Budget 2026: What is fiscal policy? How does it differ from monetary policy?

Union Budget 2026: Fiscal policy refers to the government’s strategy to raise revenue and decide how this money will be spent to maintain a healthy economy. When the government collects more revenue than it spends, the result is a budget surplus. Conversely, a budget deficit occurs when public expenditures exceed revenues. To finance a deficit, the government may choose to borrow or draw from foreign exchange reserves.
For example, during an economic downturn, the government may increase capital investment in areas such as infrastructure and social welfare. This can increase consumer spending, stimulate business investment and ultimately spur economic growth. Additionally, to support citizens, the government may reduce taxes, but doing so would result in lower government revenue.

Why are the main objectives of fiscal policy

Inflation Control: Fiscal policy serves as an important tool to maintain overall price stability and promote sustainable economic growth.
Employment Creation: The government aims to stimulate economic activity and encourage the creation of employment opportunities using fiscal measures.

Why is Fiscal Policy important in India?

Increasing Public and Private Investments: Fiscal policy helps ensure that sufficient funds are available for investment in development projects in both the public and private sectors.

Revenue Collection: The government obtains a significant part of the resources required to finance its activities and projects through taxation.

Promoting Savings: Fiscal policies play a vital role in supporting private sector growth by introducing measures and incentives that encourage higher levels of savings. These initiatives increase economic stability and support sustainable private sector development.
Reducing Income Inequality: Fiscal policy is used to improve the distribution of wealth by helping to minimize economic inequalities in society. Therefore, it can be stated that fiscal policy, along with monetary policy, is one of the most effective tools that shape Indian economic growth, inflation and the development of sectors.