Union Budget 2025 | FAQs: What is Fiscal Policy?

Ahead of the upcoming Union Budget, let's take a look at what fiscal policy entails.

The Union Budget for the upcoming financial year is all set to be presented on February 1, 2025, by Finance Minister Nirmala Sitharaman. According to reports, the Narendra Modi government may consider slashing income tax for individuals earning up to Rs 15 lakhs per annum and extend the tax relief bracket in a bid to provide relief to the middle class and boost consumption.

Ahead of the Budget day, let's take a look at what fiscal policy entails.

Fiscal policy refers to the government's strategy of managing its budget through revenue collection (mainly taxes) and expenditure to influence the country's economy. It is a critical tool used by the government to achieve economic objectives like controlling inflation, stimulating growth, and reducing income inequality.

Here are the key components and objectives of fiscal policy in India:

Government Revenue: The primary sources of government revenue include direct taxes (like income tax and corporate tax), indirect taxes (like Goods and Services Tax - GST), customs duties, and non-tax revenues (like dividends from public sector enterprises, interest receipts, etc.).

Government Expenditure: This encompasses spending on various sectors such as defense, infrastructure, education, healthcare, subsidies, social welfare programs, interest payments on borrowings, and other administrative expenses.

Budget Management: Fiscal policy is primarily manifested through the annual Union Budget, where the government outlines its revenue and expenditure for the upcoming financial year. The budget reflects the priorities of the government and its approach to managing the economy.

Deficit Management: An important aspect of fiscal policy is managing the fiscal deficit, which is the difference between the government's total expenditure and its total revenue (excluding borrowings).

The government may aim to reduce the fiscal deficit to maintain fiscal discipline or may increase it to boost spending in times of economic slowdown.

Public Debt Management: Fiscal policy also involves managing the country's public debt. Borrowing decisions and debt servicing obligations impact the economy's overall health.

Stimulating Economic Growth: In times of economic slowdown, the government may increase spending (fiscal stimulus) to spur growth, often leading to a higher fiscal deficit in the short term.

Inflation Control: Fiscal policy can also be used to control inflation. For example, reducing government spending or increasing taxes can help cool down an overheated economy.

Redistributive Policies: Through its expenditure and tax policies, the government can redistribute income and resources among different sections of society, aiming to reduce income inequality and promote social welfare.

Counter-Cyclical Measures: The government uses fiscal policy as a counter-cyclical tool to stabilize the economy during various phases of the business cycle – spending more during recessions and cutting back during booms.

Fiscal policy in India is framed in the context of the country's broader economic goals, global economic conditions, internal socio-economic challenges, and the government's development agenda.The Ministry of Finance, along with various other government departments, plays a key role in formulating and implementing fiscal policy.

(Disclaimer: This copy has been written by a generative AI tool and has been reviewed and edited by the DH Web Desk)