMICS

BIBLIOGRAPHY

1. Sawhney, U. (2018). An Analysis of Fiscal Policy in an Emerging Economy: Innovative

and Sustainable Fiscal Rules in India. Millennial Asia, 9(3), 295–317.
https://doi.org/10.1177/0976399618805629
2. Yadav, S., Upadhyay, V., & Sharma, S. (2012). Impact of Fiscal Policy Shocks on the
Indian Economy. Margin: The Journal of Applied Economic Research, 6(4), 415–444.
https://doi.org/10.1177/0973801012462171
3. Najaf, Rabia, Impact of Fiscal Policy Shocks on the Indian Economy (November 2016).
International Journal of Case Studies, Vol. 5, Issue 11, 2016
4. N R Bhanumurthy, Fiscal Policy, Devolution and Indian Economy, (26-December-2019)
5. Srinidhi R, Ragu Balan.P, A Role Of Fiscal Policy Impact On Indian Economy: An
Overview with case study, International Journal of Pure and Applied Mathematics,
Volume 120 No. 5 (2018)
6. The Financial Express What is Fiscal Policy in India?
https://www.financialexpress.com/what-is/fiscal-policy-meaning/1771755/
7. Fiscal Policy in India: Objectives, Features, Taxation Policy, Critical .
https://www.microeconomicsnotes.com/government-policies/fiscal-policy/fiscal-policy-
in-india-objectives-features-taxation-policy-critical-evaluation-and-recent-
developments/16331
8. Role of fiscal policy in India. https://www.indiastudychannel.com/resources/161774-
Role-of-fiscal-policy-in-India.aspx
9. Fiscal Policy of India | Policies | Economics.
https://www.economicsdiscussion.net/india/fiscal-policy-india/fiscal-policy-of-india-
policies-economics/27082