Three Prisoners Problem

Role of fiscal policy measures in solving the unemployment crisis of India

    The problem of unemployment is not only a contemporary macroeconomic issue, but it is something that has been weighing down the Indian economy for many decades now. In this paper, I have put forward my thoughts on how this problem can be tackled with the help of an expansionary fiscal policy as suggested by Keynes, and how these changes would affect the IS-LM model with respect to the Indian economy.

The perpetual rates of unemployment in India has always been a problem and is still weighing down the economic development of our country and the Government has been working on a variety of policies to stabilize this macroeconomic issue and to lower the rates of unemployment, since the 1950s. 

Effective fiscal policy measures to reduce unemployment 

A stimulated increase in the aggregate demand and therefore the rate of economic growth in the economy with the help of fiscal policies can help the government reduce the rate of unemployment by a significant margin, in order to achieve this the Government must cut down on the taxes (T)  and increase the government spending (G), or in other words the government should pursue expansionary fiscal policy measures. Lowering the taxes would increase the disposable income of every economic agent and therefore this would result in an increase in consumption from their side thereby increasing the aggregate demand. This increase in aggregate demand would cause an increase in the real GDP of the economy and as the firms and companies increase their output, they will start seeking for more labour, thus increasing the labour demand and encouraging more economic growth.

Now, we know that Y (GDP) = C + I + G + Xn, but increasing the government spending

simply to match with the GDP (that is, to equate the both sides of the equation) would not

work well in the real economy because of the multiplier effect. Multiplier effect states

that even a small increase in the government spending would result in a much larger

change in the GDP, and this takes place as every individual who benefitted from the

increase in Government spending and in the initial increase in GDP starts spending

more and more in the economy. 

Unemployment in the Indian economy and the IS-LM framework

The current unemployment rate of India calculated with the help of a 30 day moving average stands at about 7.6% (Source : Centre for Monitoring Indian Economy) and as of 2019 - 20 the fiscal deficit of the country stands at 4.6% (4.59% to be precise) of the GDP, which is 0.8% higher than what the government had expected it to be (3.8%).

To resolve this problem if the government spending is decreased, then the aggregate demand in the economy would decrease and thus the output would also decrease, thereby shifting the IS curve to the left. 

Doing this would adversely affect the current employment levels, and therefore now we will have to take the help of monetary policies to stabilise the economy, that is, we will have to increase the aggregate money supply in the economy, this would eventually lead to a decrease in the interest rate and therefore as the interest rate decreases the investment would increase and finally the output would also see an increase, which implies that the LM curve would shift to the right. 

Trends in the GDP growth rate and the fiscal deficit (2005-2019)

Year	GDP growth	Government budget deficit
2005	7.92%	-3.96
2006	8.06%	-3.32
2007	7.66%	-2.54
2008	3.09%	-5.99
2009	7.86%	-6.46
2010	8.50%	-4.8
2011	5.24%	-5.91
2012	5.46%	-4.93
2013	6.39%	-4.48
2014	7.41%	-4.1
2015	8.00%	-3.87
2016	8.26%	-3.49
2017	7.04%	-3.46
2018	6.12%	-3.34
2019	5.02%	-4.59

From the above given data we can notice that as there is an increase in the government budget deficit the unemployment rate decreases in most of the years, setting aside a few anomalies, this means that with an increase in the government spending the unemployment rates would decrease However, it is not possible to conclude anything from this data as only about 15 years are taken into account and to understand how an increase in government spending and a cut in taxes would affect the GDP, we will have to draw out a detailed correlation analysis between the two variables by taking into account the change in these variables for the past two or three decades. 

Conclusion

From this study, we can conclude that the problem of unemployment has been present in the economy for a long time and it is almost impossible to attain full employment levels, but effective changes in the fiscal policy measures can definitely play a pivotal role in reducing the unemployment levels. The empirical data collected shows that as the budget deficit increases, which is indicative of an increase in the government spending, the unemployment rate decreases and this indicates that a controlled expansionary policy would definitely help the Indian government reduce the unemployment rates. In addition to this, to ensure that the government does not have to suffer any losses because of an expansionary fiscal policy, small tweaks in the monetary policies are encouraged as shown in the IS LM model. 

References 

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Caldentey, E. (2003). Chicago, Keynes and Fiscal Policy. Investigación Económica, Retrieved August 2, 2020.

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http://www.mospi.gov.in/nsso 

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