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Indian Fiscal Policy can be best described as a system through which the Government of our Country decides the amount of money to be spent so as to support the economic activity of the nation and the amount of revenue to be earned from the system in order to keep the wheels of the economy running smoothly. Therefore through, fiscal policy Government tends to control the flow of tax revenues and public expenditure to maintain the economic system.
Achieving the rapid economic growth is one of the prime objectives of fiscal policy formulated by the Government of India. The significance of fiscal policy has been increasing consistently to attain the economic growth, both in India as well as abroad.
Now since we are already aware that the fact that Fiscal Policy aims to regulate the Flow of tax and the Public expenditure in order to navigate the economy, if the Government receives more revenue that it spends, it turns out to be “Surplus” while on the contrary if it spends more than the tax and non-tax receipts, it turns out to be a “Deficit”. In such a scenario, in order to meet the additional expenditures, the Government tends to borrow domestically as well as from overseas. Alternatively, the Government may choose to draw upon its foreign exchange reserves or print additional money. This can be further demonstrated as follows-
Fiscal policy is mainly used to describe the actions a government takes to influence an economy by purchasing products and services from businesses and collecting taxes. Alternatively, “Fiscal Policy” also refers to the economic intent behind the decisions for how money is used.
WHO PREPARES FISCAL POLICY IN INDIA? Ministry of Finance formulates the Fiscal Policy. Fiscal policy is playing an important role on the economic and social font of a country.
Governments spend money on wide variety of things, from military and police to services such as education and health care, as well as transfer payments such as welfare benefits. The expenditure can be funded in a number of different ways-
Fiscal policy relates to the decisions whether a Government will spend more or less than it receives. Whenever a government makes financial decisions, it has to consider the effect those decisions will have on businesses, consumers, foreign markets and other interested entities. Generally an ideal way out for the appropriate fiscal policy for the Government of any nation is to strive towards maintaining a “Balanced Budget”.
Economies follow a fluctuating pattern where they expand, peak, contract and trough. This pattern is also called “Business or Economic cycle”.
When an economy is experiencing growth or let’s say when it is expanding, employment rates and consumer income is generally higher. Business profits are high, investors are happy and the population spends more on luxury goods and non-necessity items.
When the economy is going down or let’s say when it contracts, investors take a backseat and start looking out for capital preservation techniques, businesses start cutting expenses and unemployment tends to rise. Consequentially, consumers generally have less income and begin to save more than they spend.
Thus the objective of fiscal and monetary policy is to control expansion and contraction of economy. The government has, for this reason been vested with two major tools for implementing fiscal policy. They have been laid down as follows-
Law makers can take two types of measures to control economic swings—discretionary fiscal policies and automatic stabilizers.
AUTOMATIC STABILISERS- A budget policy that automatically changes to stabilize fluctuations in the GDP.
DISCRETIONAL FISCAL POLICY- Discretionary Fiscal Policy can be better defined as actions taken in response to the changes in the economy. These are the intentional policies by the Government so as to increase or decrease the spending or taxation in order to alter the economy of the moment. Further these are of two types-
Expansionary fiscal policy involves the measures taken by the government to put more money back into the economy. This generally creates demand for products and services. It creates jobs and increases profits—stimulating economic growth. The idea is to put more money into consumers' hands to induce them to spend more. The increased demand forces businesses to add jobs to increase supply, output, and consumer spending.
The second type of fiscal policy is contractionary, used during economic booms. Since expansions may also be dangerous for a growing economy, the government tries to slow them down lest they become too intense. Contractionary fiscal policies are enacted to try to slow growth to a more manageable level and control inflation.
The term “Demonetization” implies withdrawal of a particular form of currency from circulation and replacing it with a new currency. Whenever there is Demonetization old currency must be removed and substituted with the new currency unit. One such event took place in India as well. On 8th November, 2016 the currency was demonetized third time by the present Modi Government. Soon after the demonetization was announced, there was a chaos created in every strata of the society whether upper, middle or lower segments. Some welcomed demonetization as a great initiative and effort towards eliminating corruption and eradicating black money while others were highly dissatisfied with the act of sudden demonetization that took place in year 2016.
