The Central Bank of India,i.e RBI, and the government makes two types of policies- MONETARY AND FISCAL POLICIES. Monetary policy are those policy measures which are taken to control money supply in the market to realize pre determined economic goals. Fiscal policy are those policy measures which are related to public revenue and public expenditure made by the government.
The government involves itself in an economy through fiscal policy.They make budgets of total expected revenue and expenditure of the government, which is an important tool of fiscal policy.Fiscal policies helps in accelerating the pace of economic development by making expenditure on public welfare.It even helps to control inflation and deflation in the economy.
There are Three instruments of fiscal policy. they are-
1.Public Revenue- Public revenues are the funds of the government to finance it’s expenditure.The main sources of revenue are taxes, fees, fines penalties etc. For example, the income tax paid by our parents, the chalans we pay to traffic police, the house tax, the entertainment tax on our leisure activities are all examples of public revenue.
2.Public Expenditure- It is expense that the government incurs on the maintenance of the country or for the welfare of the society.For example, expenditure on parks, water works, education and health, defense, law and order, construction work etc are all examples of public expenditure.
3.Public Debt- Debt means borrowings, therefore, public debt is made by the government when it is unable to meet it’s expenditure with current revenue.The government can borrow from the public by issuing bonds or take a loan from any international finance institute.This usually happens when public expenditure exceeds public revenue. Debt can be required to pay interest payments on previous loans or to finance new construction projects or to make public welfare schemes etc.
Fiscal policy involves using these three instruments to do the best for the public and still be in a favorable position.