fiscal policy.pptx

7/27/2019 FISCAL POLICY.pptx

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Unit I; By Vardah Saghir


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Fiscal policy deals with the taxation andexpenditure decisions of the government.


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Aggregate demand, which is the total demandfor goods and services in the economy, dependson three main variables- consumption, private

investment and government spending. When the government increases its expenditure

then it spurs the aggregate demand in theeconomy. A higher aggregate demand in turnwill stimulate output, growth and employment.Whereas if the government lowers its spendingthen it decreases the aggregate demand andhence slows down the growth of the economy.


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Mobilization of resources so as to increase the rate ofinvestment and capital formation, This, in turn, accelerates therate of economic growth, (Taxation; Public Savings; PrivateSavings)

The central and state governments have tried to make efficientallocation of financial resources. These resources are allocatedfor Development Activities which includes expenditure onrailways, infrastructure, etc. While Non-development Activitiesincludes interest payments, subsidies, etc. But generally the fiscalpolicy should ensure that the resources are allocated forgeneration of goods and services which are socially desirable.

Reduction of inequalities of income and wealth, orredistribution of income, in other words, an equitabledistribution of income, (Taxes, subsidies)


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Increase in employment opportunities - Investment ininfrastructure has resulted in direct and indirect employment.Lower taxes and duties on small-scale industrial (SSI) unitsencourage more investment and consequently generates moreemployment, rural employment programmes have beenundertaken by the Government of India.

Price stability - One of the main objective of fiscal policy is tocontrol inflation and stabilize price. Therefore, the governmentalways aims to control the inflation by reducing fiscal deficits,introducing tax savings schemes, Productive use of financialresources, etc.

Balanced regional development - incentives from thegovernment for setting up projects in backward areas such as Cashsubsidy, Concession in taxes and duties in the form of tax holidays,Finance at concessional interest rates, etc.


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Reducing the Deficit in the Balance ofPayment - Fiscal policy attempts to encouragemore 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. Theforeign exchange is also conserved by providingfiscal benefits to import substitute industries,Imposing customs duties on imports, etc.

Development of Infrastructure


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Government spending on the purchase ofgoods & services.

Payment of wages and salaries ofgovernment servants

Public investment Transfer payments (social security measures)


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Central plans such as on agriculture, ruraldevelopment, MSME, Irrigation and flood

control, energy, minerals,etc. Central Assistance for Plans of the states and

Uts.


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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 foreigngovernments.


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Growing revenue expenditure of the government Expansion of administration; governmentsinternational 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 theCurrent Non- Plan Expenditure.


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To conclude, the expenditure of the CentralGovernment 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.


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Net recoveries of loans and advances tostates and Uts.

Net market Borrowings (Gross Borrowings Repayments) Net small savings collection Other capital receipts like PF, special

deposits,etc.


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Tax Revenue Non Tax Revenue


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Non quid pro quo transfer of private income topublic coffers by means of taxes.

Classified into

1. Direct taxes- As the assesses have to paythem and cannot shift to others.Corporate tax, Div. Distribution Tax, PersonalIncome Tax, Fringe Benefit taxes, Banking CashTransaction Tax

2. Indirect taxes- Taxes on commodities andservices.Central Sales Tax, Customs, Service Tax, exciseduty.


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Interest Receipts Usually interest on loansgranted by the Centre to the states)

Dividends and Profits of governmententerprises (30% of Non- Tax Revenue) General Services


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Direct Taxes are taxes on income andproperty. Indirect Taxes are taxes oncommodities and services.

Direct Taxes came down from 36% to 16%between 1951 and 1991 and indirect taxesfrom 64% to 84%.

2001-02 - 37:63 2013-14 (Estimated) 54:46 Corporation Tax Central Excise Duties-

Personal Income Tax Custom Duties


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TAXATION:

Taxes are the main source of government

revenues. Taxation has a direct bearing onsavings, investments and if the direct tax rateswere high, there would be lesser savings and

would also affect the consumption pattern. At

the same time, if the tax rates are broughtdown, it would affect public investments.


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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. inaggregate 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 growtheffect. Debt burden is dangerous.


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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 toRBI and commercial banks. It reduces the credit capacity of financial institutions

and these are left with less credit availability forproductive purposes.

Unsustainably high levels of debt becomes a seriousproblem that my imprison an economy in a debt trap a situation in which the government has to raisefresh borrowings to service existing debt.


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Internal borrowings1. Borrowings from the public by means of treasury

bills and govt. bonds

2. Borrowings from the central bank (monetizeddeficit financing) External borrowings1. foreign investments2. international organizations like World Bank

& IMF3. market borrowings


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A budget is a detailed plan of operations forsome specific future period

It is an estimate prepared in advance of theperiod to which it applies.


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Revenue receipts Capital receipts

Revenue expenditure Capital expenditure

Revenue receipts and capital receiptstogether implies the government's total cashinflow.


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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 AugmentingRevenue and Controlling Non-PlanExpenditure


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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


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When the govt cannot raise enough financialresources through taxation, it finances its

development expenditure by: Running down its cash balances with RBI.

Borrowing from the market.

Borrowing from RBI.


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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 extensiveadoption of information technology solutions have alsofostered a sound tax system and encouraged voluntarycompliance. These measures have resulted in increasedbuoyancy in tax revenues and has helped in fiscal

consolidation. Base expansion and administrative improvement in therealm of indirect taxation.

Disinvestment Decontrolled the pricing of petrol.


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Reduction of debt

Reduction in market borrowings through dated

securities. (Issued by the govt. with maturity ofmore than a year. At present dated govt securitieswith 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


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Government is determined to bring thedeficit down to a more sustainable level and

at the same time re-orient governmentexpenditure towards priority sectors likehealth, education, irrigation with added focuson infrastructure and investment relatedactivities.


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The fiscal policy of 2012-13 has beencalibrated with two fold objectives first, to

aid economy in growth revival; and second, to bring down the deficit from 2011-

12 levels.


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Comment upon Indias overall fiscalenvironment at present. Is it favourable for thegrowth of the corporate sector.

Is Indias fiscal deficit sustainable? Suggestmeasures 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?

fiscal policy.pptx

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