Fiscal policy: Tool for economic stability and growth

In the realm of economics, fiscal policy plays a pivotal role in shaping a country's economic landscape. While monetary policy falls under the purview of the Reserve Bank of India (RBI), fiscal policy is primarily in the domain of Finance Ministry. 

Fiscal policy deals with following activities:

• Revenue management

• Expenditure management

• Borrowing strategies

All these activities are aimed at mobilizing resources, fostering growth, reducing inequality, and stabilizing the economy. In this article, we delve into the intricacies of fiscal policy. 

The Union budget is prepared in two heads namely revenue account and capital account of the budget. 

Revenue account contains revenue receipts and revenue expenditure while the capital account contains capital receipt and capital expenditure. Let's see what these accounts actually mean. 

Revenue receipts: Revenue receipts are the day-to-day earnings of a government, and the source these income can be from taxation or from the services the government provides i.e. Tax receipts, Non-tax receipts.

Tax Receipts:  

• Direct Taxation: Direct taxes are those levied directly on individuals or entities, and the burden of payment cannot be shifted to others. Examples include income tax and corporate tax. Direct taxation is often considered progressive, meaning that as income levels rise, the tax rate also increases, thus contributing to reducing income inequalities within a country. 

• Indirect Taxation: Indirect taxes, on the other hand, are imposed on goods and services, and the burden of payment can be shifted to others. Examples include excise duty, customs duty, and the Goods and Services Tax (GST). 

India's tax structure comprises a mix of direct and indirect taxes levied by both the central and state governments. The central government imposes taxes such as income tax, corporate tax, capital gains tax, securities transaction tax, excise duty, customs duty and GST.

Non-Tax receipts:

The amount government collects from fees, fines, dividend, interest from loans, grants from international organisations and such other day-to-day receipts are accounted under non-tax receipts.

 

Revenue Expenditure: These are the day-to-day expenses of the government. These expenses are classified into developmental and non-developmental expenses. 

• Developmental expenses: Health, education, R&D, transport facilities.
• Non-developmental expenses: Salaries and pensions, maintenance of law and order, defence etc.

Revenue deficit = Revenue expenditure - Revenue receipt

A deficit in revenue is not a good sign since it indicates that an entity has to borrow in order to run its day-to-day activities. It's similar to our day-to-day life, it's hard if we have to borrow from someone just to meet the ends need.

Revenue management forms a crucial component of fiscal policy, providing the necessary resources for government operations and public welfare initiatives.

The capital budget of the government show its asset and liabilities.

Capital Expenditure: The expenditure of the government in loaning states, UTs, repayment of past loans, infrastructure creation and any other such activities used for capital creation. 

Capital Receipts: The receipts of government from Disinvestments of PSUs, Sale of its assets, Recovery of past loans, Borrowings or any other such activities.

Revenue expenditure are made to keep the business running, while the capital expenditure is made to grow the business. It's similar to our life, it's okay to borrow in a limit to purchase a new house, land or any other asset. 

Fiscal deficit represents the total borrowings of a government, means it subsumes revenue deficit too. 

It's represented as Total Expenditure - Revenue Receipt - Non-Debt creating capital receipts. 

The FRBM Act mandates capping fiscal deficit at 3% of GDP. However, government priorities like boosting growth post-COVID and increasing welfare spending present challenges for fiscal consolidation. Impacts of economic shocks also constrain deficit reduction. In conclusion, prudent fiscal management balancing spending and resource mobilization is crucial for macroeconomic stability and for realizing broader developmental goals in India. Fiscal policy measures directly influence citizens' welfare and overall economic conditions. Next time, when you see the budget check our revenue deficit, fiscal deficit, what percent of fiscal deficit are interest payments and their trend from past years.