Fiscal policy refers to the taxation and expenditure decision of government. It includes various policies like export policy, investment policy, disinvestment policy, expenditure policy etc. to achieve the development of nation. Broadly, during the first 30 years of independence, between 1950 and 1980, the fiscal deficits of both the Central and the State Governments were not excessive. There was a significant deterioration in the fiscal situation in the 1980s, accompanied by large and automatic monetisation of government deficits. The fiscal reforms in India address both revenue as well as expenditure related policies.
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The major goals of fiscal policy are:
The government of India has initiated fiscal reforms in India from time to time to achieve the above stated goals but major fiscal reforms were started aftermath of 1991 economic crisis. The focus is on to raise revenue through taxation and improving the quality of public expenditure.
Until 1980’s the direct tax rate was very high which induced people to evade taxes and create Black economy. Tax rate of income tax and corporate tax have been lowered to moderate level so that tax buoyancy is achieved through better compliance and minimum exemptions.
The objective of economic policy during the 1950s and 1960s was mainly to increase the growth rate of the economy through increasing public investment and overall economic planning. Taxation was used as an instrument for reducing private consumption and for transferring resources to the Government to enable it to undertake large-scale public investment in an effort to spur economic growth. Furthermore, taxation policy was geared towards achieving the economic objectives of:
The fiscal deficits of both the central and the state governments were not excessive. This was a period of revenue surplus in general.
Fiscal policy during the 1970s consciously focused on achieving greater equity and social justice and both taxation and expenditure policies were employed towards this end. Accordingly, income tax rates were raised to very high levels, with the maximum marginal rate of income tax moving up to 97 per cent and, together with the incidence of wealth tax, it even crossed 100 per cent
During the 1980s, Indian public finances were in a state of disarray with the fiscal pattern destabilising the relationship between the economy and the budget. This resulted in persistently large deficits which were seemingly intractable. Considerable fiscal deterioration took place during the 1980s and eventually became unsustainable, though the growth rate did rise significantly with enhancement in public investment in infrastructure. During this phase, expenditure of the Government was seen as an instrument having a bearing upon aggregate demand, resource allocation and income distribution. The Government sought to reduce its deficit through tax increases. Customs duties were hiked to augment revenue and to protect domestic industry. There was a structural change in the government budgets during the 1980s. The emergence of revenue deficit in 1979-80 in the Centre’s Budget continued to enlarge during the 1980s, raising concerns over the rising public debt and interest payments and the consequent constraint on the availability of resources for meeting developmental needs. The 1980s witnessed a steady increase in market borrowings along with an increase in Reserve Bank’s support to such borrowing, thus compromising monetary policy
India’s reform program included wide-ranging reforms. These reforms can be classified as:
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