India Fiscal Policy

8/19/2019 India Fiscal Policy

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Fiscal Policy

of

Central Government (G):

Economic Survey Govt of India

http://indiabudget.nic.in/

M a c r o e c o n o m i c P o l i c y

Fiscal Policy

Objectives of Fiscal Policy

Types of Fiscal Policy

Instruments of Fiscal Policy

Trends and Composition of Public Revenue and Expenditure in India

Union Budget

Various Concept of Deficits and Their Implications

Methods of Financing Govt Deficits

Implications for Managers


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Importance of Government Expenditure

• AE= C+I+G+X-M= Real GDP

Where,

C= Private Consumption Expenditure

I= Private Investment Expenditure

G= Government Consumption & Investment Expenditure

X= Export

M=Import Transactionswith other countries

Government Plays

an important role in

economic activities

in developing

countries

• Fiscal Policy is the government program of makingdiscretionary changes in the pattern and levels of its revenue(taxation and borrowings) and expenditure, in order toachieve intended economic growth, employment, incomeequality, and stabilization of the economy on a long runsustainable growth path.

Fiscal Policy


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Taxing rich &

distributing with poor

Upswing high tax

Recession low tax

Different program ex. NREGA

JRY, PMGSY etc.

Investing limited resources

in efficient ways

Fiscal Policy: Objectives

GDP= C + I + G + X-M

Fiscal Policy: Multipliers


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Fiscal Policy: Multipliers

Fiscal Policy: Lags


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reduces Yd

Fiscal Policy: Types

Fiscal Policy as a Counter Cyclical Device

Example: Spending on Govt programs

Fiscal Policy: Types


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Economy Moves Into

Recession Inflation

Desired Policy

Government Spending Increase Decrease

Taxes Decrease Increase

Actual Outcomes

G - Defense Spending n/c n/c

Tr - Social Security Benefits n/c n/c

Tr – Unemployment Comp. Increase Decrease

TA – Lump Sum Tax n/c n/c

tY) - Income Tax Receipts Decrease Increase

Economic policies and programs that are designed to offset fluctuations in a nation'seconomic activity without intervention by the government or policymakers. The best-known automatic stabilizers are corporate and personal taxes, and transfer systemssuch as unemployment insurance and welfare.

Fiscal Policy: Automatic Stabilizers

Fiscal Policies and the performances of the Govt. are laid down in the annual budgetIn India, it’s Union Budget officially know as Annual Financial Statements.

Fiscal Policy: Instruments


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Fiscal Policy: Govt’s Revenue

Tax Revenue: Meaning


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Tax Revenue: Nature & Burden of Taxes

Type of Tax Nature Burden

Progressive Tax Increases asamount on which itis imposedincreases

• high on high income grouppeople

• less on low income grouppeople

Regressive Tax decreases asamount on which itis imposedincreases

• high on low income grouppeople

• low on high income grouppeople

Proportional Each tax payer issubject to flat orfixed rate of tax pay

• Relatively high on poor incomegroup people as flat taxes takesaway large portion of income ofpoor people

• Low on high income grouppeople

Tax Revenue: Nature & Burden of Taxes

Ex. Progressive Tax:

Income tax, a wealth or

property tax, a sales tax on

luxury goods, or the

exemption of sales taxes on

basic necessities, Estate tax.

Ex. Proportional

Tax:

a sales tax, since all consumers,

regardless of earnings, are

required to pay the same fixed

rate.

Ex. Regressive Tax:

Sales tax on food, clothing

and transportation , Tobacco

and gasoline taxes, Lotteries


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Tax Revenue: Types of TAX Rate

Taxes on Commodities

Tax Revenue: Types of TAX Rate


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Tax Revenue: Types of Tax in India

Taxation System inIndia

Direct Tax Indirect Tax

Income CorporateSecurities

TransactionWealth

Excise Duty

Capital Gain

Custom Duty

Service Tax

Central SalesTax

Value Added Tax

Wealth

Holding

PersonnelIncome

Corporate

Sector

Minimum

Alternative

Fringe Benefits

Dividend

Distribution

Goods & Service

Tax

Tax Revenue: Structure of India Tax System

Central

Government

State

Government

Local Bodies

Income Tax Sales tax Tax on Properties

Service Tax Stamp Duty Octroi

Customs Duties State Excise Tax on Markets

Sales Tax Land revenue

Central Excise Tax Duty on

Entertainment

User Charges for

utilities like water

supply, drainage etc.Tax on Professional

and Callings


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High tax rate low tax base

Multiple tax rate

Tax Revenue : Trends in India

Due to high growth rate of the economy Due to recession

Structural reform, globalization, fall in import duties1950-70= 25%

1980’s fell to 15%

1990’s stable at 16%

Tax/GDP ratio

Tax Revenue : Trends in India


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Tax Revenue : Indirect Tax



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• K+ capital inflows including equity and borrowing

K -




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"Modified Value Added Tax" i s a scheme for allowing relief to final

manufacturers on the excise duty borne by their suppliers in respect of goods

manufactured by them




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The Goods and Service Tax Bill or GST Bill, 2014, proposes a national Value

added Tax to be implemented in India from April 2016.

