What Role Does Government Play in Financial Sustainability

Financial sustainability is the capacity of people, enterprises, and governments to sustain financial operations and fulfill commitments in the long run without infringing on future needs. Just think of it as managing today’s needs while saving enough for tomorrow. If you earn less than you spend, you will be in financial trouble sooner rather than later. This applies to countries as well. One of the government’s responsibilities is to manage the country’s finances. It hence plays an important role in ensuring financial stability. It can intervene and design an environment where financial stability is possible through policy, regulation, and strategic intervention. This article explains how government intervention impacts financial sustainability, focusing on fiscal policies, regulatory frameworks, and programs that increase economic resilience.

Setting fiscal policies

Governments can control economic growth, inflation, and public debt by altering taxation and government expenditure.

● Taxation: By implementing proper tax rates, the government can control disposable income and have an impact on consumer spending. For example, less taxes can increase spending during the times of recession, whereas higher taxes can restrict inflation.

● Public spending: Clever investments in infrastructure, education, and healthcare lead to sustained growth. For instance, building a robust infrastructure offers jobs as well as enhances productivity through enhanced connectivity and logistics.

In the pandemic of COVID-19, the Indian government presented fiscal stimulus packages worth Rs. 20 lakh crore in the form of the Atmanirbhar Bharat Abhiyan to support businesses and promote economic stability. Such measures illustrate how active fiscal policies can maintain financial sustainability even in the worst of circumstances.

The invisible hand of monetary policy

Through central banks such as the RBI, governments control interest rates and money supply – instruments that have a huge bearing on financial sustainability. When inflation increases too fast, threatening economic stability, central banks usually raise interest rates. This makes it more expensive to borrow money, which inhibits consumption and squeezes the economy. When economic activity slows down, lowering interest rates can drive it forward again. Such an example is found by seeing how changing interest rates in reality affect your life. When they increase, your EMIs for your home loan go up, leaving less money left over for other discretionary expenses. When they fall, your fixed deposits may yield lower interest, so you might be tempted to spend more instead. Such individual experiences mirror the overall effect of government monetary policy on financial sustainability.

Building a robust regulatory framework

Establishing a robust regulatory system is a core component of ensuring financial sustainability. When the regulatory system is strong, it makes sure that financial institutions are responsible, protect consumers, and preserve confidence in the market.

As far as banking goes, for instance, organisations such as the RBI (Reserve Bank of India) are important. They establish guidelines on how banks must lend money, what amount of money they must have in reserve, and the ways in which they must effectively deal with risks. It’s all about maintaining stability in the banking sector and not experiencing any unpleasant shocks.

Then there’s corporate governance, which focuses on maintaining businesses in an open and honest manner. Rules set by governments make sure companies are using good accounting practices, auditing rules, and disclosure guidelines.

Lastly, there’s the matter of consumer protection. Financial stability also involves safeguarding customers. For instance, take the Consumer Protection Act of 2019. It enforces provisions that safeguard customers from predatory lending, unethical business practices, and financial fraud. Essentially, it makes financial transactions equitable and consumer rights safe.

Supporting financial inclusion

The government has a critical role to play in promoting financial inclusion, which leads to economic stability.

Initiatives such as the Pradhan Mantri Jan Dhan Yojana (PMJDY) have introduced crores of Indians to the formal banking system. This initiative, introduced in 2014, has led to the opening of over 50 crore accounts (2023), encouraging savings and curbing use of informal credit.

The effort of the government towards a cashless economy, such as instruments like UPI (Unified Payments Interface), has raised openness and lowered the shadow economy.

Through the support of microfinance institutions and SHGs, the government enables small companies and entrepreneurs, making its local economic stability more sustainable.

These initiatives provide assurance that financial services can be accessed by all citizens, even those living in rural and underprivileged areas, thus adding to the larger cause of financial sustainability.

Responsible management of public debt

Financial stability requires a balanced approach to management of public debt. Borrowing is needed to develop infrastructure and stimulate the economy, but over-borrowing can impede long-term stability. Here are some areas where the government can intervene to manage public debt.

● Debt management policies: The government of India, via the Fiscal Responsibility and Budget Management (FRBM) Act, seeks to achieve fiscal prudence by capping the fiscal deficit and prudent borrowing.

● Effective use of borrowed money: Employing public funds in productive investment instead of recurrent expenditure allows borrowed money to yield economic benefits, which may be used for the repayment of loans.

● Enhancing exports and lowering imports: Adopting policies that enhance exports and replace imports enable the government to strengthen forex reserves and effectively handle external debt.

Sound debt management decreases the danger of financial crisis and enhances economic resilience.

Conclusion

The government’s role in advancing financial sustainability also continues to adapt, especially as new technologies and global challenges arise. Digital currencies, financial services AI, and cross-border financial flows all pose new opportunities and challenges.

For Indian citizens moving through this world, knowing how the government fits into financial sustainability makes sense of policy choices and their individual impact. Whether you’re planning for retirement, opening a business, or borrowing money, government policy determines your choices and results.

With this changing financial landscape, different financial institutions have a vital role to play. NBFCs, among others, have revolutionised the way credit and financial services are accessed by Indians, and the expansion of online marketplaces has opened doors to new forms of financial inclusion and economic participation.