fiscal deficit finallast (1)
TRANSCRIPT
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Group Members
Sai Kumar K - 132
Anand Kumar S - 136Divya Shree R C - 148
Ashutosh Tiwari - 158
Vikalp Agrawal - 161
Satish K Reddy - 162Abhilasha Jha - 174
Group-6
Submitted to
Dr.C.S.Adhikari
Dean Academics
FISCAL DEFICIT AND ITS
IMPLICATIONS
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FISCAL DEFICIT
It is a phenomenon where governments total
expenditure surpasses the total revenue
generated.
In simple terms it is the difference between
governments total receipts and total expenditure.
Total receipts doesnt include governments
borrowing from external sources. Normally fiscal deficit termed as a percentage of
GDP.
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It is a clear indication of the level which
government should borrow.
Fiscal deficit takes place due to either revenuedeficit or a major hike in capital expenditure.
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COMPONENTS OF FISCAL DEFICIT
Revenue expenses: Revenue expenses are the day-to-day
expenses
salaries payable to the government employees
the expenses incurred in running various governmentdepartments, and so on
Capital expenses: Capital expenses include what is incurred
for creating new factories and improving infrastructure.
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Revenue Receipts
Revenue receipts consist of tax collected by the governmentand other receipts consisting of interest and dividend on
investments made by Govt., fees and other receipts forservices rendered by Govt.
Capital Receipts:
Capital Receipts include Recoveries of Loans anddisinvestment of Govt.s equity holdings in Publicenterprises, etc.
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Revenue Deficit
It is an economic phenomenon, where the net amount received fails tomeet the predicted net amount to be received.
Plan expenditure
These are the expenses that form a part of the governments five yearplan.
Non plan expenditure
It is an outcome of planned expenditure like maintenance of nationalhighways, subsidies to states.
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Revenue expenses: Revenue expenses are the day-to-day
expenses:
salaries payable to the government employees
the expenses incurred in running various governmentdepartments, and so on
Capital expenses: Capital expenses include what is incurred
for creating new factories and improving infrastructure.
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3%6%
9%
9%
10%
11%23%
29%
Where Does the Money Come From??
Non debt capital receipts
Service tax and other
taxesCustoms
Income tax
Union excise duties
Non tax revenues
Corporation tax
Borrowings and other
liabiliies
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4%7%
9%
11%
13%
16%
19%
21%
Where is Our Money Going??
Non plan assistance to state
and UT Govts
Plan assistance to state andUT
Subsidies
Defence
Other non plan expenditure
States' share of taxes and
duties
Interest paymaent
Central plan
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TRENDS AND PATTERNS IN FISCAL
VARIABLES IN INDIA
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0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2003-04 2004-05 2005-06 2006-07 2007-08
Subsidies
Food
Fertilizer
Petroleum
SUBSIDIES AS % OF
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PROJECTIONS(AS % OF GDP)
0
1020
30
40
50
6070
80
90
Gross Fiscal
Deficit
Public Debt
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FISCAL DEFICIT IN TERMS OF % OF
GDP
5.6
5.1
5.86 6
6.7
7.3
5.5
4.4
3.8
4.6
5.35.2
4.34.1
4.6
5.4
4.9
5.7
6.5
8.1
6.7
7.3
8.1
9.79.3
10.9
10
9.4
10.4
6.6
4.74.8
6.4
4.7
4.24.1
4.85.1
5.45.7
6.25.9
4.54.1
4.3
3.5
2.7
6.1
0
2
4
6
8
10
12
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REDUCING FISCAL DEFICIT BY
EFFECTIVE FISCAL POLICY
Fiscal policy is a policy in which government
uses its expenditure and revenue programs to
produce desirable effect on national income
and employment.
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TYPES OF FISCAL POLICY
REFLATIONARY FISCAL POLICY
Policy aims to boost the economy by decreasingthe taxes which will lower the prices of taxed
goods and encourage more demand. This will make people to spend the disposable
income which will trigger the growth.
Government will increase its expenditure.
These policy will be adopted during economicslow down and recession.
These policy will increase the fiscal deficit.
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DEFLATIONARY FISCAL POLICY
Policy adopted during boom period to stopthe growth.
Economy growing above its capacity will causeinflation and balance of payment problem.
Aims to increase indirect tax and reduce thegovernment expenditure.
Aims to increase the direct tax which will leavepeople to spend less.
These policy will reduce the fiscal deficit.
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SUPPLY SIDE POLICY
Aims to increase the capacity of the country to
produce more.
Reduction in the tax rate to motivate theenterprises to start new business ventures.
These policy will increase the fiscal deficit.
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THE KEYNESIAN VIEW OF FISCAL POLICY
Keynesians argued that the country budget shouldbe used to promote a level of aggregate demandconsistent with the full-employment rate of output.
EXPANSIONARY FISCAL POLICY
An increase in government expenditures and/or areduction in tax rates such that the expected size ofthe budget deficit expands.
