Fiscal Policy1

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Fiscal Policy and Budget

Presented By: Group 2



Fiscal Policy-Meaning The word fisc means µstate treasury¶ and fiscal

policy refers to policy concerning the use of

µstate treasury¶ or the govt. finances to achievethe macroeconomic goals.

³any decision to change the level, compositionor timing of govt. expenditure or to vary the

burden ,the structure or frequency of the taxpayment is fiscal policy.´

- G.K. ShawG.K. Shaw



O bjectives of Fiscal Policy

It has 2 major objectives:

i. GENERAL obj-. aimed at achievingmacroeconomic goals

ii. SPECIFIC obj-. relating to any typical

problems of an economy



Fiscal Policy And

Macroeconomic Goals Economic Growth: By creating conditions for increase in

savings & investment.

Employment: By encouraging the use of labour-absorbing technology

Stabilization: fight with depressionary trends and

booming (overheating) indications in the economy

Economic Equality: By reducing the income and wealthgaps between the rich and poor.

Price stability: employed to contain inflationary and

deflationary tendencies in the economy.



Instruments of Fiscal Policy Budgetary surplus and deficit

Government expenditure

Taxation- Direct and indirect

Public debt

Deficit financing



Sources of Revenue Revenue receipts:

Tax - Direct and Indirect

Direct Taxes: Personal Income Tax , Corporate tax, Div. Distribution Tax,, Fringe Benefit taxes, Banking CashTransaction Tax

Indirect Taxes: Central Sales Tax, Customs, Service Tax,excise duty.

Non-tax commercial revenue from public enterprises, court

fees, fines etc. Capital receipts:

Small savings, PF, Recovery of loans, External loans.



Heads of Expenditure

Revenue Expenditure includes:

Salaries, subsidies, interest payments, defense

Capital Expenditure

Buildings and construction, increase in

inventories like store and stock of food

grains, repayment of public debt



Stances of Fiscal Policy

Balanced budget - (R=E) => Neutral fiscal policy

Budgetary Deficit - (R<E) => Expansionary fiscal policy Budgetary Surplus - (R>E) => Contractionary fiscal

policy

An accumulated deficit over several years (or

centuries) is referred to as the government debt A deficit is a flow. And a debt is a stock. Debt is

essentially an accumulated flow of deficits



Deficits Revenue Deficit = Excess of revenue expenditure

over revenue receipts

Primary Deficit - Revenue Deficit - InterestPayments

Capital Deficit - Excess of capital expenditureover capital receipts

Monetized Deficit - Borrowing from RBI for financing budget deficit

Fiscal Deficit - Total receipts < Total expenditure



Fiscal Deficit

Difference between the government's totalexpenditure and its total receipts

Fiscal deficit can be financed by

borrowing from the Reserve Bank of India(deficit financing)

market borrowing (money market, mainly from banks)

