FISCAL POLICY
Fiscal policy deals with the taxation and expenditure decisions of the government. It refers to changes in government expenditure and revenue to influence the level and pattern of economic activity. The Indian Constitution provides the overarching framework for the country’s fiscal policy. India has a federal form of government with taxing powers and spending responsibilities being divided between the central and the state governments as well as a third tier of government at the local level. But the taxing abilities of the states do not necessarily commensurate with their spending responsibilities. Some of the centre’s revenues need to be assigned to the state governments on basis of the recommendations of the Finance Commission (FC) every five years. The Constitution also provides that for every financial year, the government shall place before the legislature a statement of its proposed taxing and spending provisions for legislative debate and approval. This is referred to as the Budget. The central and the state governments each have their own budgets. Besides the annual budgetary process, since 1950, India has followed a system of five-year plans for ensuring long-term economic objectives. The main fiscal impact of the planning process is the division of expenditures into plan and non-plan components. The plan components relate to items dealing with long-term socio-economic goals and often relate to specific schemes and projects. These are usually routed through central ministries to state governments for achieving certain desired objectives. On the other hand, the non-plan expenditures broadly relate to routine expenditures of the government for administration, salaries, and the like. Taxes are the main source of government revenues. These can be direct as well as indirect which can be collected at central, state as well as local levels.
India has a federal form of government and therefore, the responsibilities and rights are also shared between the centre, states and other levels of the polity and administration. This is also true for fiscal management of the country. 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. Like any developing economy, India too has a long history of running huge fiscal deficits. The relationship among fiscal deficit, debt and output growth and other macro targets is a much debated issue. However, the proponents of Keynes propagate the idea that high fiscal deficits are not unusual for developing economies as governments use fiscal deficits to keep aggregate domestic demand at high levels in order to generate growth and employment. But lately, the government of India is trying to control the fiscal deficit and the debt under the Fiscal Responsibility and Budget Management Act. This has led to improvements in deficit indicators in the recent time periods. Same can be observed at the state level. At the state level, it has been found that while most of the debt sustainability indicators have shown significant improvements in the latest phase as compared to the 80s and 90s, the debt repayment capacity and interest burden indicators still lag behind as compared to their positions in earlier time periods. Still, the fiscal position of India can be stated to be moving on the path of improvement.
Instruments of Fiscal Policy in India
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. The main instruments of the fiscal policy include, tax policy, expenditure policy, investment or disinvestment strategies and debt or surplus management. The taxes are the main source of government revenues. These can be direct taxes and indirect taxes. The direct taxes in India include taxes on personal and corporate incomes, personal wealth and professions are direct taxes. In India the main direct taxes at the central level are the personal and corporate income tax, levied through the Income Tax Act of 1961. Income taxes are levied on incomes from business and professions, salaries, house property, capital gains and other sources (like interest and dividends). Other direct taxes include the wealth tax and the securities transactions tax, estate duty, gift tax, expenditure tax, fringe benefits tax etc. Some of these taxes like the estate duty, fringe benefits etc. no longer exist currently. The state governments are vested with the power to tax agricultural income, land and buildings, sale of goods (other than inter-state), and excise on alcohol. Some states charge a tax on professions. Most local governments also charge property owners a tax on land and buildings.
The indirect taxes are charged and collected from persons other than those who finally end up paying the tax. The current central level indirect taxes are the central excise duty, the service tax, the customs duty and the central sales tax on inter-state sale of goods. The main state level indirect tax is the post-manufacturing sales tax (the value added tax). Similarly, on expenditure side, both the plan and non-plan expenditure is divided among the central, state and local governments. 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. There is now increasing devolution of some powers to local governments at the city, town and village levels.
India has a federal form of government and therefore, the responsibilities and rights are also shared between the centre, states and other levels of the polity and administration. This is also true for fiscal management of the country. 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. Like any developing economy, India too has a long history of running huge fiscal deficits. The relationship among fiscal deficit, debt and output growth and other macro targets is a much debated issue. However, the proponents of Keynes propagate the idea that high fiscal deficits are not unusual for developing economies as governments use fiscal deficits to keep aggregate domestic demand at high levels in order to generate growth and employment. But lately, the government of India is trying to control the fiscal deficit and the debt under the Fiscal Responsibility and Budget Management Act. This has led to improvements in deficit indicators in the recent time periods. Same can be observed at the state level. At the state level, it has been found that while most of the debt sustainability indicators have shown significant improvements in the latest phase as compared to the 80s and 90s, the debt repayment capacity and interest burden indicators still lag behind as compared to their positions in earlier time periods. Still, the fiscal position of India can be stated to be moving on the path of improvement.
Instruments of Fiscal Policy in India
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. The main instruments of the fiscal policy include, tax policy, expenditure policy, investment or disinvestment strategies and debt or surplus management. The taxes are the main source of government revenues. These can be direct taxes and indirect taxes. The direct taxes in India include taxes on personal and corporate incomes, personal wealth and professions are direct taxes. In India the main direct taxes at the central level are the personal and corporate income tax, levied through the Income Tax Act of 1961. Income taxes are levied on incomes from business and professions, salaries, house property, capital gains and other sources (like interest and dividends). Other direct taxes include the wealth tax and the securities transactions tax, estate duty, gift tax, expenditure tax, fringe benefits tax etc. Some of these taxes like the estate duty, fringe benefits etc. no longer exist currently. The state governments are vested with the power to tax agricultural income, land and buildings, sale of goods (other than inter-state), and excise on alcohol. Some states charge a tax on professions. Most local governments also charge property owners a tax on land and buildings.
The indirect taxes are charged and collected from persons other than those who finally end up paying the tax. The current central level indirect taxes are the central excise duty, the service tax, the customs duty and the central sales tax on inter-state sale of goods. The main state level indirect tax is the post-manufacturing sales tax (the value added tax). Similarly, on expenditure side, both the plan and non-plan expenditure is divided among the central, state and local governments. 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. There is now increasing devolution of some powers to local governments at the city, town and village levels.
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