Objectives of Fiscal

Policy
Fiscal Policy deals with the revenue and expenditure policy of the Govt.
The word fiscal has been derived from the word ‘fisk’ which means
public treasury or Govt funds.
The following are the objectives of the Fiscal Policy:
• Higher Economic Growth
• Price Stability
• Reduction in Inequality
The above objectives are met in the following ways:
• Consumption Control – This way, the ratio of savings to income is raised.
• Raising the rate of investment.
• Taxation, infrastructure development.
• Imposition of progressive taxes.
• Exemption from the taxes provided to the vulnerable classes.
• Heavy taxation on luxury goods.
• Discouraging unearned income.
There are three components of the Fiscal Policy of India:
• Government Receipts
• Government Expenditure
• Public Debt
• Aspirants should note that all the receipts and expenditures of the
government are credited and debited from the following:
• Consolidated Fund of India
• Contingency Fund of India
• Public Account of India
• Fiscal Responsibility and Budget Management Act (FRBMA), 2003
• The objective of this FRBM Act is to impose fiscal discipline on the
government.
• It means fiscal policy should be conducted in a disciplined manner or
a responsible manner i.e. government deficits or borrowings should
be kept within reasonable limits and the government should plan its
expenditure in accordance with its revenues so that the borrowing
should be within limits.
Measure of National income
• Governments directly and indirectly influence the way resources are used in the economy. A basic equation
of national income accounting that measures the output of an economy—or gross domestic product (GDP)—
according to expenditures helps show how this happens:
• GDP = C + I + G + NX.
On the left side is GDP—the value of all final goods and services produced in the economy. On the right side are
the sources of aggregate spending or demand—private consumption (C), private investment (I), purchases of
goods and services by the government (G), and exports minus imports (net exports, NX).

Note: Link for reference and detailed understanding

https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Fiscal-Policy
BUDGET MULTIPLIER
• Balanced budget means change in government expenditure is exactly
matched by a change in taxes. If government expenditure and tax
receipts increase by the same amount, will national income or output
increase or remain the same?
• Classical economists believed that a balanced budget is neutral in the
sense that the levels of output or income remain unchanged.
However, Keynes and his followers argued that, in reality, its effect on
income will not be zero or neutral. In other words, we can find out the
expansionary effect on national income of a balanced budget.
• The expansionary effect of a balanced budget is called the balanced budget multiplier
(henceforth BBM) or unit multiplier. Here an increase in government spending matched by
an increase in taxes results in a net increase in income by the same amount. This is the
essence of BBM. This may be illustrated here. Let us assume an MPC of 0.75. If government
expenditure increases by Rs. 20 crore national income would increase to Rs. 80 crore. The
value of BB is between 0 to 1.

• This can be obtained by using the formula for government spending multiplier, KG:

• Now, an increase in taxes by the same amount (i.e. Rs. 20 crore) would lead to a reduction
in aggregate output of Rs. 60 crore.
Alternative measures of resource
mobilisation
• Types of Resources
• There are several types of resources that are essential for economic and social development. Some of the
major types of resources:
• Natural resources: Natural resources refer to materials and substances that occur naturally in the environment and are
used by humans to sustain life and create wealth. Examples of natural resources include minerals, water, forests, oil, gas,
and agricultural land.
• Human resources: Human resources are the people who work in organizations, businesses, and other entities. Human
resources can be classified into two main categories: skilled and unskilled. Skilled human resources are those who have
specialized knowledge and expertise in a particular field, such as doctors, engineers, and lawyers, while unskilled human
resources are those who do not have specialized knowledge or training, such as manual laborers.
• Financial resources: Financial resources refer to money and other forms of capital that are used to finance economic
activities. Examples of financial resources include cash, credit, loans, and investments.
• Physical resources: Physical resources refer to tangible objects and equipment that are used in production and other
economic activities. Examples of physical resources include machinery, vehicles, buildings, and raw materials.
• Intellectual resources: Intellectual resources refer to intangible assets that are used to create and maintain competitive
advantage. Examples of intellectual resources include patents, copyrights, trademarks, and trade secrets.
• Technological resources: Technological resources refer to tools, equipment, and processes that are used to create,
develop, and implement new products and services. Examples of technological resources include computers, software,
communication systems, and research and development facilities.
• How does private sector mobilize domestic resources?
• The private sector mobilizes the savings of households and firms through
financial intermediaries, which allocate these resources to investment in
productive activities.
• Taking debt from market, FDI, etc
• How does public sector mobilize domestic resources?
• Taxation, Budgeting process, subsidies distribution
• Public revenue generation for investment in social services and infrastructure
and the allocation function.
•
• Challenges In Mobilizing Resources
• India faces several challenges in mobilizing resources for its economic and social development.
•
• Limited tax base: India has a relatively small tax base, with only a small fraction of its population paying income tax. This
limits the government's ability to mobilize resources through taxation.
• Tax evasion and avoidance: Tax evasion and avoidance are widespread in India, which further reduces the government's
ability to mobilize resources. This is often due to a lack of enforcement capacity and a complex tax system.
• Weak financial system: India's financial system is still developing, with limited access to credit and financial services for
many people and businesses. This makes it challenging for organizations to mobilize resources through borrowing or
investment.
• Informal economy: A large portion of the Indian economy operates in the informal sector, which makes it difficult to
regulate and tax. This limits the government's ability to mobilize resources and provide public services.
• Limited private sector participation: The private sector's contribution to resource mobilization in India is still relatively
limited, particularly in sectors such as education and healthcare. This is partly due to regulatory challenges and a lack of
incentives for private investment in public goods.
• Inefficient resource allocation: Inefficient allocation of resources can lead to waste and reduce the effectiveness of
resource mobilization efforts. This is often due to bureaucratic processes and a lack of transparency and accountability in
the allocation of public resources.
• Steps to improve resource mobilization in India:
• Strengthen tax administration: Improving tax administration can help to increase revenue collection and reduce tax
evasion and avoidance. This could involve simplifying the tax system, investing in technology and capacity building, and
improving enforcement mechanisms.
• Expand the tax base: Expanding the tax base by bringing more people and businesses into the formal sector can help to
increase revenue collection. This could involve providing incentives for voluntary compliance, improving tax literacy, and
simplifying compliance procedures.
• Promote private sector participation: Encouraging private sector participation in public goods, such as education and
healthcare, can help to mobilize additional resources for these sectors. This could involve providing incentives for private
investment, improving the regulatory environment, and promoting public-private partnerships.
• Strengthen the financial system: Improving access to credit and financial services for people and businesses can help to
mobilize additional resources. This could involve increasing financial inclusion, improving the regulatory environment, and
promoting innovation in financial technology.
• Improve resource allocation: Ensuring efficient and transparent allocation of public resources can help to reduce waste
and increase the effectiveness of resource mobilization efforts. This could involve strengthening monitoring and evaluation
mechanisms, promoting citizen engagement and participation, and improving governance and accountability.
• Increase international development cooperation: Strengthening international development cooperation can help to
mobilize additional resources for development. This could involve increasing development assistance, promoting public-
private partnerships, and leveraging private investment for development.