Two component : Central GST levied by the Centre and State GST levied by

the states.

GST, will subsume central indirect taxes like excise duty, countervailing

duty and service tax, as also state levies like value added tax, octroi and

entry tax, luxury tax.

The

final

consumer

will

bear

only

the

GST

charged

by

the

last

dealer

in

the

supply chain, with set‐off benefits at all the previous stages.

Petroleum products, alcohol for human consumption and tobacco have

been kept out of the purview of the GST ,as a measure of support for the

states,

Goods and

Service

tax

( GST):

Tax Revenue: Sources


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Tax Revenue : Impact

Arthur Laffer Economic Advisor to President Ronald Reagan: Supply Side

Economics (1980s)

The Laffer curve shows theamount of revenue thegovernment collects is afunction of the tax rate.

When tax rates are very high,an increase in the tax rate couldcause tax revenues to fall.

Similarly, a cut in the tax ratecould generate enoughadditional economic activity tocause revenues to rise.

Tax Revenue: Revenue Impact


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Tax Revenue : Economic Impact

Tax Revenue : Economic Impact


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Penalties imposed by courts for failure of attending

Property occupied by govt after death with no legal heir

Payment made once for improving property atpublic interest

Non-Tax Revenue : Sources

Sources of Capital Receipts(Own)

1. Disinvestment of Public Sector Units:

2. Recoveries of Past Loans

3. Loans to others

4. Grants: concessional loans or grants


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Govt act as an investor

Govt act an provider of social services

Capital Account

• That expenditure which resultsin creation of fixed assets.

• Leads to variations on thefinancial claims of govt.

Example: Expenditure

• on agricultural and industrialdevelopment, irrigation dams,public -enterprises etc.

• Loans, Investment in (FDI) other countries

Revenue Account

• Does not result in creation ofassets

• Results in variations in moneybalance

• Example: Expenditures incurredon civil administration, defenceforces, public health and ,education, maintenance ofgovernment machinery etc.

Revenue Account vs Capital Account


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Productive vs. Non-Productive Expenditure

Productive Expenditure

• All expenditures that promote

economic growth & development.

• Investment expenditure is

considered to be productive

• Example: Expenditure on

infrastructure development, public

enterprises

or

development

of

agriculture, expenditure in building

human capital i.e. education,

expenditure on creation and

maintenance of assets

Unproductive Expenditure

• Those expenditures which do not

yield any income.

• Consumption expenditure is

considered to be unproductive

• Example: Expenditure on interest

payments, administration, defence, justice, law and order

maintenance

Administration,defence

Health, edn, etc.

Housing, cultural

Fuel,energy,mining…

Functional and Economic Classification


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Plan Expenditure

• The plan expenditure is incurred

on development activities

outlined in ongoing five year

plan.

• Annual budget provision of

different heads of 5yr plan..

• Example: Expenditure incurred

on Transport, rural

development, communication,

agriculture, energy, social

services, MGNREGA etc.

Non‐Plan Expenditure

• The expenditure which incurred on

those activities, which are not

included in five‐year plan.

• It includes development and non ‐

development expenditure.

• Example: Defence, subsidies, interest

payments, maintenance, health

facilities, continuing research etc.

Plan vs. Non-Plan Expenditure

Transfer Expenditure

• Unilateral expenditures /

payment against which there is

no corresponding transfer /

receives of real goods or services.

• Results in redistribution of money

incomes within the society

• Example: Pensions, interest

payments, subsidies,

unemployment allowances,

welfare benefits to weaker

sections etc

Non-Transfer Expenditure• The expenditure which results in

creation of income or output. It includesdevelopment and non - developmentexpenditure.

• It is a payment for purchase of goods

and services by Gov.

Example:

• Economic infrastructure (Power,Transport, Irrigation etc.),

• Social infrastructure (Education, Healthand Family welfare),

• Internal law and order and defence,public administration etc.

Transfer Vs. Non-Transfer Expenditure


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Public Expenditure: Effect

Public Expenditure: Effect


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UNION BUDGET

Measurement of Govt Deficit:

Various Concepts

Indian Union Budget

Union Budget is p resented by Finance Minister in the Parliament every year, on

Feb 28, officially reported as Annual Financial Statements.

