Fiscal Policy plays very important role to affect aggregate demand, price level, cost condition, rate of interest, money supply, international trade, financial markets and the overall growth of the economy through the changes in public expenditure, public debt and taxation. It is very important tool of macroeconomic policy, which has the ability to influence key variables of the economy.[i]
It is now widely accepted that the State has a sin qua non in the regulation of economic activity along the desired lines. Fiscal Policy is traditionally concerned with the determination of state income and expenditure policy. However in recent times, with the expanding role of the state with particular reference for the need for a rapid economic growth, public borrowings and deficit budgeting has also become a part of fiscal policy.[ii]
The crux of an effective fiscal policy is related to the policy decision with regard to the entire financial structure of the government such as expenditures, transfers, loans, tax revenues and debt management etc. They all are kept in proper balance so as to achieve the best possible results in terms of economic objectives. In the ultimate sense, fiscal policy tries to achieve its objectives by regulating the working of the market mechanism while retaining the mechanism itself. The extent of its success entirely depends upon numerous factors such as marketing of market forces, economic stability, proper use of its tools and the flow of foreign capital and trade.