Fiscal Policy

What is Fiscal Policy? Fiscal Policy deals with the revenue and expenditure policy of the Govt. The word fiscal has been derived from the word ‘fisk’ which means public treasury or Govt funds.

Latest Update about Fiscal Policy of India:

  1. The Union Budget 2021 has signalled the emphasis on the Development Financial Institutions (DFIs) in the pursuit of long-term infrastructure creation for the revival of the economy.
  2. The establishment of the Dispute Resolution Committee (DRC) has been proposed in the Union Budget 2021 that can help provide quick relief to taxpayers in tax disputes.

This is an important topic for the IAS Exam.

Fiscal Policy (UPSC Notes):- Download PDF Here

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  1. UPSC Calendar 2023
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  6. UPSC Current Affairs

Objectives of Fiscal Policy

The following are the objectives of the Fiscal Policy:

  1. Higher Economic Growth
  2. Price Stability
  3. Reduction in Inequality

The above objectives are met in the following ways:

  1. Consumption Control – This way, the ratio of savings to income is raised.
  2. Raising the rate of investment.
  3. Taxation, infrastructure development.
  4. Imposition of progressive taxes.
  5. Exemption from the taxes provided to the vulnerable classes.
  6. Heavy taxation on luxury goods.
  7. Discouraging unearned income.

What are the components of Fiscal Policy?

There are three components of the Fiscal Policy of India:

  1. Government Receipts
  2. Government Expenditure
  3. Public Debt

Aspirants should note that all the receipts and expenditures of the government are credited and debited from the following:

  1. Consolidated Fund of India
  2. Contingency Fund of India
  3. Public Account of India

Download the notes on the types of funds in India from the linked article.

Government Receipts

The categorisation of the government receipts is given below:

  1. Revenue Receipt
    • Tax Revenue
      • Direct Tax
      • Indirect Tax
    • Non Tax Revenue
      • Fees
      • License and Permits
      • Fines and Penalties, etc
  2. Capital Receipt
    • Loans Recovery
    • Disinvestments
    • Borrowing and other liabilities

Debt Trap – Situation where the borrower has to borrow again for the payment of an instalment on the previous debt. A borrower unable to meet debt service obligations without borrowing is known to be in a debt trap.

Direct Tax Code Bill 2010

It hasn’t been implemented yet. The bill seeks to replace the following taxes:

  1. Income Tax Act of 1961
  2. Wealth Tax Act of 1957

Learn about the Direct Tax Code (DTC) comprehensively from the linked article.

For more on taxation in India, check the linked article.


When the government sells or liquidates its assets of Central Public Sector Enterprises, State Public Sector Enterprises or other assets; it is referring to disinvestment. This approach caters to the objective of fiscal burden reduction.

Learn more about Disinvestment and Department of Investment and Public Asset Management (DIPAM) in the linked article.

Government Expenditure

There are two classifications of public expenditure:

  1. Revenue Expenditure – It is a recurring expenditure:
    • Interest Payments
    • Defence Expenses
    • Salaries to Central Government employees, etc are examples of  revenue expenditure
  2. Capital Expenditure – It is a non-recurring expenditure
    • Loans repayments
    • Loans to public enterprises, etc.

Candidates must note that plan and non-plan expenditure have been scrapped with the abolishing of the Planning Commission of India.

What is Fiscal Consolidation?

The measures that are taken to improve the fiscal deficit comes under the process of fiscal consolidation. Through fiscal consolidation, the government tries for:

  1. Improvement in revenue receipts
  2. Better alignment in the public expenditure

Download notes PDF of Fiscal Consolidation from the linked article.

The government introduced the FRBM Act aiming for fiscal consolidation. Read about it below:

Fiscal Responsibility and Budget Management Act (FRBMA), 2003

The objective of this FRBM Act is to impose fiscal discipline on the government.

It means fiscal policy should be conducted in a disciplined manner or a responsible manner i.e. government deficits or borrowings should be kept within reasonable limits and the government should plan its expenditure in accordance with its revenues so that the borrowing should be within limits.

Read in detail about the FRBM Act in the linked article.

Along with the FRBM Act, also read about the NK Singh Committee on Fiscal Deficit from the linked article.

Fiscal Federalism

It refers to the distribution of resource between centre and states.

The distribution of taxes between centre and states is mentioned in the 7th schedule of the Indian constitution.

There are 3 lists where the taxes are distributed

  • Union List
  • State List
  • Concurrent List

Some related topics to fiscal policy are linked below:

Fiscal Deficit Central Board of Direct Taxes (CBDT)
Value-Added Tax (VAT) Goods and Services Tax (GST)
Minimum Alternate Tax (MAT) Tax Policy Council & Tax Policy Research Unit
Difference Between Monetary Stimulus and Fiscal Stimulus Difference Between Monetary Policy and Fiscal Policy

For similar notes on Economy topics, refer to the linked article.

Fiscal Policy (UPSC Notes):- Download PDF Here

FAQ about Fiscal Policy India


Who prepares fiscal policy in India?

Ministry of Finance formulates the fiscal policy.

What are the three types of fiscal policy?

There are three types of fiscal policy.They are neutral policy, expansionary policy,and contractionary policy.

UPSC Preparation:

UPSC Mains GS 3 Strategy, Syllabus and Structure Economy Questions from IAS Mains GS 3
Economy Notes for UPSC IAS Economy Optional Syllabus
Important Economic Terms for UPSC Economic Survey


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