Let us make in-depth study of the relation among fiscal policy, inclusive growth, equity and price stability in India.

Fiscal Policy Inclusive Growth and Equity:

Let us now explain how fiscal policy can be used to achieve equitable distribution of income.

Attainment of a wider measure of equality in incomes, wealth and opportunities must form an integral part of economic development and social advance. Existence of gross inequalities is a social evil and no measure of economic growth will increase economic welfare unless an equitable distri­bution of the rising national product is assured. Instrument of taxation and certain types of govern­ment expenditure are used as a means of bringing about a redistribution of income in favour of the poorer sections of the society.

It is worth noting that in a poor underdeveloped country the objective of equity can be achieved if fiscal policy seeks to reduce mass poverty and unemployment that prevails in it. A caution is, however, necessary. It is essential to strike a balance between the two objectives of lessening economic inequalities and that of sustaining and strengthening incentives to invest and accelerating economic growth.


Fiscal policy must maintain unimpaired the flow of savings and investment which makes for continued progress of productive enterprises. Higher economic growth and greater equality are both objectives of high importance. Higher incomes can be taxed without adverse repercussions on private productive effort and enterprise.

To achieve equity, income tax in India has been made progressive. Rate of income tax at present is 10 per cent in the tax slab of Rs. 2, 00,000 to 5, 00,000, 20 per cent in the slab of Rs. 5, 00,000 to 10, 00,000 and 30 per cent in the income above Rs. 10, 00,000. Besides, there was surcharge of 10 per cent on income above Rs. 10 lakhs, which was withdrawn in 2009-10 budget. Besides, there are wealth tax and expen­diture tax on the rich persons. In 2013-14 to achieve equity 10 per cent surcharge on personal income of over Rs. one crore has been levied.

This is only token super rich tax which needs to be raised if the objective of equity is to be realised. Optimum rate of growth and maximum social welfare are not irreconcilable. It will be possible to reconcile these two objectives by the formulation of a well-balanced fiscal programme.

But lessening inequalities through taxing higher incomes is only one form of fiscal operations. A better and complementary fiscal policy consists of increasing public expenditure for promoting welfare of the poor and less privileged classes. Increasing public expenditure on anti-poverty programmes such as National Rural Employment Guarantee (NREG) Scheme and Antyodaya Anna Yojana, Bharat Nirman Yojna will ensure equity in income distribution. Stepping up of public expenditure on primary education and public health will greatly improve the economic conditions of the poor people.


In fact, international experience shows that active public expenditure policies aimed at raising the consumption of the poor are far more effective in promoting equity as compared to tax policies aimed at containing the incomes of the rich.

It is in this context that economic policy of new UPA government lays emphasis on achieving through fiscal policy generation of employment opportunities in agriculture, manufacturing and services by promoting investment, providing 100 days employment to the bread earner in each family at minimum wages, food for work programme in 150 districts of the country, ensuring universal access to quality basic education and health.

For this purpose adequate funds are being provided for Sarv Shiksha Abhiyan, Midday Cooked Meal scheme, basic health care, drinking water facilities in villages. In this connection P. Chidambaram, our former Finance Minister says, “The poor want education for their children: we shall provide it …. We shall also make sure that the child is not hungry while he or she is at school”.

The poor want drinking water: we shall ensure that every habitation has an assured source of drinking water. The poor want basic health care, medicines at fair prices and doctor within a reasonable distance: we shall ensure that the public health system has adequate human and financial resources to provide basic medical care.


The poor want jobs for their children we shall ensure through higher investment, and through targeted intervention, jobs are available to them. 3 per cent education cess on all central taxes such as income tax, corporation tax, excise duties has been imposed to collect funds necessary for achieving objective of universal elementary education. However, the above promises by the Finance Minister are tall claims. Up till 2014 we are far away from the achievement of these goods.

Fiscal Policy and Price Stability:

India as well as other developing countries have been experiencing the problem of rising prices or inflation. Inflation in them has been of both demand-pull and cost-push types. The main cause of demand-pull inflation has been the fiscal deficit in Government’s budgets which has arisen because Government has not been able to finance the mounting public expenditure through revenue from taxes and public sector surpluses.

In India in the year 1986-87, fiscal deficit of the Central govern­ment rose to 8.5 per cent of GDP (Gross Domestic Product) and even after 5 years of efforts, the Indian Government had not been able to achieve a significant reduction in fiscal deficit. In 1990-91, fiscal deficit was estimated to be of the order of 6.6 per cent of GDP, whereas to achieve price stabilisation IMF recommended its reduction to 3 per cent of GDP.

Therefore, under the New Economic Policy adopted since 1991, efforts were made to reduce fiscal deficit by reducing Government expenditure and raising more resources through taxes. As a result, fiscal deficit the Central Government was reduced to 5.4 per cent in 1999-2000 and this helped in bringing inflation under control.

However, to fight recessionary conditions in Indian industrial sector during three years period (2000 – 2003), the Government had to raise its expenditure resulting in higher deficit of 5.7 % of GDP in 2000-01, 6.2% in 2001-02 and 5.9 per cent in 2002-03.

