5 POWERFUL TOOLS FOR SHAPING INDIA'S ECONOMY: A GUIDE TO FISCAL POLICY INSTRUMENTS

 

Fiscal policy refers to the government's use of spending and taxation to influence the economy . In India , the government uses a variety of instruments to implement fiscal policy including: 

1. Government spending : The government can stimulate demand and economic growth by increasing spending on infrastructure , social services and other areas .
2. Taxation : The government can use taxation to encourage or discourage certain behaviours. For example, it can raise taxes on unhealthy products like tobacco and alcohol to discourage their consumption , or lower taxes on essential items like food and medicine to make them more affordable.
3. Public debt : The government can borrow money by issuing bonds to finance its spending. However excessive borrowing can lead to high levels of public debt , which can be unsustainable in the long run.
4. Subsidies : The government can provide subsidies to certain sectors or industries to encourage their growth and development .
5. Public sector enterprises : The government can also use public sector enterprises , which are owned and operated by the government to achieve economic and social objectives.

CHALLENGES AND ISSUES

• Limited fiscal space : India's high levels of public debt and deficits limit the government's ability to use fiscal policy as tool for economic management .
• Inefficient tax collection : India has a relatively low tax to GDP ratio, which means that the government has limited resources to fund spending. This is due n part to high levels of tax evasion and complex tax system.
• Political constrains .
• Inflation.
• Distributional Effects : Fiscal policy can have distributional effects , meaning that it can disproportionately benefit or burden certain groups in society . For example regressive taxes , which take a larger percentage of income from low income earners , can worsen income inequality.

WAY FORWARD

• Strengthening tax collection : This could involve simplifying tax code , increasing enforcement efforts , and providing incentives for compliance.
• Reducing public debt : The government could work to reduce its public debt by implementing fiscal consolidation measures , such as cutting spending and increasing revenues.
• Improving transparency and accountability.
• Ensuring fiscal sustainability.
• Minimizing distributional impacts.