li   inan e in ndia      18.13
           Third world economies (including India)                 Therefore, we say that ‘fiscal policy denotes the use
     though went for higher and higher fiscal deficits             of taxes and government expenditures’.26
     and deficit financing, they either did not address                 How the taxes and the government
     or failed to address the composition of deficit               expenditures influence the overall economy, has
     favourable towards capital and non-revenue                    been explained in a brief discussion here.27 Let
                                                                   us first discuss the taxes and their impact on the
        fIscal PolIcy
                                                                         (i) Taxes have a direct bearing on people’s
     The real meaning, significance and impact of fiscal                      income affecting their levels of disposable
     policy emerged in the wake of the Great Depression                       incomes, purchase of goods and services,
     and the Second World War. Fiscal policy has been                         consumption and ultimately their
     defined as ‘the policy of the government with                            standard of living;
     regard to the level of government purchases, the
                                                                       (ii) Taxes directly affect the savings of
     level of transfers, and the tax structure’—probably
     the best and the most acclaimed definition among                         individuals, families and firms which
     experts.21 Later, the impact of fiscal policy on                         affect investment in the economy—as
     macro-economy was beautifully analysed.22 As the                         investment affects the output (GDP)
     policy has a deep impact on the overall performance                      thereby influencing the per capita income;
     of the economy, fiscal policy is also defined as                 (iii) Taxes affect the prices of goods and
     the policy which handles public expenditure and                          services as factor cost (production cost) is
     tax to direct and stimulate the level of economic                        affected thereby affecting incentives and
     activity (numerically denoted by the Gross                               behaviour of economic activities, etc.
     Domestic Product).23 It was J. M. Keynes, the
                                                                   Government expenditures affect/influence the
     first economist who developed a theory linking
     fiscal policy and economic performance.24                     economy in two ways:
           Fiscal policy is also defined as ‘changes in                  (i) There are some expenditure on
     government expenditures and taxes that are                               government purchases of goods and
     designed to achieve macroeconomic policy goals’25                        services, for example construction of
     (such as growth, employment, investment, etc.).                          roads, railways, ports, foodgrains, etc., in
                                                                              the goods category and salary payments
       21.     he acclaimed definition first came up in the widely
             used work Macroeconomics by Dornbusch and Fisher                 to government employees in the services
             which is now available as R.s. Dornbusch, s. Fisher              category; and
             and Richard startz, Microeconomics, (New Delhi: Tata
                c raw Hill,        .                                   (ii) There are some expenditure due to
       22.    ohn Hic s, the ritish o el aureate did show it                  government’s income support, to
             referring changes in taxes and government expenditure
             using the framewor of the famous S       model id .
                                                                              the poor, unemployed and old-age
       23.   s. R. Maheshwari, A Dictionary of Public                         people (known as government transfer
             Administration (New Delhi: Orient Longman, 2002)                 payments).
             p. 227.
       24.   In his acclaimed work The General Theory of             26.    samuelson and Nordhaus, Economics, p. 412.
             Employment, Interest and Money, 1936.                   27.    Based on the elaboration by samuelson and Nordhaus,
       25.   stiglitz and walsh, Economics, p. 729.                         Economics, pp. 412–13.