RESTRICTIVE FISCAL POLICY:
A reduction In government expenditures and/or anincrease in tax rates such that the expected size ofthe budget deficit declines (or the budget surplusincreases).
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Expansionary & Restrictive Fiscal Policy
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Initially, the economy is operating at c. Output isbelow potential capacity and unemployment exceeds
its natural rate.
If there is no change in policy, abnormally high
unemployment and excess supply in the resourcemarket will reduce real wages and other resource
prices, which will direct the economy toward b.
In addition, interest rates would decline as the result
of the weak demand for investment, and increaseaggregate demand.
SELF-CORRECTIVE PROCESS
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However, Keynesians believe this self-corrective process will work slowly, if at all.
(1) Wages and prices are inflexible, particularly
in a downward direction.
(2) Lower interest rates may not stimulatemuch additional spending in a recessionary
economy dominated by consumer pessimismand excess production capacity.
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Keynesians recommend government action.
When an economy is operating below itspotential capacity, the Keynesian prescription
calls for expansionary fiscal policy---adeliberate change(Increase) in expendituresand/or (Decrease) In taxes that will increasethe size of the governments budget deficit.
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The Keynesian revolution challenged the view
that a responsible government should
constrain spending within the bounds of its
revenues. Rather than balancing the budget
annually, Keynesians stressed the importance
of countercyclical policy.
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FISCAL POLICY & CROWDING-OUT EFFECT
CROWDING-OUT EFFECT
A reduction in private spending as a result of
higher interest rates generated by budgetdeficits that are financed by borrowing in the
private loanable funds market.
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The crowding-out effect suggests that budget deficits
will have less effect on aggregate demand than thebasic Keynesian model implies. Because financing the
deficit pushes up interest rates, budget deficits will
tend to retard private spending, particularly spending
on investment and consumer durables.
Thus, the expansionary fiscal policy will have little, if
any, effect on demand, output, and employment.
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Keynesians argue that an increase in government
purchases financed by a deficit will exert a strong
multiplier effect on output, employment, and real
income.
Moreover, when applied during a recession, the
demand stimulus may improve business profit
expectations and thereby stimulate additional
private investment.
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Restrictive fiscal policy will crowd in private
spending. If the government increases taxes and/orreduces its spending , the budget will shift toward asurplus. As a result, the governments demand forloan funds will decrease, placing downward pressure
on the real interest rate. The lower real interest ratewill stimulate additional private investment andconsumption.
So the fiscal policy restraint will be at least partiallyoffset by an expansion in private spending.
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THE NEW CLASSICAL VIEW OF FISCAL POLICY
New classical economists
Economists who believe that there are strong
forces pushing a market economy toward full-employment equilibrium and that
macroeconomic policy is an ineffective tool
with which to reduce economic instability.
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The new classical economists stress that debt
financing simply substitutes higher future taxes for
lower current taxes. Thus, budget deficits affect the
timing of the taxes, but not their magnitude.
RICARDIAN EQUIVALENCEThe view that a tax reduction financed with
government debt will exert no effect on current
consumption and aggregate demand because people
will fully recognize the higher future taxes implied bythe additional debt.
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example
Suppose you knew that your taxes were going
to be cut by $1,000 this year, but that next
year they were going to be increased by
$1,000 plus the interest on that figure.
Would you increase your consumption
spending this year?
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SRAS
AD1
AD2
D2
D1
E1
S2S1
e2
e1
P1
Y1
r1
Q2Q1
Price
level
Real
interest
rate
Goods & services (real GDP) Loanable funds
HIGHER EXPECTED FUTURE TAXES CROWD OUT PRIVATE
SPENDING
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KEY CHANGES IN BUDGET TO
CONTROL FISCAL BALANCES
1954-1955 (The taxation enquiry commission)
Raising tax revenue through higher taxes and
greater progressivity of direct taxes. 1985-1986 (Budget presented by Mr.V.P.Singh)
Reduce the number of income tax slabs from
four to eight.
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1985-1986(Mr.V.P.Singh)
Submitted full fledged long term fiscal policy
in the parliament. Sweeping reforms has been made in custom
duties and central excise duty.
Phased introduction VAT called as
MODVAT(modified VAT).
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1986-1987(Mr.V.P.Singh)
Implementation of MODVAT
It enabled manufacturers to deduct the excisepaid on domestically produced inputs andduties paid on imported inputs from theirexcise duty on output.
By 1990 MODVAT covered all sub-sectors ofmanufacturing except petroleumproducts, textiles, and tobacco.
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1991-1992(Chelliah committee)
Simplification and rationalization of direct taxstructure.
Introduction of three-tier personal income taxstructure with an entry rate of 20% and a top rate of40% .
The rates of corporate income tax for both publiclylisted companies and closely held companies havebeen unified and reduced to 46% from 51.75% 57.5%respectively.
Extension of MODVAT to all inputs including machinery.
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1992-1993(Dr. Manmohan Singh)
Import duties has been reduced.
110% in 1992-1993 85% in 1993-1994
65% in 1994-1995
50% in 1995-1996
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1994 (Chelliah committee)
Widening the tax base by including the service tax andextending its coverage gradually.
