Fiscal Policy

Budget
It

is a statement of the financial plan of the government. It shows the income & expenditure of the government during a financial year, which runs generally from 1stApril to 31st March

Components of Government Budget

Revenue Budget
It

consists of Revenue Receipts and Revenue Expenditure

Revenue Receipts
These are the incomes which are received by the government from all sources in its ordinary course of governance. These receipts do not create a liability or lead to a reduction in assets. Revenue receipts are further classified as tax revenue and non-tax revenue. Tax Revenue :

Tax revenue consists of the income received from different taxes and other duties levied by the government. It is a major source of public revenue. Every citizen, by law is bound to pay them and non-payment is punishable.

Taxes are of two types, viz., Direct Taxes and Indirect Taxes.

Direct taxes are those taxes which have to be paid by the person on whom they are levied. Its burden can not be shifted to some one else. E.g. Income tax, property tax, corporation tax, estate duty, etc. are direct taxes. There is no direct benefit to the tax payer. Indirect taxes are those taxes which are levied on commodities and services and affect the income of a person through their consumption expenditure. Here the burden can be shifted to some other person. E.g. Custom duties, sales tax, services tax, excise duties, etc. are indirect taxes.

Non-Tax Revenue :Fees : The government provides variety of services for which fees have to be paid. E.g. fees paid for registration of property, births, deaths, etc. Fines and penalties : Fines and penalties are imposed by the government for not following (violating) the rules and regulations. Profits from public sector enterprises : Many enterprises are owned and managed by the government. The profits receives from them is an important source of non-tax revenue. For example in India, the Indian Railways, Oil and Natural Gas Commission, Air India, Indian Airlines, etc. are owned by the Government of India. The profit generated by them is a source of revenue to the government. Gifts and grants : Gifts and grants are received by the government when there are natural calamities like earthquake, floods, famines, etc. Citizens of the country, foreign governments and international organizations like the UNICEF, UNESCO, etc. donate during times of natural calamities.

Revenue Expenditure
expenditure is the expenditure incurred for the routine, usual and normal day to day running of government departments and provision of various services to citizens. It includes both development and nondevelopment expenditure of the Central government. Usually expenditures that do not result in the creations of assets are considered revenue expenditure.
Revenue

Revenue expenditure includes following

Expenditure on agricultural and industrial development, scientific research, education, health and social services. Expenditure on defense and civil administration. Expenditure on exports and external affairs. Grants given to State governments even if some of them may be used for creation of assets. Payment of interest on loans taken in the previous year. Expenditure on subsidies.

Capital Budget
This

part of the budget includes receipts & expenditure on capital account projected for the next financial year. budget consists of capital receipts & Capital expenditure

Capital

Capital Receipts
Receipts

which create a liability or result in a reduction in assets are called capital receipts. They are obtained by the government by raising funds through borrowings, recovery of loans and disposing of assets.

Items included in Capital Receipts

The main items of Capital receipts (income) are : Loans raised by the government from the public through the sale of bonds and securities. They are called market loans. Borrowings by government from RBI and other financial institutions through the sale of Treasury bills. Loans and aids received from foreign countries and other international Organizations like International Monetary Fund (IMF), World Bank, etc. Receipts from small saving schemes like the National saving scheme, Provident fund, etc. Recoveries of loans granted to state and union territory governments and other parties.

Capital Expenditure
Any

projected expenditure which is incurred for creating asset with a long life is capital expenditure. Thus, expenditure on land, machines, equipment, irrigation projects, oil exploration and expenditure by way of investment in long term physical or financial assets are capital expenditure.

Revenue Deficit
The

revenue deficit is defined as the difference between the government revenue expenditure and government revenue receipts. In fact, revenue receipt is not enough to meet revenue expenditure

Budgetary Deficit
The

budgetary deficit refers to the difference between government total expenditure (revenue expenditure and capital expenditure) and total receipts (revenue receipts and capital receipts).

Fiscal Deficit
The

fiscal deficit is defined as the difference between the government total expenditure and the government total non-debt receipt. It is also defined as the combination of budgetary deficit and government debt receipt, i.e. borrowing from both internal and external sources, and other liabilities

Budget Deficit and Fiscal Deficit

Example showing Calculation of Budget Deficit and Fiscal Deficit. In Crores. 1. Revenue Receipts 3,50,200 2. Capital Receipts of which 1,63, 144 a) Loan recoveries + other receipts 12,000 b) Borrowings & Other liabilities 1,51,144 3. Total Receipts (1 +2) 5,14,344 4. Revenue Expenditure 1,14,982 5. Capital Expenditure 67,832 6. Total Expenditure (4+5) 5,14,344 7. Budgetary Deficit (3-6) NIL 8. Fiscal Deficit [1+2(a) - 6 = 7 + 2 (b)] 1,51,144

Fiscal Policy
Fiscal

policy is that part of government policy which is concerned with raising revenue through taxation and other means and deciding about the level and pattern of expenditure. It operates through the budget. The budget is an estimate of government expenditure and revenue for the coming financial year , presented to Parliament by the Finance Minister.

Objectives of fiscal policy

Development by effective Mobilization of Resources Efficient allocation of financial resources Reduction in equalities of income and wealth Employment generation

 Balanced Reducing

regional development the deficit in the balance of

payment
Capital

formation national income of infrastructure

Increasing

Development Foreign

exchange earnings