Instruments of Fiscal Policy


instruments of Fiscal policy are the integral part of a government’s economic framework i.e it becomes a guiding force for a government to manage the macroeconomic variables of a country effectively while ensuring control of inflation, price stabilization, providing full employment, and adequate tax collection.

In this article, we will learn about What is Fiscal policy, Fiscal policy in India, the Instruments of fiscal policy, and how the change in taxes encourages and discourage inflation. investment and consumption.

► What is Fiscal Policy?

Fiscal policy refers to the policy under which the government uses the instruments of taxation, public borrowing, and public expenditure to influence the nation’s economy and try to achieve various determined objectives.

Fiscal policy is responsible for setting the stage for the achievement of economic and social goals.

Fiscal Policy in India

In a developing country like India, fiscal policy plays a key role in determining the economic condition of the nation which is mainly regulated through the budget passed by the government annually.

Fiscal policy in India not only encourage investment in public sector education, health, and social security for the vulnerable section to end the vicious circle of poverty but also focus on providing incentive and subsidies tax exemption to private investment that increases the rate of capital formulation so that economic growth of the country can be accelerated.

In India fiscal policy is an instrument that helps the government to decide how much money it should spend and how much revenue it must earn to ensure the smooth functioning of the economy.

► Instruments of Fiscal Public

The important instruments of fiscal policy used by the government is as follows.

  • Government Receipt or taxation
  • Government Expenditure
  • Public debt
  • Budget


The budget is not only a statement of receipt and expenditure of government but it reflects the shape and future of the country’s economy.

Budget is a kind of force that can move the country forward on the path of growth, stability, and social justice.

Mainly government budget has two accounts.

  • Revenue Account
  • Capital Account

Government Receipts

The earnings of the government mainly come through taxes levied by the government. Taxes levied by the government determine the disposable income of the individual which directly impacts consumption and investment in the economy.

A healthy taxation policy helps the government to control inflation and deflation which is crucial for the smooth operation of economic activities.

During inflation → government increase taxes → lower disposable income→ Lower private demand for goods and services, investment, and consumption

During deflation → government decreases taxes → higher disposable income→ higher private demand of goods and services, investment, and consumption

The categorization of the government receipts is given below:

✔ 1. Revenue Receipt

A. Tax Revenue
  • Direct Tax – Income tax, Corporate tax, Capital gain tax, Property tax, etc.
  • Indirect Tax – GST, VAT, Customs duty, Exercise duty, Sales tax

B. Non-Tax Revenue

  • Interest receipt
  • Dividends from PSU
  • License and Permits
  • Fines and Penalties, etc
  •  External grant assistance

✔ 2. Capital Receipt

  • Loans Recovery
  • Disinvestments
  • Borrowing and other liabilities

Also Read : What is Fiscal Policy in India?

◉ Government Expenditure

Government expenditure or Public expenditure is a vital element of government fiscal policy. Government expenditure is used to facilitate the production of goods, services and capital assets,  income, and employment.

There are two classifications of public expenditure:

✔ 1. Revenue Expenditure

It is a recurring expenditure:

  • Loan interest payments
  • Major subsidies
  • Grants to states for the creation of capital assets
  • Defense Expenses
  • Salaries and pensions for Government employees

2. Capital Expenditure

It is a non-recurring expenditure

  • Loans repayments
  • Creation of new assets and infrastructure
  • Loans to public enterprises, etc.

◉ Public Debt

To meet its expenditure, government borrow money from the banks, RBI, national and foreign institution, and common people through the sales of bonds and securities.

Borrowing from the public effect the money supply which helps in controlling inflation in the economy.

Sources of public debt are.

✔ 1. Internal debt

  • T bills
  • Ways and means advances
  • Dated securities
  • National small saving fund
  • Cash management bill, etc.

✔ 2. External debt

  • A loan from multinational institutions like IMF, World bank, etc.
  • Bilateral debt