January 30, 2023
Swathi v prabhu

Fiscal policy - objectives, importance and types

The government has a spending policy that it uses year after year for the seamless running of the economy. This policy is known as Fiscal policy. It is the guiding force of the government that helps them decide the budget to be spent for sustainable growth of the economy. Fiscal policies along with monetary policy are the two pillars of economic growth of the country. Attaining rapid economic growth is one of the key goals of fiscal policy formulated by the government of India. A sound fiscal policy with efficient monetary policy results in viable growth of the economy.

Let us understand a bit more about the fiscal policy of India.

Main objectives of Fiscal policy

To ensure that there is continual or viable growth in the economy, there are certain objectives set around the fiscal policy. These objectives are as follows:-

1. Economic growth – 

economic growth is the foundation of a fiscal policy. Without economic growth, an economy will likely perish. The main objective of any fiscal policy is economic growth. Maintaining the economy along with achieving national and international goals is a sign of a sound fiscal policy

2. Price stability- 

stability in price levels is an essential characteristic of any good economy. An increase in price levels leads to economic inflation, which leads to less buying power from citizens, which is not sustainable in the long run. Therefore, with the help of a good fiscal policy price stability can be maintained in the economy

3. Full employment-

a good level of employment is a sign that the country is progressing with a young populace. A higher level of employment in an economy leads to more economic activity which leads to more economic growth. a fine fiscal policy helps to uplift the employment level in the economy which in turn leads to greater economic growth.

Types of Fiscal policy

Neutral policy

The first type of fiscal policy is a neutral policy, which is also known as a balanced budget. This is where the government brings in enough taxation to pay for its expenditures. In other words, government spending equals taxation. 

Expansionary Fiscal Policy

Expansionary fiscal policy is where the government spends more than it takes in through taxes. This may involve a reduction in taxes, an increase in spending, or a mixture of both. In turn, it creates what is known as a budget or fiscal deficit.

Contractionary Fiscal Policy

Contractionary fiscal policy is where the government collects more in taxes than it spends. A government may wish to do this for several reasons. Primarily, it is used to help stem inflation. For example, the more government tax, the less disposable income consumers have. In turn, this reduces aggregate demand which may seem like a bad thing, but it helps reduce inflation. 

Importance of Fiscal policy in India

1. In a country like India, fiscal policy plays a key role in elevating the rate of capital formation both in the public and private sectors.

2. Through taxation, the fiscal policy helps mobilize a considerable amount of resources for financing its numerous projects.

3. Fiscal policy also helps in providing stimulus to elevate the savings rate.

4. The fiscal policy gives adequate incentives to the private sector to expand its activities.

5. Fiscal policy aims to minimize the imbalance in the dispersal of income and wealth.

What is the difference between fiscal policy and monetary policy?

The government uses both monetary and fiscal policy to meet the country’s economic objectives. The central bank of a country mainly administers the monetary policy. In India, the Monetary Policy is under the Reserve Bank of India or RBI. Monetary policy majorly deals with money, currency, and interest rates. On the other hand, under the fiscal policy, the government deals with taxation and spending by the Centre.


What can be the criticism of Fiscal policy?

According to Keynesian theory or fiscal policy, when there is a recession, the government needs to spend more money than it collects as taxes. They can do this by borrowing, due to which the national debt increases which cause significant problems in the future.

What are the types of fiscal policy?

The three main types of fiscal policy are neutral, expansionary, and contractionary  

Who Sets Fiscal Policy?                                                                                                                      

Fiscal policy is set by the central government. This should not be confused with monetary policy that is decided upon by the central bank, and NOT the government.


Pradhan Mantri Kisan Urja Suraksha Evam Utthaan Mahabhiyan
How to Update Bank Details on GSTN Portal GST Refund Application?