FISCAL POLICY OF INDIA

PRESENTED BY:
ANNYATAMA BHOWMIK
AVIJIT ROY
BISWAJIT BANIK
JEET CHAKRABORTY
MRINMOY CHATTERJEE
RAHUL MAJUMDAR
SUDIPTA DEY

FISCAL POLICY: WHAT IS ABOUT?

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
The fiscal policy is concerned with the raising of
government revenue and incurring of government
expenditure.

STANCES OF FISCAL POLICY

The three main stances of fiscal policy are:

Neutral fiscal policy is usually undertaken when an economy is in

equilibrium. Government spending is fully funded by tax revenue and
overall the budget outcome has a neutral effect on the level of
economic activity.

Expansionary fiscal policy involves government spending

exceeding tax revenue, and is usually undertaken during recessions.

Contractionary fiscal policy occurs when government spending is

lower than tax revenue, and is usually undertaken to pay down
government debt

METHODS OF FUNDING

Governments spend money on a wide variety of things, from the

military and police to services like education and healthcare, as well
as transfer payments such as welfare benefits. This expenditure can
be funded in a number of different ways:

Taxation

Seigniorage ,the benefit from printing money

Borrowing money from the population or from abroad

Consumption of fiscal reserves

Sale of fixed assets (e.g., land )

OBJECTIVES:

Economic stabilization
Economic growth (GDP growth 3.986% in 2012-13)
Employment generation (Unemployment 3.8% in 2011 est.)
Reduction in inequalities of income and wealth
Increase in capital formation
Price stability and control of inflation (4.7% ; April 2013)
Effective mobilization of resources
Balanced regional development
Increase in national income
Development of infrastructure
Foreign exchange earnings (Foreign reserves $295.29 billion in
Oct.2012)

IMPORTANCE OF FISCAL POLICY

Government activities are enlarged.
Tax- Revenue and Expenditure accounts for large proportion of GNP.
Government effects the Economic activities through gap between
government receipts and borrowings.
It indicates the level of overall borrowings by the government.
It is the indicator of fiscal health of the economy.

BUDGET:
Budget refers a financial statement which shows
anticipated revenue and anticipated expenditure in
an accounting year.
or
Statement of estimated receipts and expenditures of
the government in respect of every financial year
which runs from 1 April to 31 March.

TYPES OF BUDGET:
(a) Revenue Budget: The Revenue Budget shows the
current receipts of the government and the
expenditure that can be met from these receipts.
(b) Capital Budget: The Capital Budget is an account
of the assets as well as liabilities of the central
government, which takes into consideration changes
in capital. It consists of capital receipts and capital
expenditure of the government .

GOVERNMENT BUDGET

REVENUE BUDGET

REVENUE
RECEIPTS

TAX
REVENUE

DIRECT
TAX

REVENUE
EXPENDITURE

CAPITAL
RECEIPTS

PLAN CAPITAL
EXPENDITURE

NON-TAX
REVENUE

INDIRECT
TAX

CAPITAL BUDGET

PLAN
REVENUE
EXPENDITURE

NON-PLAN
EXPENDITURE

CAPITAL
EXPENDITURE

NON-PLAN
CAPITAL
EXPENDITURE

CAPITAL BUDGET(ACCOUNT):

Capital Receipts: The main items of capital receipts are loans raised
by the government from the public which are called market borrowings,
borrowing by the government from the Reserve Bank and commercial
banks and other financial institutions through the sale of treasury bills,
loans received from foreign governments and international
organizations, and recoveries of loans granted by the central
government. (Rs 6,08,967 Crore for the year 2013-14)
Capital Expenditure: This includes expenditure on the acquisition of
land, building, machinery, equipment, investment in shares, and loans
and advances by the central government to state and union territory
governments, PSUs and other parties. (Rs16,65,297 Crore for the year
2013-14)

CAPITAL EXPENDITURE:
Capital expenditure is also categorized as plan and non plan
in the budget documents:
a) Plan capital expenditure: Plan capital expenditure, like its
revenue counterpart, relates to central plan and central
assistance for state and union territory plans. (Rs 5,55,322
Crore for the year 2013-14)
b) Non-plan capital expenditure: Non-plan capital
expenditure covers various general, social and economic
services provided by the government.(Rs 11,09,975 Crore
for the year 2013-14)

http://indiabudget.nic.in

REVENUE BUDGET(ACCOUNT):
Revenue Receipts :Revenue receipts are divided into tax
and non-tax revenues. Tax revenues consist of the proceeds
of taxes and other duties levied by the central government.
(Rs 10,56,331 Crore for the year 2013-14)
Revenue Expenditure : Broadly speaking, revenue
expenditure consists of all those expenditures of the
government which do not result in creation of physical or
financial assets.
(Rs 1,72,252 Crore for the year 2013-14)

REVENUE RECEIPTS:
Tax revenues: It is an important component of revenue receipts,
comprise of direct taxes which fall directly on individuals (personal
income tax) and firms (corporation tax), and indirect taxes like excise
taxes (duties levied on goods produced within the country), customs
duties (taxes imposed on goods imported into and exported out of India)
and service tax. (Rs 8,84,078 Crore for the year 2013-14).
Non-tax revenue: The central government mainly consists of interest
receipts (on account of loans by the central government which
constitutes the single largest item of non-tax revenue), dividends and
profits on investments made by the government, fees and other receipts
for services rendered by the government. Cash grants-in-aid from
foreign countries and international organizations are also included.
(Rs 1,72,252 Crore for the year 2013-14)

