10.6 Shortcomings of Fiscal Policy in India:

10.6  Shortcomings of Fiscal Policy in India:

Following are the major shortcomings of the fiscal policy of the country:

(i) Instability:

Fiscal policy of the country has failed to attain stability on various fronts. Growing volume of deficit financing has created the problem of inflationary rise in price level. Disequilibrium in its balance of payments has also affected the external stability of the country.

(ii) Defective Tax Structure:

Fiscal policy has also failed to provide a suitable tax structure for the country. Tax structure has failed to raise the productivity of direct taxes and the country has been relying much on indirect taxes. Therefore, the tax structure has become burdensome to the poor.

(iii) Inflation:

Fiscal policy of the country has failed to contain the inflationary rise in price level. Increasing volume of public expenditure on non-developmental heads and deficit financing has resulted in demand-pull inflation. Higher rate of indirect taxation has also resulted in cost-push inflation. Moreover, the direct taxes has failed to check the growth of black money which is again aggravating the inflationary spiral in the level of prices.

(iv) Negative Return of the Public Sector:

The negative return on capital invested in the public sector units has become a serious problem for the Government of India. In-spite of having a huge total investment to the extent of Rs 4,21,089 crore in 2007 on PSUs the return on investment has remained mostly negative or lower. In order to maintain those PSUs, the Government has to keep huge amount of budgetary provisions, thereby creating a huge drainage of scarce resources of the country.

(v) Growing Inequality:

Fiscal policy of the country has failed to contain the growing inequality in the distribution of income and wealth throughout the country. Growing trend of tax evasion has made the tax machinery ineffective for the purpose. Growing reliance on indirect taxes has made the tax structure regressive.