Gros Domestic Product (GDP) is the sum total of value of goods and services created within the geographical boundary of a country in a particular year. It is usually taken as an indicator of the well-being in the context of per capita income suggesting the prosperity of the people. It may indicate more income and capacity to buy more goods and services among the people. However, there are some limitations of using GDP as an indicator of economic welfare of a country:

• Uneven Distribution of GDP: If the GDP of the country is rising, the economic well being may not rise as a consequence. This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. For the rest, the income may in fact have fallen. In such cases, the welfare of the entire country cannot be reflected in per capita GDP.
• Non-monetary exchanges or non-marketed activities: Many activities in an economy are not evaluated in monetary terms. For example, the domestic work that women perform at home is not paid for. Barter exchanges that take place in the informal sector are not registered as part of the economic activity. In developing countries, where many remote regions are underdeveloped, these kinds of barter exchanges are common occurrences, but they are generally not counted in the GDPs of these countries. Since these exchanges are not counted in the GDPs, there occurs underestimation of GDP. Hence, GDP calculated in the standard manner may not give us a clear indication of the productive activity and well-being of a country.
• Externalities: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized). Externalities do not have any market in which they can be bought and sold. For example, the output of a refinery is the amount of oil it refines. The value added of the refinery will be counted as part of the GDP of the economy. But in carrying out the production the refinery may also be polluting the nearby river. This may cause harm to the people who use the water of the river. Hence their well-being will fall. In this case, the GDP is not taking into account such negative externalities. Therefore, if we take GDP as a measure of welfare of the economy we shall be overestimating the actual well-being. There can be cases of positive externalities as well. In such cases, GDP will underestimate the actual well-being of the economy.

In addition to this, GDP also does not take into account economic inequality, loss of jobs and opportunities and level of health and education and quality of choices in an economy. Therefore, new concepts like Gross National Happiness (GNH), Human Development Index (HDI) and the Social Progress Index (SPI) are often discussed as the better alternative to assess the well-being of society.

Fiscal policy is about the government using the instruments of taxation, public spending and public borrowing to achieve various objectives of its economic policy. It influences income, production and employment in an economy.

Role of Fiscal Policy:

• In a developing economy, fiscal policy playsa plays a key role in elevating the rate of capital formation both in the public and private sectors.

• Fiscal policy may be employed to channelize savings of the people into productive channels.
• Fiscal policy may be used to give adequate incentives to the private sector to expand its activities through subsidies and tax-relief measures.

• It can be used to secure the pattern of investment that not just benefits the private investor but contributes to the national product. Investment in economic and social overheads, viz. transport, power, education, and public health etc. forms the base for other economic activities and development.
• The government can increase the productive capacity of the economy and accelerate the rate of economic growth by incentivising innovation in both public and private sector, laying emphasis on capacity creation rather than on income-generating aspects.
• Fiscal policy plays the important role of income redistribution. A broad-based and progressive tax structure can lead to secure equitable distribution of income and wealth.
• The fiscal measures can be used to counter inflationary pressures on the economy. Apart from direct control via taxes and expenditure, fiscal policy can remove structural rigidities, market imperfections and imposition of physical controls including subsidies and protection to essential consumer goods industries.

Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing. It indicates the total borrowing requirements of the government from all sources. The government can control fiscal deficit via:

• Reducing government spending by cutting subsidies, reduction in expenditure on salaries, allowances; reducing interest payments on past debt etc.
• Increasing revenue from both direct and indirect taxation sources.
• Achieving faster economic growth: If the economy grows, then the government will increase tax revenue, without raising taxes.