Fiscal policy can be a key tool to reduce income inequality as well as make the poorest and the downtrodden a part of the country’s growth story.

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Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth.

Fiscal policy can be a key tool in reducing income inequality as well as making the poorest and downtrodden a part of the country’s growth in the following ways:

  • Taxation: Taxes have a direct bearing on people’s income, affecting their levels of disposable income, purchase of goods and services, consumption, and ultimately their standard of living. In order to reduce income inequality, the following measures have been taken:
    • India has adopted a progressive taxation system. It involves different rates of income taxation as per different slabs, thereby taxing people as per their income levels.
    • Similarly, the indirect taxation in India, such as the GST has different rates as per the type of goods or services. For example, essential items attract low taxes while luxury items such as washing machines, water parks, outdoor catering, etc. attract higher taxes.
  • Public Expenditure: Through fiscal policy, the government ensures that public expenditure directly intervenes for the welfare of society, especially the poor and downtrodden sections.
    • For example, Schemes involving targeted cash transfers such as PAHAL, National Social Assistance Programme, etc. ensure that the poor sections of society have access to resources required for their sustenance.
  • Schemes involving in-kind subsidies through the Public Distribution System, MidDay Meal, Sarv Shiksha Abhiyan, Jan Arogya Yojana, etc. ensure that the poor sections of the society have access to food, health, as well as education and, are able to progress with India’s growth.
  • Fiscal policy impacts the expenditure on key sectors such as infrastructure, which has huge multiplier effects on the economy and is beneficial for all sections in their economic activities.
    • For example, rural roads directly impact the lives of the most vulnerable and disadvantaged sections in terms of engaging in entrepreneurial activities, access to effective maternal and child health care services, etc.
  • Fiscal policy can intervene as per the need of the time to create a safety net for vulnerable sections, including giving emergency credit to small businesses.
    • For example: Extending tax relief to parents and guardians of disabled persons in the latest Budget to help families who hitherto bore the brunt alone.
  • Recognizing the importance of urban planning, mental health as well as green finance. Fiscal policy is a key tool that links income distribution to future economic growth. The government must use it judiciously for redistribution as it empowers the downtrodden, but if not done correctly, overspending by the government and increased tax ratio may discourage the upper-income groups to invest and can stifle economic growth.
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