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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 nations money supply.

Objectives of Fiscal Policy


1.
2.
3.
4.
5.
6.
7.

Development by effective mobilisation of resources


Reduction in inequalities of income and wealth
Price stability and control of inflation
Employment generation
Reducing the deficit in the balance of payment
Increasing national income
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.

Taxation
Direct 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 &IMF
Market borrowings

Types of Fiscal Policy


Fiscal policy
Discretionary
policy
To cure
recession

To control
inflation

Increase in
Govt.
expenditure

Raising taxes
to control
inflation

Reduction
of taxes

Disposing of
budget
surplus

Non-discretionary
fiscal policy
Transfer
payment
Corporate
Income
taxes

Personal
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 Deficit


Year

Fiscal deficit of
centre

Fiscal deficit of
states

Combined Fiscal deficit of


centre and states
governments

(Rs. crore)

2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15

146435
142573
126912
336992
418482
373591
515990
490190
524539
531177

87608
79979
75690
127320
194962
158374
171798
198076
284642
293973

237187
220617
199375
459908
610851
529594
688434
683418
806383
821903

Fiscal deficit of centre and states


governments
900000
800000
700000
600000
500000
400000
300000
200000
100000
0

Combined
Fiscal deficit
of centre and
states
governments

Statistical Data of Fiscal Deficit


Year

Fiscal deficit of
centre

Fiscal deficit of
states

Combined Fiscal deficit of


centre and states
governments

(as per cent of GDP)

2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15

3.96
3.32
2.54
5.99
6.46
4.79
5.73
4.85
4.62
4.13

2.37
1.86
1.52
2.26
3.01
2.03
1.91
1.96
2.51
2.28

6.42
5.14
4.00
8.17
9.43
6.79
7.64
6.76
7.10
6.38

Fiscal deficit of centre and states


governments
10
9
8
7
6
5
4
3
2
1
0

Combined
Fiscal deficit
of centre
and states
government
s

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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