Services brought under the tax net in 19941995 areTelephone, Stockbroker and General Insurance at thetax rate of 5%
1996-1997(finance act)
Advertising agencies, courier agencies and radio pagerservices were added to Service Tax Net.
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2004-2005(Mr.P.Chidambaram)
Introduction of New Securities Transaction Tax
(New STT), Fringe Benefit Tax
(FBT), commodities transaction tax (CTT).
FBT includes Tax on employee stock option.
Taxes on employee travel welfare and
accommodation.
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Securities transaction tax means Taxable
securities transaction, payable by both the
buyer and the seller, refers to any transaction
of securities entered into in a recognized Stock
Exchange in India which is increase from 0.1%
to 0.125%.
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2011-2012(proposals)
Introduction of Direct Tax code
To cut corporate profit tax from 34% (including
surcharge and tax) to 25% (all inclusive). Changes in Mininimum alternate tax.
Companies having large profits and declaringsubstantial dividends to shareholders but who were
not contributing to the Govt by way of corporatetax, by taking advantage of the various incentives andexemptions provided in the Income-tax Act, pay a fixedpercentage of book profit as minimum alternate tax.
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Introduction of GST
Central GST and State GST are the two
components of GST.
Finance Minister Pranab Mukherjee has said
that the successful implementation of the
Goods and Services Tax (GST) can give a
trillion-dollar boost to the economy, taking thetotal output to $2 trillion.
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All the existing taxes like VAT, Service
tax, Excise duty will be removed.
It is a consumer based tax and not origin
based tax.
That tax for product will be collected by states
which consumes.
The rate is expected to be between 14-16%.
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FISCAL STIMULUS
Increase of Rs.20000 crore towards planexpenditure.
4% cut in central value added tax.
Interest reduction for about 2% for exporters. Additional allocation for export incentive
schemes.
Full refund of service tax paid by foreign agents.
No export duty for iron ore.
Export duty for steel reduced.
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DEBT MONETIZATION AND FISCAL
DEFICIT
In simple terms paying off government debt
by printing more money.
This can reduce the value of the money.
Leads to increase in the inflation because of
more money supply in the market.
Downgrade the countries reputation by
international financial observers.
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WHAT IS HAPPENING IN DEBT
MONETIZATION?
Suppose government expense is RS.10,000 andincome is Rs 9,000.
Now government has options such as either goto RBI and take loan of Rs 1000, go to public andissue bonds worth Rs 1000 or print brand new Rs1000 note.
Suppose it goes for third option after printingRs.1000 it goes to the public through treasury
and buy the already issued bond worth of Rs1000 which will increase the money supply inlarge scale which will cause inflation.
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FISCAL RESPONSIBILITY AND BUDGET
MANAGEMENT( FRBM) BILL
An act initiated to keep fiscal deficit in control.
It was introduce in Lok Sabha in the year 2000.
The bill attempted to fix up responsibility toadopt prudent fiscal policy.
To ensure proper fiscal management and long
term macro economic stability by achieving
revenue surplus.
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KEY OBJECTIVES IN THE ACT
Reducing the revenue deficit by an amountequivalent to 0.5% or more of the GDP at the endof each financial year.
To bring down the gross fiscal deficit to less that2% within FY 2006.
Within 10 financial years (ie) from April 2001 toMarch 2011 to bring down the external debt
which do not exceed 50% of GDP. But now targets under FRBM act have been kept
in abeyance.
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MISCONCEPTIONS IN FRBM ACT
These measures might trigger deflation
because of the decrease in the expenditure.
Decrease in the public expenditure will block
the growth in long term aspect.
Money supply will get reduced in the market
because of the decrease in the expenditure.
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REASONS FOR FISCAL DEFICIT
Increase in the defense expenditure which is 2.5%of GDP.
India expects to spend $50 billion in next 10
years. Stimulus package like loan waiver to farmers.
Increase in the expenditure for sick public sectorcompanies.
Increase in the salary of government employeessalary in terms of 6th pay commission.
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IMPACTS OF FISCAL DEFICIT
Forcing the government to cut spending in the
improvement of social and physical
infrastructure.
Increase in the taxes which will reduce the
purchasing power.
Increase in the fuel price which triggers
inflation.
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HOW FISCAL DEFICIT IS MANAGED?
When revenue is not met to the expected
level government borrows money from RBI or
print additional money.
Normally prefers borrowing because printing
money can lead to increase money supply in
the market.
Increase in the money supply will causeinflation.
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Governments will consume the entire money
in capital market.
This will increase the loan amount to be
costlier and affects the growth of private
companies.
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HOW TO REDUCE FISCAL DEFICIT?
Disinvestment of public sector companies.
Increase the revenue generation by selling
spectrum and wi-max licenses.
Rapid growth in the country will increase the
tax collection.
Roll back the stimulus package.
Reduce the subsidy and tax relaxation.
Increase the efficiency of sick PSUs.
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Thank you