Fiscal Policy and Budget

Presented By: Group 2

 Fiscal Policy-Meaning
• The word fisc means ‘state treasury’ and fiscal
policy refers to policy concerning the use of
‘state treasury’ or the govt. finances to achieve
the macroeconomic goals.
• “any decision to change the level, composition
or timing of govt. expenditure or to vary the
burden ,the structure or frequency of the tax
payment is fiscal policy.”
- G.K. Shaw
 Objectives of Fiscal Policy
• It has 2 major objectives:
i. GENERAL obj-. aimed at achieving
macroeconomic 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 wealth
gaps 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 Cash
Transaction 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 - Interest
Payments
• Capital Deficit - Excess of capital expenditure
over capital receipts
• Monetized Deficit - Borrowing from RBI for
financing budget deficit
• Fiscal Deficit - Total receipts < Total expenditure
 Fiscal Deficit

• Difference between the government's total

expenditure 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 Composition of Tax Receipts

18% 18% 16%

14%
26%
19%
82%

Personal Tax Corporte Tax Excise Tax

Tax Revenue Non-tax Revenue Customes Duties Non-Tax Revenue

Contribution to Tax Receipts

90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1970-71

1972-73

1974-75

1976-77

1978-79

1980-81

1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94

1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
1971-72

1973-74

1975-76

1977-78

1979-80

1981-82

1994-95
1995-96
1996-97
1997-98

2006-07
2007-08
Direct Indirect
Where Does The Rupee Goes To
Revenue Expenditure - Rs. 5,88,586 crs

9%
Def ence Expendi ture
31%
Interest Payments
29%
Subsidies
Grants to States & Uts

18% Salaries & Transfer Payments

12%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%
1 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
-7 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
9 70 971 972 973 974 975 976 977 978 979 980 981 982 983 984 985 986 987 988 989 990 991 992 993 994 995 996 997 998 999 000 001 002 003 004 005 006 007
1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2

Revenue Expendi ture Capital Expendi ture

 35%
40%
45%
50%
55%
60%
65%
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

Developmental Expenditure
1993-94
1994-95
1995-96
Ratio of Expenditure

1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
Non-developmental Expenditure
2002-03
2003-04
2004-05
2005-06
Ratio of Govt. Expenditure

2006-07
2007-08
 Fiscal Deficit and its Financing
1980-81 1990-91

15% 7%
30% 25%
18%

32%
22%

External Financing Market Borrowing 50%

Other Borrowing Drawing from Cash Balances

2000-01
2007-08

-1% 6% -13% 7%
33%
29%

62% 77%
 Fiscal Responsibility And Budget
Management (FRBM) Bill
• Introduced in Lok Sabha in December 2000.
• Objectives include:
1. Long-term macroeconomic stability
2. Inter-generational equity in fiscal management.
• It aimed at:
1. Reducing revenue deficit
2. Reducing gross fiscal deficit
3. Reducing the Public debt
4. No Borrowing from the RBI
 Sticking to FRBM Targets
2005- 2006- 2007-
Items Units 06 07 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

Fiscal Deficit as a percent of GDP

6.50%

6.00%

5.50%

5.00%

4.50%

4.00%

3.50%

3.00%
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
 GROUP MEMBERS
• 114 Shailesh Devadiga (Shail)
• 150 Vineet Shah (Vini)
• 104 Sandeep Bhabal (Sandu)
• Anoop Warrier (ANU)
• Maddi
• Natraj Korgaonkar (NUTS)