Analysis of Fiscal Policy Regime Since 1970s

Fiscal policy and its macroeconomic linkages have always been an unsettled issue. In this paper, I have tried to address this particular issue. The three major debates over the fiscal policy regime are ‘Crowding Out’, ‘Inflation’ and ‘Financing of Deficit’; this paper has tried to discuss all of them. The paper has tried to highlight the fallacies in economics being followed by the policy makers in India. The paper clearly spells the desirability of direct taxes over indirect taxes.

Also in this paper, an attempt was made to analyze general trends in fiscal policies in India since 1970s. It is important to analyze the scenario since 1970s because the ischolar_mains of fiscal crisis in 1990s lie in 1970s only. Rising revenue deficit was one of the causes of fiscal crisis in 1990-91 and post-1990 restrictions were imposed by IMF and fiscal deficits were reduced but on the cost of reduction in social expenditures.

The trend shows that in the period 1970 – 2002, the share of direct taxes to GDP remained stagnant for a very long time. The increase in the tax revenue has been possible because of increase in indirect taxes. In fact when compared internationally, India’s Tax-GDP ratio was low by international standards as well. Post 2002, the rise in direct taxes collection can be attributed to increase in profit of the corporate. Next, the paper discusses why there is no clear relationship between lowering tax rate and increasing tax revenue.

In light of all these trends the case for lowering the tax rates does not hold any good. It doesn’t make sense that a small section of population is provided relaxation when that revenue can be used to finance the deficits. Lowering tax rate to increase tax compliance is totally incorrect. The reasons of tax evasion are different and are not related to high tax rates. Increasing the share of direct taxes is essential and the best way to finance fiscal deficit. There is a lot of scope for pro-equity reforms in India.