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Fiscal policy

Fiscal policy deals with the revenue and expenditure decisions of the government. Monetary policy, deals with the supply of money in the economy and the rate of interest. In most modern economies, the government deals with fiscal policy while the central bank is responsible for monetary policy. Fiscal policy is composed of several parts. These include, tax policy, expenditure policy, investment or disinvestment strategies and debt or surplus management. Fiscal policy is an important constituent of the overall economic framework of a country and is therefore intimately linked with its general economic policy strategy.


Fiscal policy is an instrument of development. Through fiscal policy government creates and sustains the public economy consisting of the provision of public services and public investment. At the same time it is an instrument for allocation of resources according to the national priorities , redistribution, promotion of private saving and investment and maintenance of stability. Fiscal policy has multi dimensional role. It particularly aims at improving the growth performance of economy and ensuring social justice to people. It influences growth performance of economy in two ways, Fiscal policy and resource mobilization: It affects the growth by influencing the mobilization of resources for development. fiscal policy and allocation efficiency; exercises its influence by improving the efficiency of resource allocation. An efficient and rational allocation of resources will obviously be helpful in raising the rate of economic growth. Fiscal policy and equity


India has a federal form of government with taxing powers and spending responsibilities being divided between the central and the state governments according to the Constitution. The central government is responsible for issues that usually concern the country as a whole like national defence, foreign policy, railways, national highways, shipping, airways, post and telegraphs, foreign trade and banking. The state governments are responsible for other items including, law and order, agriculture, fisheries, water supply and irrigation, and public health. Some items for which responsibility vests in both the Centre and the states include forests, economic and social planning, education, trade unions and industrial disputes, price control and electricity.

The fiscal policy assumes centre stage in policy deliberations as the continuous fiscal imbalances and rising levels of public debt pose risks to the prospects for macroeconomic stability, and accelerating and sustaining growth. All these budgetary deficit reveal fiscal imbalance. Fiscal imbalance & budget deficit result in harmful consequences like mounting inflation, deficit in balance of payment etc. It has also adversely affect the growth of the economy. The government must introduce fiscal correction policies to overcome the deficit budget and fiscal crisis.

Budget deficit
Budget is prepared by the government of India showing the expected receipts and expenditures in the coming financial year. When the government expenditure exceeds revenues, the government is having a budget deficit. Thus the budget deficit is the excess of government expenditures over government receipts (income). When the government is running a deficit, it is spending more than it's receipts. The government finances its deficit mainly by borrowing from the public, through selling bonds, it is also financed by borrowing from the Central Bank. The different types of budgetary deficit are explained

Fiscal Deficit
There are various ways to represent and interpret a governments deficit.A more comprehensive indicator of the governments deficit is the fiscal deficit. This is the sum of revenue and capital expenditure less all revenue and capital receipts other than This gives a more holistic view of the governments funding situation since it gives the difference between all receipts and expenditures other than loans taken to meet such expenditures. Fiscal Deficit = Total Expenditure (that is Revenue Expenditure + Capital Expenditure) (Revenue Receipts + Recoveries of Loans + Other Capital Receipts (that is all Revenue and Capital Receipts other than loans taken)) Fiscal Deficit is a difference between total expenditure (both revenue and capital) and revenue receipts plus certain non-debt capital receipts like recovery of loans, proceeds from disinvestment.

Revenue Deficit
The simplest is the revenue deficit which is just the difference between revenue receipts and revenue expenditures. Revenue Deficit = Revenue Expenditure Revenue Receipts (that is Tax + Non-tax Revenue) The revenue expenditure takes place on account of administrative expenses, interest payment, defence expenditure & subsidies.

Primary Deficit
The fiscal deficit may be decomposed into primary deficit and interest payment. The primary deficit is obtained by deducting interest payments from the fiscal deficit. Thus, primary deficit is equal to fiscal deficit less interest payments. It indicates the real position of the government finances as it excludes the interest burden of the loans taken in the past.

All these budgetary deficit reveal fiscal imbalance. Fiscal imbalance & budget deficit result in harmful consequences like mounting inflation, deficit in balance of payment, etc. It has also adversely affect the growth of the economy. The government must introduce fiscal correction policies to overcome the deficit budget and fiscal crisis. Indias fiscal policy in the phase of planned development commencing from the 1950s to economic liberalisation in 1991 was largely characterised by a strategy of using the tax system to transfer private resources to the massive investments in the public sector industries and also achieve greater income equality. This is partly reinforced by institutional structures like fiscal responsibility legislations and the regular Finance Commissions that mandate the federal fiscal transfer regime. In the future, it appears that the government would focus on tax reforms and better targeting of social expenditures to achieve fiscal consolidation while maintaining the process of inclusive growth.

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Monetised Deficit is the sum of the net increase in holdings of treasury bills of the RBI and its contributions to the market borrowing of the government. It shows the increase in net RBI credit to the government. It creates equivalent increase in high powered money or reserve money in the economy.