Unit I; By Vardah Saghir

Fiscal policy deals with the taxation and expenditure decisions of the government.

Aggregate demand, which is the total demand for goods and services in the economy, depends on three main variables- consumption, private investment and government spending. When the government increases its expenditure then it spurs the aggregate demand in the economy. A higher aggregate demand in turn will stimulate output, growth and employment. Whereas if the government lowers its spending then it decreases the aggregate demand and hence slows down the growth of the economy.

Mobilization of resources so as to increase the rate of investment and capital formation, This, in turn, accelerates the rate of economic growth, (Taxation; Public Savings; Private Savings) The central and state governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes interest payments, subsidies, etc. But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Reduction of inequalities of income and wealth, or redistribution of income, in other words, an equitable distribution of income, (Taxes, subsidies)

Increase in employment opportunities - Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generates more employment, rural employment programmes have been undertaken by the Government of India. Price stability - One of the main objective of fiscal policy is to control inflation and stabilize price. Therefore, the government always aims to control the inflation by reducing fiscal deficits, introducing tax savings schemes, Productive use of financial resources, etc. Balanced regional development - incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc.

Reducing the Deficit in the Balance of Payment - Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption of income tax on export earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc. The foreign exchange is also conserved by providing fiscal benefits to import substitute industries, Imposing customs duties on imports, etc.
Development of Infrastructure

Government spending on the purchase of goods & services. Payment of wages and salaries of government servants Public investment Transfer payments (social security measures)

Central plans such as on agriculture, rural development, MSME, Irrigation and flood control, energy, minerals,etc. Central Assistance for Plans of the states and Uts.

Revenue Interest Payments, Subsidies Food, Fertilizers, Exports + debt relief to farmers, etc. Administrative Expenditure Social Services (Education, Health, etc) Economic Services (Energy, Agriculture, Transport, etc) Grants to states and UTs Grants to Foreign governments Capital Defence capital expenditure, Loans to PSUs, Loans to state governments and foreign governments.

Growing revenue expenditure of the government Expansion of administration; governments international commitments, participation in nation building activities Non Development Expenditure is increasing. Interest burden of the government is rising. Defence expenditure shooting up. Subsidies on 3 Fs have become an integral part of Central Govt expenditure. Ever increasing burden of administration. Interest payments+ Defence+Subsidies+General Economic and Social Services account for 80% of the Current Non- Plan Expenditure.

To conclude, the expenditure of the Central Government since 1950-51 has been largely influenced by two considerations:
To speed the economic development of the

country. To keep the country prepared to face threats to its security from foreign aggression.

Net recoveries of loans and advances to states and Uts. Net market Borrowings (Gross Borrowings Repayments) Net small savings collection Other capital receipts like PF, special deposits,etc.

Tax Revenue Non Tax Revenue

Non quid pro quo transfer of private income to public coffers by means of taxes. Classified into 1. Direct taxes- As the assesses have to pay them and cannot shift to others. Corporate tax, Div. Distribution Tax, Personal Income Tax, Fringe Benefit taxes, Banking Cash Transaction Tax 2. Indirect taxes- Taxes on commodities and services. Central Sales Tax, Customs, Service Tax, excise duty.

Interest Receipts Usually interest on loans granted by the Centre to the states) Dividends and Profits of government enterprises (30% of Non- Tax Revenue) General Services

Direct Taxes are taxes on income and property. Indirect Taxes are taxes on commodities and services. Direct Taxes came down from 36% to 16% between 1951 and 1991 and indirect taxes from 64% to 84%. 2001-02 - 37:63 2013-14 (Estimated) 54:46 Corporation Tax Central Excise DutiesPersonal Income Tax Custom Duties

TAXATION:
Taxes are the main source of government

revenues. Taxation has a direct bearing on savings, investments and if the direct tax rates were high, there would be lesser savings and would also affect the consumption pattern. At the same time, if the tax rates are brought down, it would affect public investments.

PUBLIC EXPENDITURE
Public Expenditure is mainly financed by tax and non

tax revenue, market borrowings and deficit financing. Government expenditure (productive projects, infrastructure, warehouses, financial Institutions) leads to increase in aggregate demand. Inc. in aggregate demand causes increase in GDP. Govt expenditure serves as an engine of growth. Debt Monetisation increases inflation. If the expenditure is financed through public borrowings, private consumption may fall, weakening the growth effect. Debt burden is dangerous.

PUBLIC DEBT
The public debt comprises of internal and external

debt. Internal debt includes market loans, bank temporary loans by way of treasury bills issued to RBI and commercial banks. It reduces the credit capacity of financial institutions and these are left with less credit availability for productive purposes. Unsustainably high levels of debt becomes a serious problem that my imprison an economy in a debt trap a situation in which the government has to raise fresh borrowings to service existing debt.


1. 2.

Internal borrowings

Borrowings from the public by means of treasury bills and govt. bonds Borrowings from the central bank (monetized deficit financing)

1. 2. 3.

External borrowings foreign investments international organizations like World Bank & IMF market borrowings

A budget is a detailed plan of operations for some specific future period It is an estimate prepared in advance of the period to which it applies.

Revenue receipts Capital receipts Revenue expenditure Capital expenditure Revenue receipts and capital receipts together implies the government's total cash inflow.

Growing rapidly and dangerously. From Rs 27040 cr in 1988-89 to Rs 44,630 cr in 1990-91 and to Rs 5,42,499 cr in 2013-14.
Two Pronged Strategy Augmenting Revenue and Controlling Non-Plan Expenditure

Slippage on account of petroleum sector; compensation to OMCs for under recoveries. Fertilizer subsidies Food subsidies Drop in growth rate has impacted direct tax collection Volatility in the capital market

When the govt cannot raise enough financial resources through taxation, it finances its development expenditure by:
Running down its cash balances with RBI.
Borrowing from the market. Borrowing from RBI.

Better than estimated receipts from Service Tax Higher than estimated non-tax revenue - auction of 3G Rationalisation of the tax structure, widening of the tax base and reduction in compliance costs through improvement in tax administration. The extensive adoption of information technology solutions have also fostered a sound tax system and encouraged voluntary compliance. These measures have resulted in increased buoyancy in tax revenues and has helped in fiscal consolidation. Base expansion and administrative improvement in the realm of indirect taxation. Disinvestment Decontrolled the pricing of petrol.

Reduction of debt
Reduction in market borrowings through dated

securities. (Issued by the govt. with maturity of more than a year. At present dated govt securities with a maturity of 30 years are available in the market.) Buy back of fertilizers bonds in lieu of subsidy. Reduction in estimated loans from IBRD

Government is determined to bring the deficit down to a more sustainable level and at the same time re-orient government expenditure towards priority sectors like health, education, irrigation with added focus on infrastructure and investment related activities.

The fiscal policy of 2012-13 has been calibrated with two fold objectives first, to aid economy in growth revival; and second, to bring down the deficit from 201112 levels.

Comment upon Indias overall fiscal environment at present. Is it favourable for the growth of the corporate sector. Is Indias fiscal deficit sustainable? Suggest measures to control the deficit. Discuss the challenges of prudent fiscal management in India. Discuss the direct and indirect tax system in India. Discuss the concept of fiscal deficit. What has the government done to combat it?