Fiscal measures are actions taken by the government to influence economic conditions through changes in government spending and taxation. When combating inflation, the Government of India (GOI) uses a range of fiscal tools to stabilize prices, manage demand, and support economic growth.
Key Fiscal Measures
- Government Spending Adjustments
a. Reduction in Public Expenditure:
- Objective: Reducing government spending can help control inflation by decreasing the overall demand in the economy. High public spending can contribute to demand-pull inflation if it outstrips the economy’s capacity to produce goods and services.
- Example: If inflation is high, the GOI might cut spending on public projects or subsidies. For instance, reducing expenditure on infrastructure projects like road construction can decrease overall demand, helping to ease inflationary pressures.
b. Redirecting Spending:
- Objective: Redirecting government spending towards essential areas or those that boost productivity can help manage inflation. For instance, investing in sectors that enhance supply chain efficiency can address supply-side constraints.
- Example: The GOI might increase spending on agriculture and food storage infrastructure to improve supply chain efficiency and reduce food price inflation. This could involve building more cold storage facilities to reduce post-harvest losses and stabilize food prices.
- Taxation Policies
a. Increasing Taxes:
- Objective: Increasing taxes can reduce disposable income for consumers and businesses, thereby lowering spending and demand in the economy, which helps in controlling inflation.
- Example: The GOI might raise the Goods and Services Tax (GST) on non-essential goods or luxury items. This increase in indirect taxes can reduce consumption of these goods, helping to lower inflationary pressures.
b. Targeted Subsidies:
- Objective: Providing targeted subsidies can help manage inflation by easing the burden on lower-income households and reducing the impact of price increases on essential goods.
- Example: To combat rising food prices, the GOI might provide subsidies on essential food items like wheat and rice. This can help control inflation in the food sector and protect vulnerable populations from sharp price increases.
- Subsidy Reforms
a. Phasing Out Inefficient Subsidies:
- Objective: Phasing out or reforming inefficient subsidies can help reduce fiscal deficits and avoid inflating the economy. Inefficient subsidies can lead to distortions in the economy and contribute to inflation.
- Example: The GOI might reform fuel subsidies by gradually reducing them and allowing market prices to adjust. This can help reduce fiscal pressure and encourage more efficient energy use, though it might lead to short-term price increases.
b. Implementing Targeted Subsidies:
- Objective: Targeting subsidies more effectively ensures that financial support reaches those who need it most, without distorting market prices excessively.
- Example: The GOI might provide direct cash transfers to low-income households instead of broad-based subsidies. This approach can help manage inflation without distorting prices in the broader economy.
- Public Sector Reforms
a. Improving Efficiency in Public Enterprises:
- Objective: Enhancing the efficiency of public sector enterprises can reduce fiscal deficits and manage inflation by decreasing the need for government subsidies and increasing productivity.
- Example: The GOI might implement reforms in state-owned enterprises like power distribution companies to improve operational efficiency. This can help lower operational costs and reduce the need for subsidies, contributing to inflation control.
- Debt Management
a. Reducing Fiscal Deficits:
- Objective: Reducing fiscal deficits through prudent fiscal management can help control inflation by reducing the government’s borrowing needs and mitigating inflationary pressures from excessive money supply.
- Example: The GOI might implement measures to increase revenue, such as improving tax compliance or broadening the tax base, while controlling expenditures. This can help in reducing fiscal deficits and managing inflation more effectively.
Example of Fiscal Measures in India
1. 2013-14 Food Inflation:
Context: In 2013, India faced high food inflation due to rising prices of essential food items.
Fiscal Measures Taken:
- Increased Subsidies: The GOI increased subsidies on food items through the National Food Security Act, providing subsidized food grains to low-income households.
- Improved Storage Facilities: Investment in food storage and transportation infrastructure was increased to reduce supply chain bottlenecks and minimize post-harvest losses.
Outcome:
- The targeted subsidies helped mitigate the impact of rising food prices on vulnerable populations.
- Investments in storage and infrastructure aimed to stabilize food prices by improving supply chain efficiency, though the impact on inflation was gradual.
2. Fuel Subsidy Reforms (2014-15):
Context: Rising global crude oil prices led to increased domestic fuel prices, contributing to inflationary pressures.
Fiscal Measures Taken:
- Phased Reduction of Fuel Subsidies: The GOI implemented a phased reduction in fuel subsidies, allowing retail prices of diesel and petrol to adjust more closely to global market prices.
- Direct Cash Transfers: Introduced direct cash transfer schemes to compensate for the reduction in subsidies for low-income households.
Outcome:
- The reform helped reduce the fiscal burden on the government and encouraged more efficient energy consumption.
- While fuel prices initially increased, the cash transfer schemes provided some relief to affected households, helping to manage the inflationary impact.
Conclusion
Fiscal measures are crucial tools for the Government of India in combating inflation. By adjusting government spending, modifying taxation policies, reforming subsidies, improving public sector efficiency, and managing debt, the GOI can influence inflationary pressures and stabilize the economy. Effective use of these measures helps in maintaining price stability, promoting economic growth, and protecting the purchasing power of consumers
