Monetary, Fiscal and Taxation policies constitute the core of government’s economic policies and form the foundation of public finance. Whenever the policy makers seek to influence the economy they have these three main tools at their disposal viz monetary policy, fiscal policy and taxation policy. Governments directly or indirectly influence generation of resources and their utilization in the economy through these policies. The basic equation of national income accounting shows how this happens:
On the left side of the equation is gross domestic product (GDP) which is the value of all final goods and services produced in the economy. On the right are the sources of aggregate spending or demand- private consumption(C) private investment (I) purchase of goods and services by the government (G) and net exports (NX). This equation makes it evident that governments affect economic activity (GDP) through controlling (G) directly which is ability created through tax collection and influences C, I and NX indirectly through taxes transfers and spending.
The theoretical framework of policies that were to be pursued post-independence had gradually evolved during the course of independence struggle itself. Catastrophic consequences of the great depression of 1929 were not lost upon the national leaders. Revolutionary reverberations of Bolshevik revolution emanating from Soviet Union also helped shape their thought process for the shape of things that were to be defining milestones of the destiny of this country. All these were to shape the contours of the public policies to be ushered after independence. Whereas the great depression convinced the policy makers that path of unbridled capitalist development was passé, success of Russian revolution and of the system of planned economy provided the necessary motivation for crafting out a policy of mixed economy which was to steer the country to the path of progress,...