FISCAL POLICY

 FISCAL POLICY   AND WHY ITS REQUIRED

·        Fiscal Policy to maintain equity, stability and growth, in an economy.

Fiscal policy is the policy under which the government uses the instruments of public spending, taxation and public borrowing to achieve various objectives of economic policy. These are mainly three instruments of fiscal policy i.e. taxation policy, public expenditure policy and public debt policy. All these instruments must work together in right balance sound and effective.

·        Fiscal policy and economic stability:

Stability in an economy can be maintained by restricting the fluctuation to occur. The economy should be saved from inflation and depression. 

FISCAL POLICY DURING INFLATION

·        Taxes- Inflation is a situation of persistent rise in price level due to excess of demand over supply when there is excessive money in the economy. Taxes should be raised and some more new taxes should be imposed. This should done to reduce the purchasing capacity of the people and demand to restrict the excessive flow of money on the economy.

·        Public Debt- During inflation when there is excessive flow of money in the economy leading to an increase in aggregate demand over supply, the govt. should float out more bonds, debenture to attract surplus money. The bonds and debentures nearing their maturity date should be postponed for an indefinite period. In this ways inflationary pressure can be checked by public debt.

·        Public Expenditure- During inflation when private expenditure goes up the govt. should lower its own expenditure for a temporally period of time only i.e. the govt. should not undertake public utility works because there is already excessive flow of money in the economy. 

FISCAL POLICY DURING DEPRSSION

·        Taxes- Depression or Deflation is a situation of persistent fall to price level due to excess of supply over demand when there is lack of money supply in the economy. Taxes should be reduced to the maximum and unnecessary taxes should be slashed. This is one to increase the purchasing capacity of the people by raising demand to the level of supply and increasing the flow of money and increasing the flow of money in an economy.

·        Public Debt- During recession or depression when there is lack of money supply in the economy there is a fall in aggregate demand. The govt. should not issue new bonds and debenture, those bonds which are likely to mature should be repaid immediately. There is done to allow more money to remain in people’s hands so that their purchasing capacity can increase thereby leading to a rise in demand to the level of supply.

·        Public Expenditure- During depression when there is lack of money supply in the economy, which proves that private expenditure has gone down, then the govt. should increase its owm expenditure and start undertaking more of public utility works to create employment opportunities in a society. In this way employment would be created and income would be generated to many houses thereby raising the flow of money in an economy. 

FISCAL POLICY &EQUITY

Equity is the prime objective of the government in developing countries. In brief equity means equitable distribution of income and wealth in a society with the aim of reducing inequalities of income. It is done in the following manner:

·        The tax system should be made progressive so that greater burden can be imposed on the rich and the poor can be exempted from taxation. Direct taxes should be made progressive, in this way the tax structure would be justified.

·        Indirect taxes should also be made progressive i.e. greater taxes should be imposed on luxuries and the necessities should be exempted from taxation totally.

·        Taxes should be imposed heavily on big business houses and those in big cities and town and the money thus collected can be utilized in giving subsidies to the industries in backward areas. In this way regional disparities can be ended.

·        Public expenditure of the govt. should spend the money particularly on these programmers and projects which can benefit the lower income groups, this includes expenditure on social services like education, sanitation, and medical, public health etc. and these services should be provided free cost in order to provide greater benefits to the lower groups. The govt. should also spend on provision of social security by giving pensions, unemployment benefits, and scholarship stipends to upgrade the standard of the lower income groups and reduce the inequalities in a society.

·        The govt. should also provide incentives by giving subsidies to the entrepreneurs to set up industries in backward and remote areas of the country. This would reduce the inequalities and regional disparities to a great extent. 

FISCAL POLICY &ECONOMIC GROWTH

Fiscal policy can be used efficiently in accelerate the rate of economic growth so as to increase the real N.Y. in the country. Fiscal policy is implemented In the following manner.

·        Taxation and public borrowing policy should be implemented simultaneously in an integrated manner to induce saving and investment to a society.

·        Tax relief and subsidies should be granted by the govt. to the entrepreneurs to stimulate investment and capital formation, this will have a positive effect on the economic growth of the country.

·        Special tax holidays and subsidies of other kinds should b given to the entrepreneurs to set up industries in backward region so that regional disparities can be reduced to minimum. With the growth of industries the country’s prosperity is assured.

·        The govt. should spend more money on agriculture and industries development and to strengthening of the infrastructure like provision of power, transport and communication facilities, irrigation etc.

·        The govt. should spend more money in developing basic and key industries so that the infrastructure base in strengthened and the scope for industrialization on a massive scale can be increased.

1.)    What is deficit financing?

Ans.) Deficit financing in its literal sense means financing the deficit in the budget which is caused due to excess of expenditure over income. The word deficit financing has been interpreted differently in U.S.A, the deficit in the budget can be financed even with the help of public debt whereas public debt. Is totally outside the preview of deficit financing in india.

In India the deficit in the budget can be financed by the govt. in the following ways:

a.)    Running down the cash balance in the R.B.I.

b.)    Running down the cash balance from the state treasuries.]

Resorting to the printing press i.e., asking R.B.I to print new paper money of bigger denominations.