Fiscal marksmanship in India

Abstract

Macroeconomic policy decisions can be categorized as belonging to one of the following two: Monetary Policy and Fiscal Policy. Monetary policy represents the actions of a central bank, or other such regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. However, here, the focus is on Fiscal policy. Dornbusch defines the fiscal policy as: Fiscal policy is the policy of the Government with regard to the level of government purchases, the level of transfers, and the tax structure To elaborate a bit, fiscal policy consists of managing the national Budget of a country and its financing so as to influence the level of economic activity. This entails the expansion or contraction of government expenditures related to specific government programs. It also includes the raising of taxes to finance government expenditures and the raising of debt to bridge the gap (fiscal deficit) between revenues (primarily tax receipts) and expenditures related to the implementation of government programs. In its broadest sense, macroeconomic policy is directly concerned with the dual goals ofi : • stabilization of output • inflation control All other goals can be thought of as deriving out of these two only. Of course, there would be multiple components of these two goals in a healthy growing economy. Broadly, stabilization of output can be thought of as the goal of a good fiscal policy and inflation control as the end-goal of a good monetary policy. However, it is much more intertwined than it appears to be. For example, fiscal policy is determined by the triple objectives of currency stability, full employment, and economic growth.ii Currency stability, because of its importance for the balance of payments, is required to permit full employment and full employment has an intimate functional relationship with the size of national income. How these objectives are achieved using the fiscal policy?