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Fiscal Policy
Agenda
o Introductiono Fiscal Policy & Macroeconomic Goalso Overview of Indian system of Fiscal policyo Budget 2009-10
Definition & Meaning Of Fiscal Policy
• 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.
• Arthur Smithies defined fiscal policy as “a policy under which government uses its expenditure and revenue programs to produce desirable effects and avoid undesirable effects on national income,production and employment.”
• Fiscal Policy is the government programme of making discretionary changes in the Pattern and level of its expenditure, taxation and borrowings in order to achieve Intended economic growth,employment,income equality,and stabilization of the Economy on a growth path
Fiscal policy is also called Budgetary Policy. The government receipts are inflows and expenditures are outflows of money.
Fiscal Policy & Macroeconomic Goals
Fiscal policy for economic growth
To achieve desirable employment level
To achieve desirable price level
To achieve desirable consumption level
To achieve desirable income distribution
Fiscal policy for stabilization
Fiscal policy for external balance
Fiscal Policy - Tools
Tools Of Fiscal
Policy
Government
ExpenditureTaxation
Public
Borrowing
Government Expenditure
Government spending or government expenditure is classified by economists into three types :
Government Consumption :
Government purchases of goods & services for current use
Government Investment : Government purchases of goods and services intended to create future benefits such as infra-structure investment, research spending etc
Transfer Payments :
Government expenditures that are not purchases of goods & services, and instead just represents transfer of money such as pensions,subsidies,social security payments etc.
Government Expenditure Estimate 09-10
• Budget estimate provide for a total expenditure of Rs.10,20,838 cr. consisting of Rs.6,95,689 crore under Non-Plan and Rs.3,25,149 crore under plan registering an increase of 37 % in non-plan and 34 % in plan expenditure over 2008 – 2009.
• Increase in Non-Plan expenditure is manly due to Implementation of central Sixth Pay Commission recommendations, increased food subsidy,higher interest payment arising out of larger fiscal deficit in 2008-09
• Additional amount of Rs.430 crore provided to modernize police machinery in the States
• Construction of fences,roads,Flood lights on International boarders with additional amount of Rs.2,284 cr. over 2009-2010
• Outlay for Defence up from Rs.1,05,600 cr.in 2008-09 to Rs.1,41,703 cr in 2009-2010.
Methods Of Funding
Governments spend money on a wide variety of things, from the military and police to services like education,healthcare,as well as transfer payments.
The expenditure can be funded in number of different ways :
Taxation
Public Borrowings
Consumption of fiscal reserve
Sale of assets (eg. Land)
Taxation
Purpose and Effect
Funds provided by taxation have been used by states and their functional equivalents throughout history to carry out many functions
Taxation has four main purposes or effects : Revenue,Redistribution & Reprising
Revenue : Taxes raise money to spend on schools, hospitals, roads and on more government indirect functions like market regulation or legal systems.
Redistribution : Transferring wealth from richer sections of society to poorer sections
Reprising : Taxes are levied to address externalities : tobacco is taxed, for example, to discourage smoking
Taxation
The major tax enactment in India is The Income Tax Act 1961 passed by the parliament, which imposes a tax on income from individuals and corporations. The act imposes a tax on income under the following heads :
Direct Taxes
• Income from Salaries
• Income from house and property
• Income from business and profession
• Income in the form capital gains
• Income from other sources
Taxation
•Indirect Taxes
• Custom Duty : duty on goods imported In India
• Central Excise Duty : duty of excise on goods manufactured or produced in India
• Service Tax : tax on the services provided by the service provider
• Central Sales Tax : tax on goods sold in inter-state trade or commerce in India
• Transaction Tax : tax on transactions of sale of securities
Taxation
Other major taxation enactment passed by State Legislatures :
• Excise duties ,on tabacco,alcohol and narcotics• Sales tax, on sales of goods within the state• Stamp duties, on sale of properties within the state• Entertainment tax
Public Borrowing
When resource mobilization through ‘tax means’ are inadequate, the government resort to borrowings to finance the expenditures.
