Fiscal Policy and Centre State Finance
NCERT Class 12 • Introductory Macroeconomics • Chapter "Government Budget and the Economy" | NCERT Class 11 • Political Science • Federalism chapters
Fiscal Policy and Centre State Finance
Fiscal policy is the use of government spending and taxation to influence the level of economic activity. It works alongside monetary policy but acts more directly, since a change in government spending enters the economy as demand immediately rather than through the credit market.
Expansionary and Contractionary Policy
- Expansionary fiscal policy raises government spending or cuts taxes to increase demand during a slowdown.
- It is used when output is below capacity and unemployment is high.
- Contractionary fiscal policy cuts spending or raises taxes to reduce demand when inflation is high.
- Fiscal policy can be targeted at a region or a sector, which monetary policy cannot do.
- Automatic stabilisers work without any new decision: tax collection falls in a slowdown and welfare spending rises, which cushions the fall by itself.
- The main limits of fiscal policy are the time lag in decision and implementation, and the constraint of existing debt.
Centre State Financial Relations
- The Constitution divides taxation powers between the Union and the states, so each has its own list of taxes.
- The Finance Commission is constituted periodically to recommend how the shareable central tax revenue should be divided between the centre and the states and among the states.
- Its recommendations cover the share of taxes, grants in aid and measures to support local bodies.
- States also receive central assistance for specific schemes, and the goods and services tax council decides GST rates jointly.
- Local bodies, that is panchayats and municipalities, receive funds through the state government and through Finance Commission grants.
- Balanced regional development requires transfers to flow towards states with weaker revenue capacity.
| Situation | Fiscal Policy | Action |
|---|---|---|
| Slowdown and unemployment | Expansionary | More spending, lower taxes |
| High inflation | Contractionary | Less spending, higher taxes |
| Automatic response | Stabilisers | Tax falls, welfare rises by itself |
Automatic stabiliser — a feature of the budget that dampens fluctuations in output without any fresh policy decision.
Exam me kaise aata hai
- Raising spending during a slowdown is — expansionary fiscal policy
- Which body recommends sharing of central taxes with states — the Finance Commission
- Welfare spending rising automatically in a slowdown is an — automatic stabiliser
- Fiscal policy uses which two main instruments — spending and taxation
UPSC/State PSC ke liye
- Fiscal policy can be targeted by region and sector, which is exactly why it is preferred for correcting regional imbalance while monetary policy is uniform nationwide.
- Transfers to states matter for equity because states differ sharply in their own revenue capacity while their spending responsibilities are similar.
Yahan confuse hote hain
✗ Fiscal policy is run by the central bank | Fiscal policy is run by the government through the budget | ✓
✗ Automatic stabilisers need a new decision each time | They work by themselves without a fresh decision | ✓
✗ Expansionary policy is used during inflation | It is used during a slowdown; contractionary policy is used during inflation | ✓
Ek nazar me
- Fiscal policy uses government spending and taxation.
- Expansionary for a slowdown; contractionary for high inflation.
- Automatic stabilisers cushion the cycle without new decisions.
- The Finance Commission recommends how central taxes are shared with states.
Ab practice karein
Budget aur fiscal deficit se har exam me direct questions bante hain. ExamAtlas ke mock test se apni taiyari abhi jaanchein.