Public Administration Mains 2017 : Model Question and
(Public Administration Paper I / Chapter: Financial Administration)
Question : Discuss importance of fiscal policy for a
developing economy. (35 Marks/600 words)
Model Answer :
Fiscal policy refers to the policy of the government with regard to taxation,
public expenditure and public borrowings. Fiscal policy is a powerful weapon in
the hands of government by means of which it can achieve the objectives of
development. The objectives of fiscal policy can be achieved only if the tools
of policy are effectively used. The state has to play active role. In a
democratic society direct methods are not approved. So, the government has to
depend on indirect methods of regulations. The following are the importance of
1) Efficient Taxation System to have a sound and evolving, user friendly
taxation system which aptly places an individual in the right tax slab, where
considerable tax discounts are given to senior citizens, physically disabled and
other special needy classes.
2) Protect Economy to insulate or afflict least harm to the economy of a
country from financial crisis in the era of LPG.(global recession 0f 2008)
3) This policy is also used to increase the rate of savings in the country.
In the developing countries rich class spends a lot of money on luxuries. The
government can impose taxes on them and can provide the basic necessities of
life to the poor class on low rate. In this way by providing incentives, savings
can be increased.
4) The government can encourage the investment by providing various
incentives like the tax holiday in the various sectors of the economy. The
capital can be shifted from less productive sectors to more productive sectors.
So the resources of the country can be utilized maximum.
5) Fiscal policy is very useful for the achievement of equal distribution of
wealth. When the wealth is equally distributed among the various classes then
their purchasing power increases which ensures the high level of employment and
6) Fiscal policy is very useful weapon for controlling the rate of inflation.
When the expenditure on non productive projects is reduced or the rate of taxes
are increased then the purchasing power of the people reduces.
7) In the less developing countries the regional disparity is found. Some
areas are more developed while the others are less developed. Government
provides the infrastructure facilities in less developed areas. The tax holiday
incentive is also provided in these areas which is very useful in increasing the
per capita income.
8) Fiscal policy is also used to achieve desirable level of prices in the
country. It means the cost and price should be at such level that production and
employment may increase.
9) Fiscal policy is also used that the output of various sectors of the
economy must increase. The demand inside and outside the country should be
10) Fiscal policy main objective is to achieve maximum welfare of the people.
The quality of life must improve in the country. outlays for various
socio-economic programs and schemes are decided in budget.
11) Fiscal policy is also used to check the rapid increase in the consumption
will be high then the rate of saving will be low and consequently rate of
investment will be low. So one country cannot improve its economic condition
without increasing the investment. The recent check on excessive gold
consumption in India by increasing import duty is an example.
12) The aim of fiscal policy is to increase the rate of production and
employment without inflation. So in all the countries fiscal policy major
objective is to ensure the economic stability. India was less affected by
recession of 2008 as compared to other countries owing to its strong fiscal
policy. (Total Words-593)
(Linkages : Fiscal Policy , Developing Economy , Taxation , Government
,Public Expenditure, Public Borrowings )