Fiscal Policy & Budget

Every February 1st, the Finance Minister stands in Parliament and announces the Budget. Stock markets swing wildly. News debates rage. But what is it actually?

1. What is Fiscal Policy?

Fiscal Policy = How the Government uses:

1. Taxes (Revenue collection).
2. Spending (Expenditure on roads, schools, subsidies).

to influence the economy.

Goal: Manage growth, employment, and inflation.

2. Fiscal Policy vs Monetary Policy

Aspect	Fiscal Policy	Monetary Policy
Who	Government (Finance Ministry)	RBI
Tools	Taxes, Spending	Interest Rates, Money Supply
Speed	Slow (Needs Parliament approval)	Fast (MPC decides)
Example	Building highways, GST cut	Repo Rate change

3. The Union Budget (India's Financial Plan)

The Budget is a statement of:

1. Revenue (Taxes, Fees).
2. Expenditure (Where money will be spent).
3. Deficit (Borrowing needed if Expenditure > Revenue).

A. Revenue Side (Income)

Tax Revenue:

• Direct Taxes: Income Tax, Corporate Tax (48% of total).
• Indirect Taxes: GST, Customs Duty (52%).

Non-Tax Revenue:

• Dividends from PSUs (ONGC, Coal India).
• Spectrum Auction (Telecom).
• Disinvestment (Selling govt stake in companies).

B. Expenditure Side (Spending)

1. Capital Expenditure (CapEx): Roads, Railways, Airports (Builds assets).
2. Revenue Expenditure (RevEx): Salaries, Subsidies, Interest on debt (Recurring).

Key Allocations (2024 Budget):

• Defense: ₹6 Lakh Cr.
• Infrastructure: ₹10 Lakh Cr.
• Education: ₹1.2 Lakh Cr.
• Subsidies (Food, Fertilizer): ₹4 Lakh Cr.

4. Fiscal Deficit (The Big Number)

Fiscal Deficit = Total Expenditure - Total Revenue.

If Govt spends ₹45 Lakh Cr but earns only ₹30 Lakh Cr → Deficit = ₹15 Lakh Cr.

How to fill the gap?

• Borrow (Issue bonds).

Fiscal Deficit as % of GDP:

• Target: Below 3% (Healthy).
• India (2024): ~5.9% (High, but improving).
• COVID (2020): 9.5% (Emergency spending).

Why does it matter?

• High Deficit → Govt borrows more → Interest rates rise → Private sector gets crowded out.
• Too Low Deficit → Less spending → Slow growth.

5. Types of Fiscal Policy

A. Expansionary Fiscal Policy (Gas Pedal)

When: Recession, Low Growth. Action:

• Increase Spending (Build roads, give subsidies).
• Decrease Taxes (People have more money to spend).

Example: COVID stimulus packages (₹20 Lakh Cr in 2020).

Effect: Boosts demand, creates jobs. Risk: High deficit, inflation.

B. Contractionary Fiscal Policy (Brakes)

When: High Inflation, Overheating Economy. Action:

• Decrease Spending.
• Increase Taxes.

Effect: Cools down economy. Risk: Recession, unemployment.

6. Budget Day: What to Watch

For Investors:

• Income Tax Slabs: Any relief?
• Capital Gains Tax: Changes in LTCG/STCG?
• Sector Allocation: Railways, Defense, Infra (Related stocks rally).

For Businesses:

• Corporate Tax Rate: Any cuts?
• Customs Duty: Import/Export impact.

For Common Man:

• Standard Deduction: Increased?
• GST Rates: Any goods cheaper?
• Subsidies: LPG, Food grains.

7. India's Budget Process

1. October-December: Ministries submit spending proposals.
2. January: Finance Ministry consolidates.
3. February 1st: Budget presented in Parliament.
4. March: Passed by Parliament.
5. April 1st: New financial year begins.

8. Famous Budget Moments

• 1991: Liberalization Budget (Opened economy).
• 2017: GST Introduced (One Nation, One Tax).
• 2020: ₹20 Lakh Cr COVID package.

7-Day Action Plan

Day 1: Watch the next Budget speech (Live on Feb 1st). Follow along with a cheat sheet.
Day 2: Check the Economic Survey (Released 1 day before Budget). It diagnoses the economy.
Day 3: Learn the difference between "Interim Budget" (Election year) and "Full Budget".
Day 4: Understand "Revenue Deficit" = Revenue Expenditure - Revenue Receipts.
Day 5: Check India's debt-to-GDP ratio (Currently ~85%). Compare with Japan (260%) and USA (120%).
Day 6: Read about "FRBM Act" (Fiscal Responsibility & Budget Management). It sets deficit targets.
Day 7: Follow the Finance Minister on Twitter. Budget announcements happen there first now!

Quiz

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💡 Final Wisdom: "A budget is not just numbers. It's a nation's priorities on paper. Read between the lines."