To follow fiscal prudence in fiscal policy, Fiscal Responsibility Budget Management Act FRBMA was enacted in 2003 to reduce fiscal deficit to 3 per cent by 2008-09, As a result of fiscal efforts fiscal deficit was brought down to 2.7 per cent of GDP in 2007-08. However, again in 2008 there was slowdown in the Indian economy as a result of global financial crisis.

To keep the growth momentum the Government had to increase its expenditure and cut certain taxes to provide fiscal stimulus to the economy. Consequently fiscal deficit rose to 6.0 per cent in 2008-09 and 6.4 per cent in 2009-10. This had inflationary potential. Food inflation rose to over 18 per cent in Jan. 2010.

Though inflation measured by CPI had risen to 11.5 per cent in Jan. 2010, inflation rate as measured by WPI rose to 10.56 per cent in June 2010. Initially it was believed that WPI inflation was driven by supply-side factors, but later it was realised that demand pressures contributed a good deal to this double-digit WPI inflation. Apart from planned reduction in fiscal deficit to 5.1 per cent 2010-11 and to 4.6 per cent in 2012-13 no concrete fiscal policy measures were announced to fight this higher inflation rate.

The consumer price Index (CPI) for Industrial workers rose to 9.85 per cent (YOY) in September 2013 and food inflation increased has risen above 18 per cent in September 2013. Dispute some measures taken by the Government and the RBI rates of retail inflation and food inflation have remained high in 2012-13 and 2013-14.


A huge fiscal deficit of Central Government is financed in two ways:

(1) By Government borrowing from the market,

(2) By monetizing the deficit which is commonly called deficit financing in India.

A high degree of fiscal deficit leads to excess market borrowing by the Government which causes expansion in bank credit to the Government and therefore leads to increase in money supply in the economy causing prices to rise. Besides, excessive Government borrowing from the market leads to the rise in interest rate which discourages private investment.


Further, a part of fiscal deficit is financed through borrowing from Reserve Bank of India which issues new currency (which is called reserve or high powered money) for the Government. This causes greater expansion in money supply through the process of money multiplier and generates inflationary pressures in the economy. Thus, to check the rate of inflation, fiscal deficit has to be reduced through both raising revenue of the Government and reducing non-plan Government expenditure.

Goods and Service Tax (GST):

An important fiscal reform recommended by Kelkar committee was the introduction of a “Goods and Services Tax (GST)” which will replace all multistage value added taxes such as CENVAT and service tax levied by the Centre sales tax, entertainment tax, luxury tax and VAT levied by the States. This comprehensive tax on goods and services will not only simplify the indirect tax structure in the country but will also yield more revenue for the Government.

The significant cause of complexity of the present indirect tax system is related to the existence of various exemptions and multiple rates of CENVAT on various commodities and different rates of VAT levied by the States. The starting base for central excise duty or CENVAT is narrow and is further eroded by a variety of area-specific and conditional and unconditional exemptions. Therefore, the introduction of Goods and Services Tax (GST would thus be appropriate for deepening tax reforms.

Thus, the Goods and Service Tax (GST) is a final tax on buying goods and services as taxes paid on inputs that go into the production of a particular good or service have been excluded so that there is no cascading effect of taxes. To put it simply, GST is levied only on the value added at every stage of production. Thus goods and service tax system ensures that when the final tax is calculated, tax paid on inputs is taken out and the tax is paid on the cost of the final good produced.

GST rate:


There is no decision yet on the rate structure of GST. A task force set up by the Thirteenth Finance Commission in its report recommended a rate of 12%. States, however, have said they will not settle for a rate less than 15%. Internal studies carried out by the Centre and various states point to rate of 14-16%. At present, the talks have veered round to the view that there should be two slabs – one lower or floor rate for essential items and another higher or effective rate for most items. There will also be an exempted list of items and a lower rate of 1% for precious metals such as gold, platinum, silver.

Impact of GST on Prices?

If the GST rate is pegged at 16%, it will lower the price of goods but push up the cost of services. For example, a good attracting 8% excise duty and 12% VAT faces a total tax of 20%. That will fall to 16%. However, cost of consuming services will go up, as service tax rate is currently 10%.

GST is a broad-based consumption tax which is expected to yield more revenue both for the States and Centre. The Empowered Committee of State Finance Ministers in November 2007 had recommended a “dual” GST levied concurrently by both levels of government (i’. e. Centre and States).

The dual GST tax strikes a good balance between fiscal autonomy of the Centre and States and the need of harmonization of tax structure. The empowered committee recommended that both levels of government (i.e. Centre and States) should apply this GST tax to a comprehensive base of goods and services at all points in the supply chain. It will also eliminate the tax cascading, which occurs because of truncated or partial application of the Centre and State taxes.

GST will Benefit both Industry and Government:

GST will eliminate the cascading effects of multiple layers of taxation all over the country. It will also help create a seamless national market, as the plethora of taxes and checks that movement of goods faces will go. For both the centre and state governments, integration of goods and services taxation across the country will create a world-class tax system and improve tax collections as it will end the long standing distortions of differential treatments of manufacturing and service sector and end exemptions. Moreover, GST is a tax on consumption and will reduce the incidence of evasion.