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Indian Economic Policy

Notes the consumer demand and, therefore, a contractionary effect on the economy. This proves helpful
in reducing the inflationary pressure in the economy.
(b) Discretionary Changes in Government Expenditure : The discretionary changes in the
government spending include change in (i) the size of the government expenditure, (ii) the
pattern of government expenditure, (iii) the methods of financing government expenditure,
(iv) transfer payments (e.g., subsidies, old age pensions, unemployment relief, etc.), (v) overall
budgetary surplus and deficit, and (vi) the methods of deficit financing.
Here again, there are no set rules for making changes in the fiscal policy. Any or many of these
changes can be made at any time at the discretion of the government. Changes can be altered or
reversed at the discretion of the government. It is this character of fiscal policy which makes a
discretionary policy.
Limitations of Discretionary Fiscal Policy : It is generally alleged that a discretionary fiscal policy
works in theory better than in practice. The discretionary fiscal policy does not work effectively in
practice because it has certain limitations.
First, an important limitation of discretionary policy is that it is suitable and effective only when it is
used for short-run corrections in the economy. Attempts to solve the macroeconomic malad-justments
or disequilibrium of long-term nature through the discretionary fiscal policy creates a greater mess
and distortions in the economy rather than resolving them.
Second, an important factor that makes effectiveness of discretionary fiscal policy doubtful even in
the short run is the problem in making an accurate assessment of the magnitude of the problem and
forecasting expected results of policy changes. In the absence of reliable estimates and fore-casting,
the decisions are likely to go wrong and the consequences may be disastrous. For example, like all
other countries affected by the global recession, India had implemented certain short-run stimulus
package. Since the economy has started recovering, the government is in dilemma as to whether or
not to withdraw the stimulus package because its effects are unpredictable.
Third, there are two kinds of time-lags in the implementation of fiscal actions : pre-implementation
and post-implementation time-lags. Pre-implementation time-lag arises due to time, taken in the
process of decision-making, called ‘decision lag’. The policy measures and policy tools are decided
upon by the policy-makers and the think-tank of the government. For instance, in India, for all long-
term fiscal actions or policy reforms, a committee is appointed to make its recommendation. The
committee takes more time than stipulated in its terms of reference. After the committee makes its
recommendations, the report is placed for the bureaucratic appraisal. It is then sent for ministerial
consideration for its approval. The committee’s recommendations are then placed before the Parliament
for discussion. After its approval by the Parliament, proposals find a place in the Finance Bill. The
time lost in decision-making is called ‘decision lag. After the Finance Bill is voted, it takes further
time in the implementation of the policy. It is called ‘execution lag’.
Thus, a considerable time is lost in the process of decision-making and its execution. As regards the
post-implementation time-lag, it arises due to lagged effect of fiscal actions. The lagged effect arises
because fiscal changes work through the related variables and, therefore, take a long time to produce
the expected result or unexpected/undesired effects or to show that they cannot produce any
satisfactory results.
The time-lag associated with the working of the discretionary fiscal policy makes the efficacy of the
policy doubtful. Its working is further complicated when other changes are made in the fiscal policy
before the full effect of a previous action is realized. This also complicates the assessment of the
performance of the policy. In India, such changes were of regular nature—fiscal changes were made
invariably in each annual budget—before the Economic Reforms were made in 1990— 91. Changes
in taxation and expenditure are also made within a financial year. Now, the frequency of discretionary
fiscal changes has considerably reduced.
Fiscal Policy of India
India’s fiscal policy was formulated initially in 1950-51 in the background of India’s economic
conditions at the time of Independence. The Indian economy was trapped in a vicious circle of poverty

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