The term infrastructure and development points to core elements of economic and social change. These kernel elements serve as a support system to all production activities in the economy. Without these core elements, economic growth and social development would only continue to be primitive. It means it can at best yield subsistence; it cannot generate surplus to achieve higher levels of living.

Infrastructure and Development is Broadly Divided into two Categories:

(i) Social Infrastructure,

(ii) Economic Infrastructure.

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Social Infrastructure:

The term social infrastructure refers to the central elements of social change. These elements include schools, colleges, hospitals and nursing homes. They serve as a support system for the process of social development of a country. Social development concentrates on human resource development, implying the development of skilled as well as healthy and efficient human beings.

Economic Infrastructure:

The term economic infrastructure points to all key elements of economic change. These elements include power, transport and communication. They serve as a support system to the process of economic growth. Since it is an essential prerequisite to the process as a support of growth, without them it is virtually impossible to develop an efficient system of growth and development.

While economic infrastructure promotes economic growth (indicating an increase in living standards of the people), social infrastructure promotes human growth (indicating an increase in their quality of life).

It can be safely ascertained that economic and social infrastructure is complementary to each other. Economic infrastructure provides us robust sources of energy, better means of transport and communication, besides efficient system of banking and finance. But all these elements of economic infrastructure would be of no use if the majority of population of a country remains to be illiterate and suffers from disease and sickness.

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How infrastructure and development contributes to growth?

Infrastructure and Development Affects Productivity:

At present no one can think of agricultural production sans irrigation. Without irrigation, an important part of economic infrastructure, agricultural production would depend entirely on rainfall. This condition would lead the agricultural production to such a state where actual output would remain much lower than the potential output.

Similarly one cannot think of an enhanced industrial production without coal, petroleum and electricity as these are the main sources of energy.

Similarly can tourism industry prosper without the infrastructure of connectivity through roads, railways, waterways and airways.

Infrastructure Induces FDI

In a fast developing country like India FDI has been accepted as instrumental in the growth process. Since the introduction of economic reforms in 1991, FDI has substantially increased in the Indian economy, mainly because of the expanding infrastructure.

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Infrastructure Increases Size of the Market

It is a well known fact that large- scale production is possible only when size of the market is large. Means of transport are important components of economic infrastructure and core to the growth and expansion of an efficient market system.

Infrastructure Increases Ability to Work

This point covers the social infrastructure. Educational institutions, health care centres, and similar other facilities elevate skill formation which in turn enhance the people’s ability to work. This leads to the efficiency that is an important determinant of productivity and growth.

Infrastructure Facilitates Outsourcing

A country possessing a robust system of infrastructure rises as a destination for outsourcing. India is fast catching up as a global destination for study centres, call centres, medical transcription and such other services that is largely due to its profound system social infrastructure that is mainly a result of a revolutionary growth of IT sector.

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Fiscal policy involves the government changing the levels of taxation and government spending in order to influence Aggregate Demand (AD) and the level of economic activity. AD is the total level of planned expenditure in an economy.

Purpose of Fiscal Policy

• Stimulate economic growth in a period of a recession.
• Keep inflation low (UK government has a target of 2%)
• Basically, fiscal policy aims to stabilize economic growth, avoiding a boom and bust economic cycle.

Fiscal policy is often used in conjunction with Monetary Policy. In fact, governments often prefer monetary policy for stabilizing the economy.

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Types of Fiscal Policy

There are two basic types of fiscal policy. The first, and most widely-used, is expansionary. Its objective is to stimulate the economy and create more growth. This is most critical at the contraction phase of the business cycle when voters are clamoring for relief from a recession.

The government spends more, or cuts taxes or both if it can. The idea is to put more money into consumers’ hands, so they spend more. This jumpstarts demand, which keeps businesses running,

Expansionary fiscal policy is usually impossible for state and local government because they often are mandated to keep a balanced budget. If they haven’t created a surplus during the boom times, they usually have to cut spending to match lower tax revenue during a recession — making it worse.

The second type, contractionary fiscal policy, is rarely used. That’s because its objective is to slow economic growth. One reason only, and that’s to stamp out inflation. That’s because the long-term impact of inflation can damage the standard of living as much as a recession.

The tools of contractionary fiscal policy are used in reverse: taxes are increased, and spending is cut. Monetary policy is very effective in preventing inflation.

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Tools of Fiscal Policy

The first tool is taxation, whether of income, capital gains from investments, property, sales or just about anything else. Taxes provide the major revenue source that funds the government. The downside of taxes is that whatever or whoever is taxed has less income to spend themselves. That makes taxes very unpopular.

The second tool is spending. The government provides subsidies, transfer payments including welfare programs, contracts to perform all kinds of public works, and of course salaries to government employees — to name just a few. The reason government spending is a tool is that whatever or whoever receives the funds has more money to spend, thus driving demand and economic growth.

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Fiscal Policy vs. Monetary Policy

Monetary policy is when a nation’s central bank increases the money supply, using expansionary monetary policy, or decreases it, using contractionary monetary policy. It has many tools it can use, but it primarily relies on raising or lowering the Fed funds rate. This benchmark rates then guides all interest rates. When interest rates are high, the money supply contracts, the economy cools down, and inflation is prevented. When interest rates are low, the money supply expands the economy heats up, and a recession is avoided — usually.

Monetary policy works faster than fiscal policy. The Fed can simply vote to raise or lower rates at its regularly FOMC meeting. It may take about six months for the effect to percolate throughout the economy.

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Brief history of fiscal policy

• Keynes advocated the use of fiscal policy as a way to stimulate economies during the great depression.
• Fiscal Policy was particularly used in the 50s and 60s to stabilize economic cycles. These policies were broadly referred to as ‘Keynesian’
• In the 1970s and 80s governments tended to prefer monetary policy for influencing the economy. Fiscal policy became more prominent during the great depression of 2008-13.

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Indian economy