Fiscal Policy in India: Trends, Role and Macroeconomic Impact

Evolution of Indian Fiscal Policy (1950–1980)

• Fiscal Objectives in the 1950s and 1960s

  • The primary objective of economic policy during this period was to increase the growth rate through expanded public investment and planned development.

  • Taxation policy was strategically employed to reduce private consumption and redirect resources toward Government-led investment.

  • The economic objectives of taxation policy included:

  • • (i) Promoting employment via tax incentives for new investment;

    • (ii) Reducing inequality through progressive taxes on income and wealth;

    • (iii) Alleviating balance of payments pressure through increased import duties;

    • (iv) Stabilising prices via excise duty rebates on consumption goods.

• Fiscal Policy in the 1970s

  • During the 1970s, fiscal policy emphasized equity and social justice through both taxation and public expenditure measures.

  • The income tax rate peaked at a maximum marginal rate of 97%, and when combined with wealth tax, the effective rate even exceeded 100%.

  • Over time, government expenditure expanded to include rising subsidies and interest payments on growing debt, alongside developmental spending.

  • Current revenue remained stagnant, leading to the emergence of significant revenue deficits starting in 1979–80.

• Fiscal Deterioration in the 1980s

  • In the 1980s, Indian public finance faced instability due to unsustainable fiscal deficits and a mismatch between the economy and budget policies.

  • Despite a rise in public investment in infrastructure, deficits continued to expand.

  • Government expenditure served as a tool for influencing aggregate demand, resource allocation, and income distribution.

  • To contain the deficit:

  • • (i) Customs duties were increased to raise revenue and protect domestic industries.

    • (ii) Structural shifts occurred in budget composition, including expansion of the revenue deficit and increased reliance on market borrowings.

  • The Reserve Bank of India increasingly supported government borrowing, constraining monetary policy autonomy.

• Broad Fiscal Trends (1950–1980)

  • From 1950 to 1980, fiscal deficits remained manageable for both the Centre and States.

  • The 1980s marked a period of fiscal deterioration characterized by increasing deficits and automatic monetisation of debt.