This is commonly known as Deficit Financing .
Sources of funding:
• Internal Borrowings• Issuance of government bonds and treasury bills• Borrowing from central bank (Monetizing deficit financing)
• External Borrowings • Foreign government• International org. World Bank and IMF
Fiscal Policy - Instruments
Instruments Of
Fiscal Policy
Budgetary Policy
Compensatory Policy
Deficit-budget Policy
Deficit-budget Policy
Surplus-budget Policy
Surplus-budget Policy
Balanced-budget Policy
Balanced-budget Policy
DiscretionaryPolicy
DiscretionaryPolicy
Built In
Stabilizers
Built In
Stabilizers
Budgetary Policy
Its also known as the Contra cyclical Fiscal Policy
1) Budget Deficit - Fiscal Policy During Depression• When government expenditure exceeds the receipts• Expansionary effect of budget deficit• Two ways : Increasing Government expenditure and keeping tax intact or Decreasing Tax and keeping government expenditure intact
C+I+G= Consumption +Investment+ Government ExpenditureE= Equilibrium Point
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Budgetary Policy
2) Surplus Budget - Fiscal Policy During Boom• When government revenue exceeds the expenditure• To control the inflationary pressure within economy• Increasing Taxation and Decreasing Government expenditure
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3) Balance Budget Multiplier
• Increase in the Taxes and Government Expenditure equally• Leads to increase in the net national income.
Compensatory Policy
• The compensatory fiscal policy aims at continuously compensating the economy against tendencies towards inflation and deflation by manipulating public expenditure and taxes.
•When there are deflationary tendencies in the economy the government should increase its expenditure through deficit budgeting and reduction in taxes.
• When there are inflationary tendencies the government should reduce the expenditure by having surplus budget and raising taxes in order to stabilize the economy.
1)Built in Stabilizers: Automatic adjustment of the expenditure and taxes in relation to cyclical upswings and downswings within the economy without any deliberate action from the government. Stabilizers include: Corporate profit tax, Income tax, Excise tax, Old age, survivors and unemployment insurance and unemployment relief payments.
Compensatory Policy
2) Discretionary Fiscal Policy: This requires the deliberate change from government
i) Changing taxes with government expenditure constant ii) Changing government expenditure with taxes constant iii) Variations in both expenditures and taxes simultaneously
This is depend upon the proper timing and accurate forecasting
Lags In Effect Of Policy
1) Recognition Lag:• Refers to time between the development and recognition of
need of action by the Monetary and Fiscal authorities• Its difficult to identify the turning points of the business cycle• Past experience with Federal Reserve Bank (US) states that it
recognize the need for action after Three months from Trough and Six months after Boom is started
2) Administrative Lag:• Refers to authorities recognize the need for action and actually
collects the relevant data• Length of this lag depends on which type of policy is being
implemented• This lag is short in duration compare to other lags
Inside LagsInside Lags
Lags In Effect Of Policy
1) Operation Lag:• Refers to time between the adaption of the policy and its final
effect on economic activities.• It is divided in two types:
a) Intermediate Lag:Refers to the time period between the moment at which action is
been taken by authorities till the moment at which economy is faced with change in interest rates, money supply, taxes, public expenditure.
b) Outside Lag:Refers to time involve between interest rates,, total reserves,
credit rationing and their effects on aggregate spending, income and output of the economy
Outside LagsOutside Lags
Fiscal Responsibility And Budget Management (FRBM)
• Enacted by parliament in 2003 to bring fiscal discipline.
• The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of the government to stick to the deficit targets.
• It aimed at:1. Reducing revenue deficit2. Reducing gross fiscal deficit3. Reducing the Public debt4. No Borrowing from the RBI
Advantages Of Fiscal Policy
Emphasis on overall economic growth Management of revenue and expenditure Helps in planning Easy to target specific sector For the social welfare
Disadvantages Of Fiscal Policy
Requires accurate forecasting, which is essential to judge the stage of cycle through which economy is passing.
