B.Com Ist Year Fiscal Policy Long Short Question Answer Notes

B.Com Ist Year Fiscal Policy Long Short Question Answer Notes :- Study material question papers notes examination papers all topic content wise notes chapter wise syllabus this post shows the complete details regarding the Fiscal Policy available. in our site parultech.com

Fiscal Policy

Q.23. What do you understand by Fiscal Policy ? Explain its objectives in the undeveloped and developing economy.


Fiscal policy refers to the government’s tax, expenditure, public debt and budgetary policies designed to influence the national income, production, prices, employment etc. of the country. Under this policy, the government determines that on which commodities and services tax to be imposed ? What should be the rate of taxes and on which sectors the revenue should be spent ? What arrangernents should be made by the government if expenditure exceeds its revenue? Thus fiscal policy includes the matters related to taxation, public expenditure, public debt and budget.

According to Arthur Smithies, “Fiscal Policy means a policy under which the government uses its expenditure and revenue programmes to produce desirable effects and avoid undesirable effects on the national income, production and employment.”

According to J.L. Hanson, “Fiscal policy is meant by the use of taxation through the budget as an adjunct to monetary policy.”

In other words, fiscal policy means the policy of the government to achieve and maintain the objectives of stability, full employment and growth. The fiscal policy deals directly with matters whch influence the consumption and investment expenditures, and hence.

the income, output and employment in the economy.




In under-developed countries, fiscal policy is a powerful mstrument in the hands of the government by means of which it can achieve the obiectives of development. In these countries the fiscal policy is concerned with accelerating the rate of capital formation and investment so that the productive capacity of the economy is eloped and economic growth becomes possible. Moreover, fiscal licy should also aim at influencing the pattern of production, the eral price level and bring about equitable distribution of wealth incomes. The following are the main objectives:

(1) Rapid Economic Development : Fiscal policy is the major instrument for achieving economic growth. The governmen spends its revenue on those activities which will help in ra economic development of the country. Tax policy is to be directed towards effective mobilisation of all available resources and harness them in the execution of development programmes.

(2) Increase in Capital Formation: The objective of fiscal policy is also to encourage capital formation in the country. Due to low level of income, savings and investments are low in most of the developing countries. Through appropriate taxation policy consumption can be reduced and savings can be increased in the country to get the highest possible rate of capital formation.

(3) Economic Stability: Another important objective of fiscal policy is to promote economic stability and use taxation as an instrument for dealing with inflationary and deflationary situations. To check inflation, purchasing power of the public can be reduced through increasing taxes. Tariffs and custom duties can be imposed in the situation of boom period while public construction works can be encouraged during the period of depression.

(4) Redistribution of Income and Wealth : In under-developed countries, the distribution of income and wealth is very uneven. Fiscal policy, therefore, must be used as a means of bringing about a redistribution of income in favour of the poorer sections of the society. Public expenditure on sanitation, health and educational services improve the quality of man power available for development.

(5) Proper Allocation of Resources : The one important objective offiscal policy in an under-developed economy is to allocate the resources mobilised in desirable channels of investment. All natural and human resources are limited as compared to their requirement. Hence, the distribution of resources is to be determined according to the priorities of the plan. The resources can be transferred from luxurious activities to essential areas through fiscal policy.

(6) Generation of Employment : In under-developed economy like ours, unemployment of large mass of people has been å basic economic problem. It is the cause of poverty in the economy. The creation of employment through various employment generation schemes has been a major objective of the fiscal policy.

(7) Balanced Economic Development: Balanced economi development can be done through fiscal policy. The governmen invest in those sectors where private enterpreneurs are not ready to invest their money such as transport, power, irrigation and water supply facilities etc. Government expenditure in these areas facilitates balanced development in the country.

Q.24. What do you understand by the components of Fiscal Policy ? Explain the main drawbacks of Fiscal Policy in India.


Explain the Fiscal Policy of India. Explain its main

Or draw backs. (Meerut, 2013)

Ans                        MAIN COMPONENTS OF FISCAL POLICY

The main components of Fiscal Policy are as follows:


(1) Taxation Policy : Taxation policy of the government is a basic component of fiscal policy. In the year 2010-11 about 56.4% of revenue of Central and State Government of India came from tax revenue. Taxation policy can prove helpful in capital formation, generating employment opportunities, reducing inequilities in the distribution of income and wealth and to check the rapid inflation in the country. Imposing taxes at high rates on the rich class and spending the such accumulated money for the welfare of poor people, inequilities of wealth and income can be reduced. With the help of taxation policy total volume of savings and investment can be increased by diverting the wasteful and luxury spending to saving. But when taxation policy discourages investments, brings slackness in output and causes recession in employment, then it will be treated as imperfect.

(2) Publie Expenditure Policy: In the developing countries like India, public expenditure policy is used as a important policy instrument for economic development of the country. This policy helps to safeguards the interests of common people and providing Justice and equility to weaker section of the society. This policy should be designed in such a way which promote welfare of less Privileged classes. Expenditure on agriculture, irrigation, education, medical and public health will improve the economic condition of the weaker sections of the society. By setting up various projects in under-developed areas, the  government facilitates balanced development in the country. Construction works and other community development programmes can be encouraged to provide employment in the rural areas. Thus, by spending on infrastructure, maintaining law and order and providing services for social welfare, the government promotes rapid economic development. but when

government spend excessively on administration and in expenditure on unnecessary economic subsidy and programmes, then it create inflationary problems and affect can formation adveršely.

In 2009-10, share of public expenditure in national income 18.83 percent.

(3) Public Debt Policy : Underdeveloped and developing countries need huge amount of capital at a time to invest simultaneously in various activities. Taxation and small saving cannot fulfill this requirement, hence the government takes loans from domestic and foreign financial institutes. Amount of debt are used to finance the development programmes. To obtain loans government issue bonds and debentures and provide interest on them. If loans are used for the productive works then it increase employment opportunities and pace of economic development in the country. But irrational debt policy and use of debts in unproductive works increase debt burden of the country and create inflationary situations.

B.Com Ist Year Fiscal Policy Long Short Question Answer Notes

(4) Budgetary Policy : It is the last and most important component of fiscal policy. To determine the form of income, expenditure, savings and investment, government of every country prepare budget for a certain period. To check the inflation and deflation and in maintaining economic stability, budget plays a vital role. During deflation government prepare deficit budget to increase the purchasing power of the people. Government also increase its expenditure to increase the level of production, employment and income. On the other hand to check the inflation, government prepare surplus budgets, increase tax rates and decrease its unnecessary expenditures.





Some of the drawbacks of fiscal policy of India are as follows:

(1) Lack of Integrated Tax System : The Indian tax system is hapazard and has not been scientifically planned to bring about a progressive development of revenues. Little attentions seems to have been paid to the incidence of taxation and its effects. production and distribution in the country.

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