Indian Finance Minister Mr. Arun Jaitley, further explained the reasons for demonetization in his budget speech in February, 2017. “As per him, Demonetization seeks to create a new “Normal” wherein the GDP would be bigger, cleaner and real. “The main objective was fiscal, to expand the tax base. Besides it, there were several others which have been enumerated below-
The basic idea behind the act of Demonetization was to curb and altogether stop the age-old stigma of tax evasion practiced by some. Needless to say that Tax evasion slowly and gradually became a way of life for some people. This undoubtedly compromised the larger public interest and created unjust enrichment in favor of the tax evader, detrimental to the interests of the society at large. Also it aimed to eliminate the “Black Money” (also known as “Dirty Money”) from the system on which no tax was paid and which remained unaccounted in the duration of country tax assessment period which ultimately causes revenue to the Government. This altogether served as a strong foundation for putting a halt on the scam of Corruption and thus abolishing it from its very roots. The Government had been quite a lot concerned about the size of the unaccounted and therefore the non-tax paying, income base. The government therefore argued that the act of Demonetization would make India a Tax-Compliant Country, making the citizens of the country quite responsible and honest with respect to the timely tax payments and this would definitely help in expanding the tax base of our economy in the long term. This would turn out to be helpful to the Government in raising its tax revenue.
The major cause of inflation is presence of higher liquidity in the market. Because of Demonetization there is less liquidity and less cash flow in the market which is why inflation goes down. As the black money goes out of the system the money supply will shrink to some degree.
The move of Demonetization has affected the purchasing power. Due to the shortage of cash, consumers could not make long term investments in the Real Estate Sector, Vehicles and many others. The stock prices of the Companies of these sectors will have a negative impact.
The impact of Demonetization has not even spared the tourism sector which has also been badly hit. Therefore, the travel and hospitality industries are facing a tough time.
Demonetization smashed the real estate market.
One of the negative consequences of Demonetization was the Deteriorating Gross Domestic Product or the GDP mainly due to the cash crunch and shortage of cash resources in the country.
The Government of India intends to go cashless. Thus demonetization will have a positive impact on such online based transactions and other modes of payment. With cash transactions facing a reduction, alternative forms of payment will see a surge in demand. Digital transaction systems, E wallets, online transactions using E banking, usage of Plastic money (Debit and Credit Cards), UPI, EFTPOS, Net Banking etc. will definitely see substantial increase in demand. This should eventually lead to strengthening of such systems and the infrastructures required.
Hence we can conclude by saying that the Demonetization has bought about a remarkable change in the Indian economy by significantly affecting its various sectors substantially either in a positive or in a negative manner. Sectors such as Pharmaceuticals, FMCG, Education, Agriculture, Hospitals, Energy and Telecommunication remained unaffected. From an equity market perspective, this move turned out to be positive for Banking and Infrastructure sector in the medium to long term. This turned out to be negative for Real Estates, Customer durables, Luxury items in the near to medium term.
However, the overall agenda behind the decision of Demonetization was to enhance the tax base across the country. To such an extent it turned out to be a positive one.
One such notable happening is the Global Pandemic “COVID-19” or more commonly known as “coronavirus”- A kind of highly communicable and infectious virus that has taken toll on the lives of innocent people across the world. It has been a crisis like no other, shutting shops and schools, closing borders and putting half of humanity under some form of lockdown. And it's not over, the pandemic that has taken away lives of millions of people from different age groups.
It is not just a global pandemic and public health crisis it has also severely affected the global economy and financial markets. Significant reductions in income, a rise in unemployment, and disruptions in the transportation, service, and manufacturing industries are among the few consequences.
