What is meant by Fiscal Policy?
Fiscal policy is the name given to the government's policy regarding its revenue and expenditures. The government is an important service provider to the economy, incurring expenses on administration, development services, defence and other heads. In order to finance these operations, the government needs to generate revenue through taxation and other non-tax means like borrowing. Its policies regarding these operations is called fiscal policy. Since the operations of the government have a significant impact on the economy, it is important for the government to enunciate its intentions in a well formulated fiscal policy statement. One such statement made each year is the Budget presented by the Finance Minister of India.
What kind of fiscal policies are possible?
Fiscal policy can be expansionary or contractionary. If the government intends to increase its expenditures in order to, say, give a fillip to the economy, then it termed as expansionary. It may lead to an increase in money supply, inflation in the short run, increase in the output of goods and services, and lower unemployment. If expansionary policy is followed at a time when the domestic economy is not performing too well, say there is high unemployment and low growth, then it is termed as counter-cyclical.
A contractionary fiscal policy does the opposite. It seeks to curtail government expenditure, keep deficits to a minimum, and prevent an increase in money supply. This could be followed at a time when the economy is said to be 'overheating': when all indicators in the economy are pointing upwards, interest rates are falling, and investment is booming, then a such a counter-cyclical contractionary policy seeks to add a modicum of caution in a bullish environment.
What is the budget?
THE core of the budget is called the Annual Financial Statement. This is the main budget document. Under article 112 of the constitution, a... [continues]
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