external borrowing disinvestment in PSU



Where The Rupee Comes From

Composition of Revenue Receipts - Rs.5,25,098 crs

82%

18%

Tax Revenue Non-tax Revenue

Composition of Tax Receipts

16%

26%

19%

14%

18%

Personal Tax Corporte Tax Excise TaxCustomes Duties Non-Tax Revenue

Contribution to Tax Receipts

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1 9 7 0 - 7 1

1 9 7 1 - 7 2

1 9 7 2 - 7 3

1 9 7 3 - 7 4

1 9 7 4 - 7 5

1 9 7 5 - 7 6

1 9 7 6 - 7 7

1 9 7 7 - 7 8

1 9 7 8 - 7 9

1 9 7 9 - 8 0

1 9 8 0 - 8 1

1 9 8 1 - 8 2

1 9 8 2 - 8 3

1 9 8 3 - 8 4

1 9 8 4 - 8 5

1 9 8 5 - 8 6

1 9 8 6 - 8 7

1 9 8 7 - 8 8

1 9 8 8 - 8 9

1 9 8 9 - 9 0

1 9 9 0 - 9 1

1 9 9 1 - 9 2

1 9 9 2 - 9 3

1 9 9 3 - 9 4

1 9 9 4 - 9 5

1 9 9 5 - 9 6

1 9 9 6 - 9 7

1 9 9 7 - 9 8

1 9 9 8 - 9 9

1 9 9 9 - 0 0

2 0 0 0 - 0 1

2 0 0 1 - 0 2

2 0 0 2 - 0 3

2 0 0 3 - 0 4

2 0 0 4 - 0 5

2 0 0 5 - 0 6

2 0 0 6 - 0 7

2 0 0 7 - 0 8

Direct Indirect



Where Does The Rupee Goes To

Revenue Expenditure - Rs. 5,88,586 crs

9%

29%

12%18%

31%Defence Expendi ture

Interest Payments

Subsidies

Grants to States & Uts

Salaries & Transfer Payments

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 9 7

0 - 7 1

1 9 7

1 - 7 2

1 9 7

2 - 7 3

1 9 7

3 - 7 4

1 9 7

4 - 7 5

1 9 7

5 - 7 6

1 9 7

6 - 7 7

1 9 7

7 - 7 8

1 9 7

8 - 7 9

1 9 7

9 - 8 0

1 9 8

0 - 8 1

1 9 8

1 - 8 2

1 9 8

2 - 8 3

1 9 8

3 - 8 4

1 9 8

4 - 8 5

1 9 8

5 - 8 6

1 9 8

6 - 8 7

1 9 8

7 - 8 8

1 9 8

8 - 8 9

1 9 8

9 - 9 0

1 9 9

0 - 9 1

1 9 9

1 - 9 2

1 9 9

2 - 9 3

1 9 9

3 - 9 4

1 9 9

4 - 9 5

1 9 9

5 - 9 6

1 9 9

6 - 9 7

1 9 9

7 - 9 8

1 9 9

8 - 9 9

1 9 9

9 - 0 0

2 0 0

0 - 0 1

2 0 0

1 - 0 2

2 0 0

2 - 0 3

2 0 0

3 - 0 4

2 0 0

4 - 0 5

2 0 0

5 - 0 6

2 0 0

6 - 0 7

2 0 0

7 - 0 8

Revenue Expendi ture Capital Expendi ture



R

a t i o of

G o v t .E

x p e n d i t ur e

R a t i o

of E x p e n d i t ur e

3 5 %

4 0 %

4 5 %

5 0 %

5 5 %

6 0 %

6 5 %

1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

D e v e l o p m e n

t a l E x p e n d i t ur e

N o n - d e v e l o p m e n t a l E x p e n d i t ur e



Fiscal Deficit and its Financing

1980-81

15%

32%

22%

30%

Ext ¡ ¢ £

¤

F¥

¢ £ ¢ ¦

¥

¢

g M£ ¡

k

t B§ ¡ ¡ §

w¥

¢

g

Oth ¡

B§ ¡ ¡ §

w¥

¢

g ̈

¡ £

w¥

¢

g f ¡ § ©

£

h B£

¤

£ ¢ ¦

1990-91

%

18%

50%

25%

2000-01

6%

62%

33%

-1%

2007-0

7%

77%

29%

-13%



Fiscal Responsibility And Budget

Management (FRBM) Bill

Introduced in Lok Sabha in December 2000.

O bjectives include:

1. Long-term macroeconomic stability

2. Inter-generational equity in fiscal management.

It aimed at:1. Reducing revenue deficit

2. Reducing gross fiscal deficit3. Reducing the Public debt

4. No Borrowing from the RBI



Sticking to FRBM Targets

Items Units

2005-

06

2006-

07

2007-

08*

Central Government Finances

Revenue deficit/ GDP % 2.6 2 1.5

Fiscal deficit/ GDP % 4.1 3.7 3.3

Gross Tax/ GDP % 10.3 11.4 12.0

Expenditure/ GDP % 14.2 14.1 14.0**

Debt/ GDP % 65.1 64.4 58.6

*From Budget proposals ** SBI share transfer excluded



Fiscal Deficit

Fi al D fi it a a p r nt of GDP

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08



GR OU

P MEMBERS 114 Shailesh Devadiga (Shail)

150 Vineet Shah (Vini)

104 Sandeep Bhabal (Sandu)

AnoopWarrier (ANU)

Maddi

Natraj Korgaonkar (NUTS)

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Fiscal Policy1