Fiscal policy in India is the guiding force that helps the government decide how

much money it should spend to support the economic activity, and how much
revenue it must earn from the system, to keep the wheels of the economy
running smoothly. In recent times, the importance of fiscal policy has been
increasing to achieve economic growth swiftly, both in India and across the
world. Attaining rapid economic growth is one of the key goals of fiscal policy
formulated by the Government of India.
Through the fiscal policy, the government of a country controls the flow of tax
revenues and public expenditure to navigate the economy. If the government
receives more revenue than it spends, it runs a surplus, while if it spends more
than the tax and non-tax receipts, it runs a deficit. To meet additional
expenditures, the government needs to borrow domestically or from overseas.
Alternatively, the government may also choose to draw upon its foreign
exchange reserves or print additional money.
For example, during an economic downturn, the government may decide to
open its coffers to spend more on building projects, welfare schemes,
providing business incentives, and so on. The aim is to help make more of
productive money available to the people, free up some cash with the people
so that they can spend it elsewhere and encourage businesses to make
investments. At the same time, the government may also decide to tax
businesses and people a little less, thereby earning lesser revenue itself.
However, the main objectives of Fiscal Policy in India are to achieve and
maintain the level of full employment in the country. It aims to achieve full
employment, or near full employment, as a tool to recover from low economic
activity. Next, Fiscal Policy to stabilize the growth rate in the economy. Fiscal
policy helps maintain the economy’s growth rate so that certain economic
goals can be achieved. Other than that, Fiscal Policy helps to stabilize the
pricing level in the economy. It controls the price level of the country so that
when the inflation is too high, prices can be regulated.
Next, Monetary policy. Monetary policy is the process by which the monetary
authority of a country, generally the central bank, controls the supply of
money in the economy by its control over interest rates in order to maintain
price stability and achieve high economic growth. In India, the central
monetary authority is the Reserve Bank of India (RBI). The RBI implements the
monetary policy through open market operations, bank rate policy, reserve
system, credit control policy, moral persuasion and through many other
instruments. Using any of these instruments will lead to changes in the interest
rate, or the money supply in the economy.

We have already seen that monetary policy refers to the actions undertaken by
a nation’s central bank to control the money supply. Control of money supply
helps to manage inflation or deflation. The monetary policy can be
expansionary or contractionary.

An expansionary monetary policy is focused on expanding (increasing) the

money supply in an economy. An expansionary monetary policy is
implemented by lowering key interest rates thus increasing market liquidity.

A contractionary monetary policy is focused on contracting (decreasing) the

money supply in an economy. A contractionary monetary policy is
implemented by increasing key interest rates thus reducing market liquidity.

The primary objective of monetary policy is to maintain price stability while

keeping in mind the objective of growth. Price stability is a necessary
precondition for sustainable growth.

To maintain price stability, inflation needs to be controlled. The government of

India sets an inflation target for every five years. RBI has an important role in
the consultation process regarding inflation targeting. The current inflation-
targeting framework in India is flexible in nature.
While the main objective of the monetary policy is economic growth as well as
price and exchange rate stability, there are other aspects that it can help with
as well. Firstly, monetary policy helps to promote of saving and investment.
Since the monetary policy controls the rate of interest and inflation within the
country, it can impact the savings and investment of the people. A higher rate
of interest translates to a greater chance of investment and savings, thereby,
maintaining a healthy cash flow within the economy. Secondly, monetary
policy controls the imports and exports. By helping industries secure a loan at a
reduced rate of interest, monetary policy helps export-oriented units to
substitute imports and increase exports. This, in turn, helps improve the
condition of the balance of payments.