Model Answer
0 min readIntroduction
India’s fiscal policy underwent a significant transformation following the economic liberalisation of 1991. Prior to this, the policy was largely characterized by import substitution, high tariffs, and extensive government control. The balance of payments crisis of 1991 necessitated structural reforms, leading to a shift towards a more open and market-driven economy. These changes encompassed tax reforms, expenditure management, and a greater emphasis on fiscal consolidation. However, the question remains whether these reforms have truly delivered ‘growth with social justice’, ensuring that the benefits of economic expansion are equitably distributed across all sections of society.
Evolution of Fiscal Policy Post-Liberalisation
The initial phase (1991-2000s) focused on stabilisation and structural adjustment. Key changes included:
- Reduction in Tariffs: Import tariffs were progressively lowered, exposing Indian industries to global competition.
- Tax Reforms: Introduction of Value Added Tax (VAT) aimed at streamlining the indirect tax system.
- Fiscal Consolidation: Attempts were made to reduce the fiscal deficit, though with limited success initially.
The FRBM Act and Subsequent Reforms (2000s-2010s)
The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, marked a significant step towards fiscal discipline. It mandated the government to reduce the fiscal deficit and revenue deficit over a specific timeframe. However, the Act faced challenges in implementation, particularly during periods of economic slowdown.
- FRBM Act, 2003: Aimed for fiscal consolidation, setting targets for deficit reduction.
- Increased Expenditure on Social Sector: Schemes like the National Rural Employment Guarantee Act (NREGA) – later renamed MGNREGA (2005) – were launched to provide employment and income support to rural households.
- Disinvestment Policy: Continued disinvestment in Public Sector Undertakings (PSUs) to raise revenue and improve efficiency.
GST and Recent Trends (2010s-Present)
The introduction of the Goods and Services Tax (GST) in 2017 was a landmark reform, creating a unified national market. More recently, fiscal policy has been influenced by the COVID-19 pandemic and the need for countercyclical measures.
- Goods and Services Tax (GST), 2017: Simplified the indirect tax structure, improving tax compliance and efficiency.
- Increased Capital Expenditure: Focus on infrastructure development to boost economic growth.
- Countercyclical Fiscal Policy: Increased government spending during the COVID-19 pandemic to mitigate the economic impact.
Growth with Social Justice: An Assessment
While economic growth has undoubtedly accelerated post-liberalisation, the extent to which it has been inclusive remains debatable.
| Indicator | Pre-Liberalisation (1990-91) | Post-Liberalisation (2022-23) |
|---|---|---|
| GDP Growth Rate | ~5.6% | ~7.2% |
| Poverty Headcount Ratio | ~35% | ~11.3% |
| Gini Coefficient | ~0.33 | ~0.47 |
The table shows that while poverty has declined, income inequality (as measured by the Gini coefficient) has increased.
- Positive Impacts: MGNREGA has provided a safety net for rural populations. Increased access to education and healthcare has improved human development indicators.
- Negative Impacts: The benefits of growth have been unevenly distributed, with the upper strata of society benefiting disproportionately. Agricultural distress and rural unemployment remain significant challenges.
- Regional Disparities: Growth has been concentrated in certain regions, exacerbating regional inequalities.
Conclusion
The changes in India’s fiscal policy since liberalisation have undeniably contributed to higher economic growth. However, achieving ‘growth with social justice’ remains an ongoing challenge. While schemes like MGNREGA have mitigated some of the negative consequences of liberalisation, addressing income inequality, regional disparities, and agricultural distress requires a more comprehensive and targeted approach. Future fiscal policy needs to prioritize inclusive growth, investing in human capital, and strengthening social safety nets to ensure that the benefits of economic progress are shared by all.
Answer Length
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