Tax and Non-Tax ReceiptsRecoveries of Outstanding loansFresh Borrowing of GOI

(All payments require prior authorizationfrom parliament)

Placed at the disposal of thePresidentMeets Urgent and UnforeseenExpenditure

(Approval from Parliament is required)

Provident Funds, Small Savings, OtherdepositsFunds do not belong to the GovtGovts acts as banker

(Approval from Parliament is not required)


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Indian Union Budget

Indian Union Budget


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• Revenue Deficit= (E1+E2)-(R1+R2+R3)= RE-RR

• Capital Account Deficit= (E3+E4)-(R4+R8+R9)

• Budget Deficit =(Rev Exp+Cap Exp)-(Rev receipts+ all cap receipts other than 91day ad hoc Treasury Bills and Drawing down of cash balances)

=(E1+E2+E3+E4) -((R1+R2+R3)+(R4+R5+R7+R8+R9))=R6

• Fiscal Deficit =(Rev Exp+Cap Exp)-(Rev receipts+ own cap receipts (capitalgains + recoveries + sale of Public assets)

=(E1+E2+E3+E4) -(R1+R2+R3+R4+R8+R9))=(R5+R6+R7)

• Primary Deficits= Gross fiscal deficit-Interest Payments

= (Rev Exp+Cap Exp)-(Rev receipts+capital gains + recoveries +

sale of Public assets)- Interest Payments=(E1+E2+E3+E4) -(R1+R2+R3+R4+R8+R9)-E1=R5+R6+R7-E1

Gross vs Net Deficit:

• Net Fiscal Deficit= Gross Fiscal deficit-Net loans and advances

= Gross Fiscal Deficit-Loans and advances+recoveries

= R5+R6+R7+R8-E3

Indian Union Budget :Deficits


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Economic Survey 2013-14


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Economic Survey 1992-93

Very highled to

economiccrisis on

India

Fiscal Deficits and GDP Growth Rate


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Fiscal Deficits as Percentage of GDP

Deficit Financing means funding of spending by borrowing

Sources of Financing Deficits : Pros & Cons


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FRBMA Act 2003

The Fiscal Responsibility and Budget Management Act, 2003 (FRBMA)

– An Act of the Parliament of India to institutionalise financial discipline,

– To reduce India's fiscal deficit, revenue deficits,

– To improve macroeconomic management and the overall management of

the public funds by moving towards a balanced budget.

Objectives:

• to introduce transparent fiscal management systems in the country

• to introduce a more equitable and manageable distribution of the country's

debts over the years

• to aim for fiscal stability for India in the long run

Additionally, the act was expected to give necessary flexibility to Reserve Bank of

India(RBI) for managing inflation in India


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‘Fiscal Austerity’ Measures??

Austerity is a policy of deficit-cutting by lowering Govt. spending via areduction in the amount of benefits and public services provided andincreases in Taxes.

a. Supporters of austerity predict that under expansionary fiscalcontraction (EFC), a major reduction in government spending can changefuture expectations about taxes and government spending, encouragingprivate consumption and resulting in overall economic expansion.

b. Critics argue that, in periods of recession and high unemployment, austeritypolicies are counter-productive, because:

a) reduced government spending can increase unemployment, whichincreases safety net spending while reducing tax revenue;

b) reduced government spending reduces GDP, which means the debt toGDP ratio examined by creditors and rating agencies does not improve;

c) short-term government spending financed by deficits supports economicgrowth when consumers and businesses are unwilling or unable to do so.

Fiscal Cliff : is a situation in which a particular set of financial

factors cause or threaten sudden and severe economic decline.

The massive new spending programme threatens to send a nation

over a fiscal cliff, leading to even higher taxes and fewer jobs

The United States fiscal cliff was a situation that came into

existence in January 2013 whereby a series of previously

enacted laws would come into effect simultaneously,

increasing taxes while decreasing spendingIn. ( austerity

measures).

The idea behind the fiscal cliff was that if the government

allowed these two events to proceed as planned, they would

have a detrimental effect on an already shaky economy,

perhaps sending it back into an official recession as it cut

household incomes, increased unemployment rates and

undermined consumer and investor confidence

Fiscal Cliff???


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The increase in revenue came from

• increased marginal income and capital gains tax rates relative totheir 2012 levels for annual income over $400,000 ($450,000 for couples);

– a phase-out of certain tax deductions and credits for those withincomes over $250,000 ($300,000 for couples);

– an increase in estate taxes relative to 2012 levels on estates over $5 million;

– and expiration of payroll tax cuts (a 2% increase for mosttaxpayers earning under approximately $110,000).

• A reduction in spending due to budget sequestration was delayedfor two months under the act and the debt ceiling was not changed.

How Fiscal Cliff Avoided?

Implications for Managers

• Govt Exp imp components of aggregate demand

– During recession with deficiency of demand govt consumptionand investment expn boost agg demand and encouragebusiness firm to produce more.

• Taxes affects D and S, disposable income, purchasing power etc,

which affect C, I and hence business activities.

• Taxes affects production, employment, investment anddiversifications of business etc.

• Level of fiscal deficit affects overall economy and business units. itaffects inflation

-Fiscal deficit financed from borrowing affects interest rates


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References

• Handout supplied to you on FiscalPolicy

• Ch 26 Macroeconomics by Blanchard

• Ch 31 Macroeconomic Theory andPolicy by D N Dwivedi

Thank You All

Documents

India Fiscal Policy