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10 min read

Notes

Fiscal Policy

Definition/Introduction

Fiscal Policy is defined as the use of government spending and taxation to influence the economy. It is a critical tool used by the government to manage economic fluctuations and achieve macroeconomic objectives.

Constitutional Provisions

  • The Constitution of India provides for the fiscal powers of the Union and State Governments under Articles 265 to 300.
  • Article 265 - No tax shall be levied or collected except by authority of law.
  • Article 266 - Consolidated Funds of India and States.
  • Article 270 - Taxes levied and collected by the Union but assigned to the States.

    • Historical Evolution

  • The concept of Fiscal Policy gained prominence during the Great Depression in the 1930s, where governments realized the need for intervention in the economy.
  • Post-independence, India adopted a mixed economy model, where both the public and private sectors play a crucial role.

    • Classification/Types

  • **Expansionary Fiscal Policy**: This policy is used during periods of recession where the government increases its spending or decreases taxes to stimulate economic growth.
  • **Contractionary Fiscal Policy**: This policy is applied when the economy is overheating, involving a reduction in government spending or an increase in taxes to curb inflation.

    • Important Provisions/Features

  • The Union Budget is presented annually by the Finance Minister, which outlines the government's fiscal policy for the upcoming financial year.
  • Fiscal Responsibility and Budget Management (FRBM) Act, 2003 aims to ensure fiscal discipline by the government.

    • Landmark Judgments

  • **Keshavananda Bharati case** - 1973: The Supreme Court ruled that the basic structure of the Constitution cannot be altered by amendments, impacting fiscal policies indirectly.
  • **Minerva Mills case** - 1980: Reinforced the basic structure doctrine that has implications on fiscal policies.

    • Amendments

  • The 73rd and 74th Constitutional Amendments (1992) provided for the establishment of Panchayati Raj institutions, enhancing local self-governance and fiscal decentralization.

    • Comparison Tables

    | Feature | Expansionary Fiscal Policy | Contractionary Fiscal Policy |

    | ------- | -------------------------- | ---------------------------- |

    | Objective | Stimulate economic growth | Curb inflation |

    | Government Action | Increase spending, decrease taxes | Decrease spending, increase taxes |

    | Economic Condition | Recession | Overheating economy |

    UPSC Exam Focus

  • Understanding the objectives and types of Fiscal Policy.
  • The significance of the Union Budget and its implications on fiscal policy.
  • Recognizing the role of the FRBM Act in maintaining fiscal discipline.
  • Familiarity with landmark judgments that influence fiscal policies.

    • ---

    Key Concepts

    Fiscal Policy - It refers to the use of government spending and taxation to influence the economy.

    Objective of Fiscal Policy - To achieve economic stability, full employment, and equitable distribution of income.

    Types of Fiscal Policy - Expansionary and Contractionary Fiscal Policy.

    Expansionary Fiscal Policy - Involves increasing government spending and/or decreasing taxes to stimulate the economy.

    Contractionary Fiscal Policy - Involves decreasing government spending and/or increasing taxes to cool off an overheating economy.

    Budgetary Process - The Union Budget is presented annually by the Finance Minister in the Parliament.

    Fiscal Deficit - It occurs when the total expenditure exceeds the total revenue, excluding borrowings.

    Revenue Deficit - It occurs when the revenue expenditure exceeds the revenue receipts.

    Important Facts

    • •[2003] Introduction of FRBM ActAimed at ensuring fiscal discipline by setting targets for the fiscal deficit.
    • •[2020-21] Fiscal Deficit target set by the governmentThe target was set at 3.5% of GDP as per the Economic Survey.
    • •[Measured annually] Revenue DeficitWhen revenue expenditure exceeds revenue receipts, indicating a need for fiscal correction.
    • •[Annually] Union Budget presentationThe Finance Minister presents the budget in February, outlining fiscal policies for the upcoming year.
    • •[Annually] Economic Survey releaseThe Economic Survey is presented just before the Union Budget, providing an overview of the economy.
    • •[2020] Impact of COVID-19 on Fiscal PolicyThe pandemic led to increased government spending to support the economy, impacting the fiscal deficit.

    Mnemonics & Memory Tricks

    Types of Fiscal Policy

    E for Expansionary, C for Contractionary - Remember 'E' comes before 'C'.

    Constitutional Articles related to Fiscal Policy

    265-270 - Remember 2-6-5-2-7-0, to recall the tax authority and consolidated funds.

    Fiscal Deficit and Revenue Deficit

    FDR - Fiscal Deficit Revenue, where Revenue is less than Expenditure.