With the country going through a pandemic-driven slowdown, the Economic Survey 2020-21 has pushed for the adoption of counter-cyclical fiscal policy to enable growth.
The survey said the call for a more active countercyclical fiscal policy is not one for fiscal irresponsibility. The term came to limelight when the Chief Economic Advisor, KV Subramanian, indicated last year that the government has adopted “Counter-Cyclical Fiscal Policy” to decrease the economic slowdown in the country.
What does counter-cyclical fiscal policy mean?
It can be termed as an action by the government to counter growth or downturn through fiscal measures. It refers to a step that will go against the ongoing trend to bring the economy back on track.
The Economic Survey tabled on January 29 explains it as an exercise similar to those Indian kings used to adopt during famines and droughts to provide employment and improve the economic fortunes of the private sector.
In general, it is a strategy to counter recession by increasing expenditure and reducing taxes. The basic idea of this measure is to create a demand that can drive the economic boom. However, during a boom in the economy, counter-cyclical fiscal policy aims at raising taxes and cutting public expenditure, as a measure to control inflation and debt. The strategy during the boom will be to slow down demand, to make the growth mild.On the other hand, a pro-cyclical fiscal policy is the one wherein fiscal policy reinforces the business cycle by being expansionary during good times and contractionary during recessions. Thus it goes in line with the existing trend in the economy.