Even though it received bids six times the offer, RBI recently turned down bids for government securities citing higher yield as unacceptable. Selling and buying of government securities is a part of RBI’s Monetary Policy. Fiscal Policy being its sister policy, it remains in as much talk. In this two part series, we will understand what fiscal and monetary policy are and what is RBI’s current dilemma around Monetary Policy. Let’s understand fiscal policy in this part.
Crux of the Matter
What Is Fiscal Policy?
Fiscal policy is a means through which the government of the nation adjusts its spending levels and tax rates to monitor and influence a nation’s economy.
Fiscal policy is based on the Keynesian theory given by British economist, John Maynard Keynes. It states that the government can influence macroeconomic productivity levels by increasing or decreasing tax levels and the amount that the government spends.
Tools Of Fiscal Policy
The government can boost consumer spending and aggregate demand by reducing taxes on individuals and businesses – called expansionary fiscal policy. Similarly, increasing tax on individuals and businesses can reduce consumer spending and aggregate demand – called contractionary fiscal policy.
The government can also boost consumer demand through influx of money (expansionary) in the economy through various means like spending money on infrastructure projects or reduce it in times of rapidly rising inflation by cutting spending (contractionary).
What Is Fiscal Deficit Then?
Fiscal surplus/deficit = Government’s Revenue – Government’s Expenditure. Fiscal surplus is when revenue is higher than expenditure, and deficit is when expendityure is higher than revenue. Experts say that, a big reason for India’s fiscal deficit has been its struggles with tax collection. Take a look at these numbers.
Tax GDP Ratio
India’s tax collection lags behind most emerging nations. Since the majority of Indians do not pay income taxes, Indian tax revenues remain largely dependent on indirect tax collections (such as GST).
- The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework, namely neoclassical economics.
- Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods.
- Sher Shah Suri was the founder of the Suri Empire in India, with its capital in Sasaram in modern-day Bihar. He is often credited for introducing the currency of rupee or rupiyah.