Let us understand the relative consequences of the Covid-19 pandemic on the various aspects as well. Briefly enumerated as follows-
India has been hit hard by the pandemic particularly during the second wave of the virus in the year 2021. There has been a sharp dent in the India’s GDP. The worst of all was the economic damage experienced by the poorest households. According to the survey, the overall rate of contraction in India was (in real terms) 7.3% for the whole 2020/21 financial year. In post-independence period, India's national income had declined only four times before 2020 – it was in year 1958, 1966, 1973 and 1980 – with the largest drop being in 1980 (5.2%). This means that 2020/21 is the worst year in terms of economic contraction in the history of India and much worse than the overall contraction in the world.
The pandemic has also given rise to the social problem of Unemployment, which is again a matter of serious concern. Due to economic hardship, the young individuals of the Country were severely affected. This in turn, has a negative impact on lifelong earnings as well as the employment prospects. Due to the nationwide Lockdown announced by the Government to stop the transmission of virus which also restricted the public movement, people were unable to go to their workplace or elsewhere. Moreover, such Lockdown resulted out to be the biggest life-threatening enemy for the poor. The Daily Wage workers who mainly rely on their daily earnings were among the ones who were deeply affected. If not the Virus, it was the Hunger which led them to live disrupted lives for sure.
The Coronavirus Pandemic introduced tremendous fiscal pressures for many countries including India requiring additional expenditure to be made on public health including vaccination schemes and oxygen plants for the patients hit by coronavirus. Governments around the World are addressing these fiscal pressures through a range of measures, including additional borrowing and expenditure adjustments.
The Coronavirus Pandemic introduced tremendous fiscal pressures for many countries including India requiring additional expenditure to be made on public health including vaccination schemes and oxygen plants for the patients hit by coronavirus. Governments around the World are addressing these fiscal pressures through a range of measures, including additional borrowing and expenditure adjustments.
Precisely, Covid-19 being a global pandemic has deeply and severely affected the world economy. It would be quite difficult to say if any nation is spared by this. The pandemic has badly hit the Developed Nations with better economy, even though their economy suffered pretty severely. Needless to say what the pandemic must have done to the weaker economies and Developing economies and maybe the poor nations
The sectors that have been directly as well as hardly hit by the Pandemic are mainly the ones that depend largely upon the large groups of people coming together in a spot. One of the best examples of the same could be the Aviation sector. Hotels are yet another example of the same followed by the Tourism sector. Thus it would not be wrong to say that the these two sectors are amongst the ones which are drastically affected.
In view of the large disruption caused by the pandemic, it is evident that the current downturn is fundamentally different from previous recessions. The sudden shrinkage in demand & increased unemployment rates are going to alter the business landscape. Adopting new principles like ‘shift towards localization, cash conservation, supply chain resilience and innovation’ shall help businesses in treading a new path in this uncertain global environment.
AATMANIRBHAR BHARAT ROZGAR YOJANA (ABRY) or “Self Reliant India”- In order to support the shaken economy and to revive the same, this scheme was launched by the Government of India on 13th May, 2020-
Thus Scheme was announced as a part of Aatmanirbhar Bharat to boost the economy, increase the employment generation in post Covid recovery phase and to incentivize creation of new employment along with other social security benefits and restoration of loss in employment during COVID-19 pandemic.
The aim is to make the country and citizens independent and self-reliant in all senses. He further outlined five pillars of the Aatma Nirbhar Bharat – Economy, Infrastructure, System, Vibrant Demography and Demand.
Thus both the events, Demonetization as well as the Covid-19 pandemic have affected the India’s Fiscal Policy in its own significant ways; both of them turn out to be equally notable happenings causing a significant decline in the nation’s GDP and its economic growth. Both of them have its own set of challenges set for the Government of India. While the former holds a few pros and cons for our country, which is still a matter of debate amongst the masses, the latter is still something with which every nation across the world is fighting a tough battle to come out and revive its economy according to their own set of policies aiming to recover the loss caused to them either in economic or social terms. The novel Coronavirus has not spared anyone- be it the Developed Nations or the Developing Ones. It has greatly collapsed every nation’s economy, which is quite similar to a short-term recession.
