FISCAL POLICY

Introduction Fiscal Policy is a part of macro economics. This policy is also known as budgetary policy. One major function of the government is to stabilize the

economy. Current indian govt wants to achieve fiscal deficit target

by not reducing expenditure but increasing tax collection. Keynesian economics, when the government changes the

levels of taxation and governments spending, it influences aggregate demand and the level of economic activity.

Meaning •The word fisc means ‘state treasury’ and fiscal policy

refers to policy concerning the use of ‘state treasury’ or the government finances to achieve the macroeconomic goals.

•Fiscal policy involves the decisions that a government makes regarding collection of revenue, through taxation and about spending that revenue.

• It is sister strategy to monetary policy through which a central bank influences a nation’s money supply.

Objectives of Fiscal Policy1. Development by effective mobilisation of resources2. Reduction in inequalities of income and wealth 3. Price stability and control of inflation4. Employment generation5. Reducing the deficit in the balance of payment6. Increasing national income7. Development of infrastructure

Instruments of Fiscal policy

Instruments of Fiscal Policy

Budget Taxation Public expenditure Public debt

Budget•“A Budget is a detailed plan of operations for some

specific future period”•Budget is presented by the finance minister of India.•Budget is also known as Annual Financial Statement of

the year.•Total Expenditure has accordingly been estimated

at Rs.17,77,477 crore in 2015-16•The requirements for expenditure on Defence, Internal

Security and other necessary expenditures are adequately provided.

TaxationDirect Tax• Individual Income Tax &Corporate Tax.• Wealth tax @ 2%

Indirect Tax• Central excise (a tax on

manufacture goods)• VAT @ 12.5%• Service Tax @ 14%• Custom Duty

Public Expenditure•Public expenditure is spending made by the

government of a country on collective needs and wants such as pension, provision, infrastructure, etc.

•Public expenditure is an important component of aggregate demand.

•Public expenditure include Revenue expenditure and capital expenditure.

Public Debts“ public debt is defined as any money owned by a government agency”• Internal borrowings Borrowings from the public means of treasury bills and

govt. bonds.Borrowings from the central bank • External borrowings Foreign investment International organizations like World Bank &IMFMarket borrowings

Types of Fiscal Policy

Fiscal policy

Discretionary policy

To cure recession

Increase in Govt.

expenditure

Reduction of taxes

To control inflationRaising taxes to control

inflationDisposing of

budget surplus

Non-discretionary fiscal policy

Personal income taxes

Transfer payment

Corporate Income taxes

Corporate dividend policy

Concept of Deficit

•Revenue Deficit = Revenue Expenditure – Revenue Receipts

•Fiscal Deficit = Total Expenditure (that is Revenue Expenditure + Capital Expenditure) – Total Receipts (that is all Revenue and Capital Receipts other than loans taken)

Statistical Data of Fiscal DeficitYear Fiscal deficit of

centreFiscal deficit of states

Combined Fiscal deficit of centre and states governments

(Rs. crore)2005-06 146435 87608 2371872006-07 142573 79979 2206172007-08 126912 75690 1993752008-09 336992 127320 4599082009-10 418482 194962 6108512010-11 373591 158374 5295942011-12 515990 171798 6884342012-13 490190 198076 6834182013-14 524539 284642 8063832014-15 531177 293973 821903

Fiscal deficit of centre and states governments

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

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Combined Fiscal deficit of centre and states gov-ernments

Statistical Data of Fiscal DeficitYear Fiscal deficit of

centreFiscal deficit of states

Combined Fiscal deficit of centre and states governments

(as per cent of GDP)2005-06 3.96 2.37 6.422006-07 3.32 1.86 5.142007-08 2.54 1.52 4.002008-09 5.99 2.26 8.172009-10 6.46 3.01 9.432010-11 4.79 2.03 6.792011-12 5.73 1.91 7.642012-13 4.85 1.96 6.762013-14 4.62 2.51 7.102014-15 4.13 2.28 6.38

Fiscal deficit of centre and states governments

2005

-06

2006

-07

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

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Combined Fiscal deficit of centre and states govern-ments

Achievements of Fiscal Policy in India•Mobilization of resources• Increase in savings• Increase in capital formation• Incentives to investment•Reduction in Income and wealth Inequalities•Reduction in inter regional variations

Fiscal Reforms in India•Simplification of taxation system

• Improving tax to GDP ratio

•Reduction in rates of direct taxes

•Reforms in indirect taxes

• Introduction of service tax

Contd… •Reduction in non-plan government expenditure

•Reduction in subsidies

•Closure of sick public sector companies

•Disinvestment of public sector units

•Efforts to reduce government administrative expenses

Fiscal Responsibility and Budget Management Act, 2003

• The Fiscal Responsibility and Budget Management Act, 2003 is an Act of the Parliament of India to institutionalise financial discipline, reduce India's fiscal deficit, 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

Current Fiscal Policy• The state of world economy has been the most decisive

factor affecting the fortunes of every developing countries.•  Roadmap to achieve Fiscal deficit of 3% of GDP in three

years: Target is 3.9% in 2015-16, 3.5% in 2016-17, 3% in 2017-18.

• The current financial year will end on a satisfactory note with the fiscal deficit at 4.6 percent (below the red line of 4.8 percent) and the revenue deficit at 3.3 percent.

• Fiscal Deficit in 2014-15 estimated to be 4.1 percent which will be below the target set by new Fiscal Consolidation Path and Revenue Deficit is estimated at 3.0 percent.

Conclusion • Thus, the fiscal policy encompasses two separate but

related decisions; public expenditures and the level and structure of taxes. It occupies the central place for maintaining full employment without inflationary forces in the economy. With its various instruments it influences the economic stability of an economy. The fiscal policy of the Indian government has been very successful in several fields such as mobilization of resources for economic development, increasing rate of savings and capital formation, developing cottage and small scale industries ,reducing the incidence of poverty etc.

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