TAX REVENUE:
a) Direct tax: Direct taxes which fall directly on individuals
(personal income tax) and firms (corporation tax). Other
direct taxes like wealth tax, gift tax and estate duty.
(Rs 5,64,337 Crore for the year 2013-14)
b) Indirect tax: Indirect taxes like excise taxes (duties levied
on goods produced within the country), customs duties
(taxes imposed on goods imported into and exported out of
India) and service tax. (Rs 5,04,423 Crore for the year
2013-14)

REVENUE EXPENDITURE:
Plan revenue expenditure: Plan revenue expenditure
relates to central Plans (the Five-Year Plans) and central
assistance for State and Union Territory Plans. (Rs 4,43,260
Crore for the year 2013-14)
Non- plan revenue expenditure: Non-plan expenditure, the
more important component of revenue expenditure, covers a
vast range of general, economic and social services of the
government. The main items of non-plan expenditure are
interest payments, defence services, subsidies, salaries and
pensions. (Rs 9,92,908 Crore for the year 2013-14)

MEASURES OF GOVERNMENT DEFICIT:

Budget deficit: When a government spends more than it
collects by way of revenue, it incurs a budget deficit.
Revenue Deficit: The revenue deficit refers to the excess
of governments revenue expenditure over revenue
receipts. (Rs 3,79,838 Crore for the year 2013-14)
Revenue deficit = Revenue expenditure - Revenue receipts

 Fiscal Deficit : Fiscal deficit is the difference between the

governments total expenditure and its total receipts
excluding borrowing
Gross fiscal deficit = Total expenditure (Revenue receipts +
Non-debt creating capital receipts)
Non-debt creating capital receipts are those receipts which
are not borrowings and, therefore, do not give rise to debt.
Examples are recovery of loans and the proceeds from the
sale of PSUs. The fiscal deficit will have to be financed
through borrowing. Thus, it indicates the total borrowing
requirements of the government from all sources.
(Rs 5,42,499 Crore for the year 2013-14)

 Gross fiscal deficit = Net borrowing at home + Borrowing

from RBI + Borrowing from abroad
Net borrowing at home includes that directly borrowed from
the public through debt instruments (for example, the
various small savings schemes) and indirectly from
commercial banks through Statutory Liquidity Ratio (SLR).
Fiscal deficit is 4.89 % of GDP (2013), The Economic Times

 Primary deficit: To obtain an estimate of borrowing on

account of current expenditures exceeding revenues, we
need to calculate what has been called the primary deficit. It
is simply the fiscal deficit minus the interest payments.
(Rs 1,71,814 Crore for the year 2013-14)
Gross primary deficit = Gross fiscal deficit net interest
liabilities
Net interest liabilities consist of interest payments minus
interest receipts by the government on net domestic lending.

DEFICIT FINANCING AND INFLATION

Countries (Developing) need to promote Economic Growth.

Resources required for development exceeds the amount which can be raised by
normal ways: taxation, borrowing, surpluses etc.

Economic development can be achieved by Investment.

For Investment the government needs to resort to Deficit Financing.

Does Deficit Financing leads to Inflation?

NOT NECESSARY
If the supply of output (Consumer goods) is also increasing with demand
But in short run it might turn inflationary in developing economies as there is
dearth of capital and long term Investment projects does not add to supply of
consumer goods.

DEBT:

Budgetary deficits must be financed by either taxation, borrowing or

printing money.

Governments have mostly relied on borrowing, giving rise to what is

called government debt.

The concepts of deficits and debt are closely related.

Deficits can be thought of as a flow which add to the stock of debt.

If the government continues to borrow year after year, it leads to the

accumulation of debt and the government has to pay more and more by
way of interest.

These interest payments themselves contribute to the debt.

(Public debt 67.59% of GDP in 2012 est.)

CONCLUSION:

Indias fiscal situation requires immediate attention, high growth and

low interest rate will not take care of the problem in the long run.

In, fact growth rate in recent years have been significantly lower, at
present India's economic growth rate is 3.986 % in the last quarter of
2013.

Indias external position is relatively strong, in terms of trade flow,

reserves, foreign exchanges, but up to some extent monetary and
exchange rate policies are biased to compensate the fiscal deficit.

Coordination of fiscal policy with monetary and exchange rate policy

would be better than letting later to adjust fiscal looseness.

A narrow focus on deficit or debt can lead to neglect the long run
growth.

 Govt. has to think about revenue enhancing tax reforms

because there has ample scope of improving indirect tax
structure. Tax reform is an essential step towards increasing
govt. revenue as well as reduce microeconomic distortion.
Fiscal adjustment is going to major agenda for the govt. they
have to plan it intelligently rather than seeing as a crisis.
Govt. has to reconstruct their expenditure.
Hence we can say that fiscal measures reduce the intensity
of business fluctuations (Inflation & Recession) but only
these alone are not sufficient to correct fluctuations
significantly , therefore the role of discretionary fiscal
policy and explicit changes in tax rates and Govt.
Expenditure are required to cure recession and curb
inflation.