Time Lags :The time required in studying the problem & taking the decision involves too long time.
Execution Lags : Once the decision is taken,delay in executing the same
Fiscal Deficit – The Biggest Challenge
The fiscal deficit is the difference between the government's total expenditure and its total receipts . When the government’s expenditure exceeds the receipts it is called fiscal deficit or the deficit – budget policy.
Fiscal deficit = Total Govt. Expenditure > Total Govt. Revenue
MEANINGMEANING
The biggest challenge before the Finance Minister, will lie in the area of containing the government’s fiscal deficit. If the deficit of States & off-budget liabilities (such as petroleum and fertilizers bonds) taken into account, the combined fiscal deficit will be almost 11 per cent of the GDP
Trends In Fiscal Deficit Of India
Where The Rupee Comes From 2008-09
Where Does The Rupee Goes To
Budget Deficit Or Surplus In FY 2002
-6 -4 -2 0 2 4
Italy
Sweden
Canada
United Kingdom
France
United States
Ireland
Norway
JapanSource: Organization for Economic Development and Cooperation
• India's per capita income is $440
• In India 30-40% population is below poverty line
• India is trying to catch up with China in terms of foreign direct investment (FDI)
• In the case of India, the FDI figure stood at $4.67 billion in 2002.
• China's per capita income stood at $990
• In China, 3% of the population is below the poverty line
• China opened up its economy before India & could therefore attract foreign investment . Since the opening up of the economy in 1978, China enjoyed a steady flow of FDI.
• China received FDI of $52.7 billion in 2002
Fiscal Policy Case Study – India vs China
IndiaIndia ChinaChina
India & fiscal Deficit
Budget At Glance 2008-09
Government of India
Key Features Of Budget 09-10
• To lead economy to high GDP growth rate of 9% per annum at the earliest
• To deepen and broaden the agenda for inclusive development
• To improve delivery mechanism of the Government
CHALLENGESCHALLENGES
Overview Of Economy
Growth rate of GDP dipped from an average of over 9 % in the previous years to 6.7 % during 2008-09.
WPI rose to nearly 13 % in August, 2008 and had an equally sharp fall to zero per cent in March, 2009.
The structure of India’s economy changed over the last ten years with contribution of the services sector to GDP at well over 50 % and share of merchandise trade doubling to 38.9 % of GDP in 2008-09
Recognizing economic recovery and growth as co-operative effort of the Central and State Governments, meeting with Finance Ministers of States held as part of preparation of the Budget. This is intended to become an annual feature.
Estimates 2009-10
• Gross tax receipts budgeted at Rs.6,41,079 crore in 2009-2010 compared toRs.6,87,715 crore in 2008 – 2009.
• Non- tax receipts estimated at Rs.1,40,279 crore in 2009 -2010 compared to Rs.95,785 crore in 2008 – 2009.
• Tax proposals on direct taxes to be revenue neutral.On indirect taxes, estimated net gain to be Rs.2,000 crore for the full year .
• Revenue deficit projected at Rs.4.8 per cent of GDP in 2009 – 2010 compared to 1 per cent in 2008 – 2009.
• Fiscal deficit as a percentage of GDP is projected at 6.8 per cent compared to 2.5 per cent in 2008 – 2009 and 6.2 per cent as per provisional accounts 2008- 2009
Thank You !
“We need faster growth because, at our level of incomes, there can be no
doubt that we must expand the production base of the economy if we
want to provide broad-based improvement in the material conditions of
living of our population, ..........
But growth alone is not enough if it does not produce a flow of benefits
that is sufficiently wide-spread. We, therefore, need a growth process that
is much more inclusive, .......... and which also ensures access to
essential services such as health and education for all sections of the
community”.-Dr. Manmohan Singh,
Prime Minister
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