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Fiscal Policy

Updated on July 18, 2023

Fiscal policy refers to the government’s use of spending, taxation, and borrowing to influence the country’s economy. It involves decisions made by the government regarding its revenue (money it collects through taxes) and expenditure (money it spends on various programs and services). The government through its fiscal policy can adjust its spending and taxation to achieve specific goals like economic growth, price stability, employment generation, and reducing inequalities.

How does fiscal policy work? Explain with examples

When the government wants to stimulate economic growth, it can increase its spending on infrastructure projects, education, healthcare, and other sectors. This boosts demand, creates job opportunities, and promotes economic activity.

On the other hand, if the government wants to control inflation or reduce budget deficits, it may reduce its spending or increase taxes. By reducing spending, the government decreases the amount of money flowing into the economy, which can help control inflation. Increasing taxes means individuals and businesses have less money available for spending, which can also help control inflation and generate revenue for the government.

Additionally, the government can also use fiscal policy to promote equity and social welfare. It may allocate funds for social programs, subsidies, and welfare schemes to support disadvantaged sections of society and reduce income inequalities.

How is the fiscal policy implemented?

Fiscal policy in India is implemented through the annual budget presented by the government, which outlines its revenue and expenditure plans for the upcoming year. The government’s fiscal policy decisions play a crucial role in shaping the overall economic conditions and development of the country.