Aspirant Academy

Economy

Fiscal Policy — Types and Current Stance

Public Finance: Union Budget, Revenue/Expenditure, Deficit, Public Debt, Fiscal Policy, Finance Commission

Paper I · Unit 2 Section 8 of 12 0 PYQs 29 min
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Fiscal Policy — Types and Current Stance

7.1 Types of Fiscal Policy

Expansionary Fiscal Policy

  • Tools: Increase government spending AND/OR cut taxes
  • Goal: Stimulate aggregate demand during recession or slowdown
  • India's Experience: Post-COVID (2020-21 to 2022-23) — record capex, PM Garib Kalyan package, Atmanirbhar Bharat stimulus
  • Risk: Worsens fiscal deficit; if financed by borrowing, can crowd out private investment

Contractionary Fiscal Policy

  • Tools: Reduce government spending AND/OR raise taxes
  • Goal: Reduce inflationary pressure and fiscal deficit
  • India's Experience: 2025-26 budget continues fiscal consolidation — deficit reduced from 9.2% (2020-21) to 4.4% (2025-26 target)
  • Risk: Slows growth if private demand is insufficient

Neutral/Balanced Fiscal Policy

  • Budget is approximately balanced — revenues = expenditure
  • Rare in developing economies; India has run a deficit every year since independence

7.2 Current Fiscal Policy Stance (2025-26)

Theme of Union Budget 2025-26: "Viksit Bharat — Sabka Vikas" — continuing the investment-led growth model while consolidating the fiscal position.

Key priorities:

  1. Infrastructure Investment: Rs 11.21 lakh crore capex (3.1% of GDP); PM Gati Shakti for multimodal infrastructure
  2. Agriculture & Rural: Rs 1.71 lakh crore for agriculture sector; PM-Kisan, MSP revisions
  3. Manufacturing Push: PLI schemes extended; "Make in India" for semiconductors
  4. Tax Reforms: New income tax regime made more attractive — standard deduction raised; corporate tax at 25% base rate
  5. Social Sector: PM Awas Yojana (Rs 54,000 crore), Jal Jeevan Mission, PM-JAY health insurance

Middle Path: India's fiscal stance in 2025-26 is a calibrated middle path — using capital expenditure to sustain growth multipliers while gradually reducing the overall fiscal deficit to build buffers for future shocks.

7.3 Fiscal Policy vs. Monetary Policy

Dimension Fiscal Policy Monetary Policy
Authority Finance Ministry / Parliament RBI (Monetary Policy Committee)
Tools Taxes, government spending, subsidies Repo rate, CRR, SLR, OMO
Lag Long implementation lag (Budget cycle) Shorter implementation lag (MPC meets every 2 months)
Primary Goal Growth, redistribution, employment Price stability (CPI inflation target: 4±2%)
Direct control Direct impact on government spending Indirect — works through banking system
Coordination Must coordinate to avoid conflicting signals Must coordinate (e.g., no fiscal dominance)