The Fiscal System is a broad topic that covers a range of economic affairs of the country. It is through the elaborate fiscal policy that the government manages the accounts and finances thereby strengthening the economy. The Indian fiscal system, as per the federal laws of the constitution is separated between the center and the states, though not completely. There are separate lists of areas of fiscal affairs the state and central government has to take care of. Budgeting, taxation, government borrowings, other financial regulatory authorities, etc. come under the fiscal system. The fiscal system is a very important topic in the Economy Syllabus of the UPSC examination.

What is a Fiscal System?

• A country's fiscal system refers to the revenue and capital resources that can be raised by the government, the procedure to be followed in raising and spending funds, and, in the case of a federation like ours, the provision that governs the relationship between the constituent units of the federation.
• Taxation, expenditure, debt management, and intergovernmental fiscal relations are all within their scope.
• The Indian fiscal system is based on the constitution of India which is federal in character.

What is Fiscal Policy?

• Fiscal policy is the guiding force of the fiscal system of the country. The fiscal policy, also known as the budgetary policy deals with the revenues and expenditures of the country for a financial year.
• The term fiscal comes from the word "fisk," which means " public treasury" or " government funds”.
• Fiscal policy is divided into three categories: neutral, expansionary, and contractionary. The government spends more money than it collects through taxes in an expansionary fiscal policy. It's the opposite in the case of contractionary fiscal policy.
• The fiscal policy has three major components. They are

1. Government Receipts - Government's income in the form of Taxes, interests, and earnings on investments, cess, and other receipts for services rendered.
2. Government Expenditures - Refers to the purchase of goods and services by the government, which includes public consumption and public investment, as well as transfer payments, which include income transfers (pension, social benefits) and capital transfers.
3. Public Accounts of India - The Public Account of India accounts for flows for those transactions where the government is merely acting as a banker. Eg: provident funds, small savings, etc.

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Government Budgeting

• The government budget, also known as the Annual Financial Statement of the nation, is the annual fiscal statement that depicts the revenues and expenditures of the country for a financial year.
• Reallocation of resources, bridging income disparity, attainment of economic stability, etc are some of the objectives of government budgeting.

The budget has been divided into three types 1) Balanced budget, 2) Surplus budget, and 3) Deficit budget. They are

• Balanced Budget: A balanced budget is one in which the revenues match its expenditure. It is a balanced budget that the government seeks to come up with.
• Surplus Budget: If the estimated government receipt is more than the estimated expenditure for a fiscal year, the budget is said to be surplus.
• Deficit Budget: A budget is a deficit budget if the estimated revenue is less than the expenses to be made. India’s budget has mostly been a deficit budget, just like any other democracy in the world.

The government budget has two major components:

• Revenue budget: The revenue budget is made up of revenue receipts and expenditures. Both tax revenue (excise duty, income tax) and non-tax revenue (profits, interest receipts) are reflected in these receipts.
• Capital budget: The capital budget comprises both short-term capital expenditures (such as disinvestment) and long-term capital expenditures (such as borrowing). Government liabilities or decreasing financial assets, such as loan repayments, market borrowing, and so on, are examples of capital receipts.

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Fiscal Responsibility and Budget Management (FRBM) Act

• The Fiscal Responsibility and Budget Management (FRBM) Bill was passed in Parliament in 2003.
• The bill introduced by Atal Bihari Vajpayee Government aimed at providing legal backing for the fiscal discipline to be institutionalized in the country.
• The Act is aimed at ensuring financial discipline, efficient management of public funds, improved fiscal prudence, and reduced fiscal deficits.

Targets of FRBM Act 2003

• To reduce and eliminate the revenue shortfall by 2008-09
• After that, build up a sufficient revenue surplus.
• At the end of 2008-09, to have the budget deficit was reduced to no more than 3% of GDP.
• Reduction of the gross fiscal deficit (GFD) by 31st March 2008.

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Difference between Debt and Deficit

Important tools used in the Fiscal System

Government Bonds

• A bond is an instrument of the contract made between an investor and a borrower. Bonds are issued by firms and governments, and investors buy them as a form of savings and security.
• The Government of India also issues bonds which are considered to be safe investment options.
• Treasury Bills, Municipal Bonds, Zero-coupon Bonds, etc. are examples.

Masala Bonds

• Masala bonds are debt instruments issued by an Indian party in foreign markets to raise money in Indian currency and not in the local currency.
• Stimulating domestic growth through borrowing

NRI Bonds

• The Reserve Bank of India (RBI) issues NRI bonds to non-resident Indians who want to invest their money in the country.
• These bonds provide larger yields than other similar investments, they can be utilized to attract money when other local assets fail to attract international investors.
• NRI bonds may theoretically assist in boosting demand for rupees and stabilize the currency's value against the dollar. These were also released in 1998 and 2000 to aid in the rupee's depreciation.

Important terminologies associated with Fiscal System

Fiscal Stimulus

• The economic slowdown is natural occur in any economy. Consequent to such slowdowns, the government adopts different measures to stimulate the engines of the economy and bring it back to optimal functioning. Such measures are collectively called fiscal stimulus.
• By lowering taxes, raising expenditure, and promoting economic development, the government employs fiscal stimulus packages to alter overall supply and demand.
• The government uses fiscal stimulus to generate employment and growth by boosting direct spending and accelerating the hiring process.

Financial Stability and Development Council

• The FSDC is a non-statutory apex council under the Ministry of Finance constituted by the Executive Order in 2010 followed by the recommendation of the Raghuram Rajan Committee (2008) for reforming the financial sector.
• The council reviews issues such as stressed asset management, enhancing institutional mechanisms for financial stability analysis, IBC ( Insolvency and Bankruptcy Code) difficulties, government data sharing mechanisms, internationalization of the Indian rupee, and pension sector issues.
• FSDC is chaired by the Finance Minister and its members include the heads of all Financial Sector Regulators (RBI, SEBI, PFRDA & IRDA), Finance Secretary, Secretary of Department of Economic Affairs (DEA), Secretary of Department of Financial Services (DFS), and Chief Economic Adviser.

Macroeconomic Stability

• “Macroeconomic stability" refers to a country's economy that has reduced its sensitivity to external shocks, hence improving its prospects for long-term growth.
• The government through its budget and several monetary and fiscal policies ensures the stability of the economy as a whole.
• Ensuring the fiscal stance is safely consistent with fiscal solvency, ensuring a low and stable rate of inflation through an efficient monetary policy stance, and ensuring an exchange rate that avoids excessive volatility are the prime objectives that come under Macroeconomic stability.

Financial Stability Board

• The Financial Stability Board is an international organization that has been established to take regulatory measures for banks to prevent future bank failure.
• It was created after the 2007 financial crisis, by the G20 countries.
• The board is made up of 68 institutions. It includes 25 central banks, ministries of finance, and supervisory and regulatory institutions, as well as 10 international organizations and six Regional Consultative Groups (RCGs).
• Coordinating the apex banks, as well as a few other major banks, of each country, conducts outreach activities, supervising the global financial market.

Conclusion

To conclude, the fiscal system of the country includes every financial apparatus and infrastructure that is in place. Studying the fiscal system enables the aspirants to understand the budgeting process, the taxation system, the various fiscal regulatory authorities, and so on.