Page 316 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Indian Economic Policy

Notes • Another variant of stabilizing policy is compensatory fiscal policy. The compensatory fiscal policy
is a deliberate budgetary action taken by the government to compensate for the deficiency in,
and to reduce the excess of, aggregate demand.
• A discretionary fiscal policy is one in which ad hoc changes are made in the government
expenditure and taxation system and tax rates at the discretion of the government as and when
required.
• Peston has rightly remarked, “The literature on economic policy makes a great deal of fuss
about discretionary versus automatic policy making. ”The distinction between automatic and
discretionary fiscal policies is a matter of frequency of government discretion in changing the
taxation and expenditure programmes.
• The mechanism of fiscal policy described above appears to be theoretically simple and feasible.
In practice, however, policy-makers face a number of problems in the formulation and execution
of the fiscal policy.
• 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 with the lowest per capita income and consumption in the world.
• The most difficult problem that the Government of India faced was how to mobilize resources
for development. It was with this background that the government formulated its fiscal policy.
Under the conditions highlighted above, the Government of India adopted discretionary fiscal
policy.
• The fiscal policy of the Central Government is reflected in its annual budget. Let us have an
overview of the annual budgets of the Government of India in recent years.
• In order to understand the basic features of India’s fiscal policy, let us study the central
government’s budget’s of the last few years.
• Till 1990-91, the Government of India made minor modifications in its fiscal policy (including
both taxation policy and expenditure pattern). But drastic changes were made in the fiscal
policy and fiscal management of the country in 1991.
• Apart from constraints imposed by the FRBM Act, robust economic growth and improved
performance of the manufacturing and services sectors kept the tax revenue buoyant in the last
five years.
24.4 Key-Words

1. Fiscal federalism : As a subfield of public economics, fiscal federalism is concerned with
"understanding which functions and instruments are best centralized and
which are best placed in the sphere of decentralized levels of government"
(Oates, 1999). In other words, it is the study of how competencies (expenditure
side) and fiscal instruments (revenue side) are allocated across different
(vertical) layers of the administration.
2. Fiscal policy : The three main stances of fiscal policy are:
(i) Neutral fiscal policy is usually undertaken when an economy is in
equilibrium. Government spending is fully funded by tax revenue and
overall the budget outcome has a neutral effect on the level of economic
activity.
(ii) Expansionary fiscal policy involves government spending exceeding
tax revenue, and is usually undertaken during recessions.
(iii) Contractionary fiscal policy occurs when government spending is lower
than tax revenue, and is usually undertaken to pay down government
debt.

310 LOVELY PROFESSIONAL UNIVERSITY