Fiscal and Monetary Policies are critical tools for economic management in India, used by the government and the Reserve Bank of India (RBI) respectively. This chapter covers their objectives, tools, and key differences, designed for UPSC Prelims preparation.
Fiscal Policy
Fiscal Policy involves government decisions on taxation, expenditure, and borrowing to influence the economy, managed by the Ministry of Finance.
Objectives
Economic Growth: Increase GDP through public spending on infrastructure and welfare schemes.
Price Stability: Control inflation through tax adjustments and expenditure management.
Employment Generation: Create jobs via schemes like MGNREGA and infrastructure projects.
Income Redistribution: Reduce inequality through progressive taxation and subsidies.
Fiscal Discipline: Maintain sustainable deficits as per the FRBM Act, 2003 (target: fiscal deficit at 3% of GDP).
Tools
Revenue Receipts: Taxes (GST, Income Tax) and non-tax revenue (dividends, fees).
Capital Receipts: Borrowings, disinvestment, and loan recoveries.
Revenue Expenditure: Salaries, subsidies, and interest payments (e.g., ₹10.79 lakh crore in 2024-25).
Capital Expenditure: Infrastructure and asset creation (e.g., ₹11.11 lakh crore in 2024-25).
Example: The 2024-25 Union Budget increased capital expenditure by 11.1% to ₹11.11 lakh crore to boost growth through projects like Bharatmala.
Monetary Policy
Monetary Policy, managed by the RBI, regulates money supply and interest rates to achieve economic stability, under the RBI Act, 1934.
Objectives
Price Stability: Target 4% CPI inflation (±2%) as per the 2016 agreement with the government.
Economic Growth: Support GDP growth by ensuring adequate credit availability.
Exchange Rate Stability: Stabilize the rupee through liquidity management.
Financial Stability: Ensure banking sector solvency and liquidity.
Tools
Quantitative Tools: CRR (4.5%), SLR (18%), Repo Rate (6.5%), Reverse Repo Rate (3.35%) as of 2025.
Qualitative Tools: Open Market Operations (OMO), Marginal Standing Facility (MSF at 6.75%), and credit rationing.
Example: In 2022-23, RBI raised the Repo Rate by 250 basis points to 6.5% to curb inflation, impacting loan EMIs.
Differences Between Fiscal and Monetary Policy
Aspect
Fiscal Policy
Monetary Policy
Authority
Government (Ministry of Finance)
RBI (Monetary Policy Committee)
Tools
Taxation, expenditure, borrowing
CRR, SLR, Repo Rate, OMO
Objective
Growth, employment, redistribution
Price stability, financial stability
Impact Speed
Slower (budgetary process)
Faster (MPC decisions)
Scope
Broad (affects all sectors)
Focused (banking, credit)
Example: During the 2020-21 pandemic, fiscal policy provided stimulus via PMGKP (₹2.65 lakh crore), while monetary policy cut Repo Rate to 4% to boost liquidity.
Key Concepts for Prelims
Understanding related terms is crucial for UPSC Prelims.
Fiscal Deficit: Total expenditure minus total receipts (excluding borrowings), targeted at 4.9% of GDP in 2024-25.
Monetary Policy Committee (MPC): 6-member body (3 RBI, 3 external) sets Repo Rate, established under RBI Act, 1934 (amended 2016).
FRBM Act, 2003: Mandates fiscal discipline, targeting 3% fiscal deficit and zero revenue deficit.
Inflation Targeting: RBI targets 4% CPI inflation (±2%) since 2016.
Key Points for Prelims
Fiscal Policy is presented as the Union Budget under Article 112.
RBI, established in 1935, conducts bi-monthly MPC meetings.
2024-25 Budget: Fiscal deficit targeted at 4.9% of GDP; Repo Rate at 6.5%.
Fiscal policy affects government spending; monetary policy affects credit and interest rates.
Coordination between fiscal and monetary policy is key for economic stability.
Frequently Asked Questions (FAQs)
Q1: How do fiscal and monetary policies coordinate during a recession?
Ans: Fiscal policy boosts spending (e.g., infrastructure projects), while monetary policy lowers rates (e.g., Repo Rate cut) to increase liquidity, as seen in 2020-21.
Q2: What is the role of the FRBM Act in fiscal policy?
Ans: It ensures fiscal discipline by targeting a 3% fiscal deficit and eliminating revenue deficit, promoting sustainable public finances.
Q3: Why is inflation targeting important for monetary policy?
Ans: Targeting 4% CPI inflation (±2%) stabilizes prices, supports growth, and anchors public expectations.