Fiscal policy is that part of Government policy which is concerned with raising revenues through taxation and other means along with deciding on the level and pattern of expenditure it operates through budget. However, generally the expenditure exceeds the revenue income of the Government. In order to meet this situation, the Government imposes new taxes or increases rates of taxes, takes internal or external loans or resorts to deficit financing by issuing fresh currency.
If the government spends more than it receives it runs a deficit. To meet the additional expenditures, it needs to borrow from domestic or foreign sources, draw upon its foreign exchange reserves or print an equivalent amount of money. This tends to influence other economic variables.
On a broad generalisation, excessive printing of money leads to inflation. If the government borrows too much from abroad it leads to a debt crisis. If it draws down on its foreign exchange reserves, a balance of payments crisis may arise. Excessive domestic borrowing by the government may lead to higher real interest rates and the domestic private sector being unable to access funds resulting in the „crowding out? of private investment.
Various instruments of Fiscal Policy are:-
- Reduction of Govt. Expenditure
- Increase in Taxation
- Imposition of new Taxes
- Wage Control
- Public Debt
- Increase in savings
- Maintaining Surplus Budget
- Increase in Imports of Raw materials
- Decrease in Exports
- Increase in Productivity
- Provision of Subsidies
- Use of Latest Technology
- Rational Industrial Policy
Taxation policy of the government has witnessed major changes. In the last ten years, there has been considerable growth in direct tax collection. The collection has increased from 33.8% in 1999-2000 to 55.5 % in 2008-09. GDP-tax ratio has also been improved from 2.97% in 1999-2000 to 16.6% in 2015-16. Direct tax collection has been dramatically improved because of the following initiatives taken by the government; Moderate tax rates have been structured in order to eradicate vagueness in tax structures Information technology has been implemented in income tax departments in order to deliver services like e-filing of returns, electronic tax collection reporting, issue of refunds etc. This measure has improved functional efficiency of the department; Tax administration has been improved so that deterrence levels may be enhanced and better tax services may be provided.
The Fiscal Responsibility and Budget Management Act or the FRBM Act, 2003 is an Act mandating Central Government to ensure intergenerational equity in fiscal management and long term macro-economic stability. The Act also aims at prudential debt management consistent with fiscal sustainability through-
- Limits on the Central Government borrowings, debt and deficits,
- Greater transparency in fiscal operations of the Central Government
- Conducting fiscal policy in a medium term framework and
- Other matters connected therewith or incidental thereto