macro 11 fiscal policy

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Economics and Business and

economic environment 2012-13

Government in the BusinessPolicy Economics

Fiscal Policy


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Introduction

Public finance is one of the importantbranches of economics.

It deals with the finances of the public whichin the context of India could be identified aspublic bodies such as Local self govts.Municipal corporations, State Govts /UTs

and Central Govt.


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Policy led development dominated by public sectortill 1991, mgmt of public finance occupied veryimportant role.

Keynesian economics states how during depression,govt can play very important role by increasing

expenditure and by increasing tax during inflation.


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Contd...

National government announced aneconomic stimulus package of $4 billion to

shield its economy from recession substantialincrease in government expenditure coupledwith a cut in interest rates by Reserve Bankof India aim towards raising aggregatedemand during 2008-09


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contd..

We have also learnt when we discussed agg.Demand and agg. Supply that fiscal policycan stimulate agg. Demand.

When G is financed through borrowings itadds to govt. debt.

It affects private spending what we popularly

say crowding out effect.


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Fiscal Policy

Objectives: Meaning and scope of fiscal policy

How fiscal policy helps in achieving the overallobjective of growth and economic developmentthrough fiscal instruments.

What is Budget, concepts of deficit and othercomponents.

How to analyse budget and implications of fiscaldeficit on growth.


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Fiscal Policy

DefinitionIt refers to govt.s programs of taxation,

expenditure and public borrowings with aview to achieve certain nationalgoals/objectives.

Objectives- Economic Growth- Promotion of employment- Macro Economic Stability

- Economic Justice or Equity


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Contd....

Key to Growth- High overall investment

- High productivity- High investment in infrastructure andeducation

Key culprits to Growth

- High fiscal deficit of central and state govts.- High non plan expenditure


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How It Works

Fiscal policy is also known as Budgetary Policyand is reflected by Union Budget.

Budget has two sides: Inflows and outflows. By its statutory powers, govt can influence inflows

and outflows and thereby the macroeconomicvariables such as agg. Consumption, pvt savingsand investment by altering taxation, govt spending,

and borrowings.


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Fiscal Instruments Government Expenditure, Taxation, Public

Borrowings, Budgetary balance are known as fiscalinstruments.

Budget could be: Balanced Budget, Surplus

Budget, Deficit Budget. Govt. Revenue Expenditure takes place due topublic spending on purchases of goods andservices, transfer payments such as pensions,subsidies, unemployment allowance, grants and aid,

payments of interest, and amortisation of loans. Govt. capital expenditure on new roads, newbuildings, ports etc.

Devt exp/Non-devt exp both in revenue and capital;by plan and non plan expenditure and by revenue

and capital exp.


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Taxation

Taxation: Direct and Indirect Direct Taxes: income tax, corporate tax,

wealth and property tax

Indirect Taxes: Excise, sales tax, customsand various state/local bodies taxes

Recovery of loans and Public sector

disinvestment are capital receipts


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Govt Expenditure

Non Plan Expenditure- Revenue Expendituresuch as interest payment, defence services,

subsidies, social services, grants to foreigngovts. Non plan capital expenditure: Defence

services, loans to public enterprises, Loans to

state and UT govts Plan expenditure:Revenue expenditure andcapital expenditure: Central Plan and centralassistance to State and union territory Plans


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Public Borrowings Internal Borrowings:(1) Borrowings from the

public by means of government bonds, and treasurybills and other liabilities such as small savings and,provident fund etc. (2) Borrowings from the centralbank, i.e. deficit financing.

Both have different implications. The former istransfer of purchasing power from public to govtand the latter monetisation of deficit withinflationary implications.

External Borrowings from foreign govts,international organisations such as IMF, World

bank, Asian Development Bank.


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The Indian Budget

Intentions Vis--vis Realities


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What is it ?

Fiscal stance of the government Annual Balance Sheet

Mandated under Article 112 of theconstitution


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Govt. Receipts

Include Revenue receipts

- Tax:direct(income), indirect(tax on

commodities and Services) and non-taxrevenue(interest and dividend, fees etc.)

Capital receipts:

- Receipts from recovery of loans

- Public sector disinvestments

- Other short, medium and long term loans

- External assistance

- state provident funds, special deposits


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Govt Expenditure..

Govt. expenditures It is divided into:Revenue exp & capital

expenditure Revenue exp: Consumption exp, interestpayments and transfer payments.

Capital Exp:Expenditure on New roads, dams

etc. It is also divided into plan exp. And non plan

exp.

Plan exp. And non plan exp again is dividedinto revenue ex . And ca ital ex .


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Contingency Fund

Any unforeseen expenditure Any urgent expenditure pending parliament

approval Placed at the disposal of the president

- parliament approves subsequently


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Public Account

Includes transactions where governmentacts more as a banker

- Provident funds- Small savings

- Other deposits Money does not belong to the government Parliament approval not required


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The Broad Category Revenue budget

- Inflows Tax revenues

- Direct Taxes : Income, corporate, service

- Indirect : Custom duties, Excise, Sales Non-Tax receipts: interest income and

dividends on investments, other fees,Education, Fines, Forfeitures, Gifts, Grants,Donation.


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Expenditure- Normal running of govt. departments.

- It is divided into revenue expenditure and plan

expenditure and non plan expenditure- Subsidies, interest payments, expenditure oneconomic and social services, pension, police, loansand grants given to the state govts, Uts, defence etccomprise the revenue expenditure.


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Capital Payments

- Expenditure on acquisition of assets- It is non recurring- Loans and advances

Development &Non-Dev. Exp

Maintenance of Law and Order and Defence,interest payment,subsidies are known as non devtexps.

Plan and Non Plan expenditure:1-Budget support to central plan towards economic

activities and social activities,2-cental assistance tostate and UTs plans


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Some Basic Fiscal Concepts

Budget Deficit : Difference bet total expen & totalreceipts of central govt.

Revenue Deficit : Difference between revenue

receipts & revenue expenditure increasing trendover the yrs (4% of GDP) Fiscal Deficit : Difference between govt. total

expenditure &govt. total own receipts increasingtrend (6.5 % of GDP)

Primary Deficit : difference bet govt currentexpenditure(total exp minus interest payment),minus govt total receipts.


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The Govt. Budget Dynamics

Deficit on revenue account made good bysurplus on capital account

Huge fiscal deficit Interest outgo accounts for over 34% of

current revenue Disinvestment target Rs. 50,000 cr Expenditure not under control non-

developmental cannot be touched


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Central Govt. ExpenditureBE (2012-13)

Total Non-Plan Expenditure:969900 Revenue non-plan exp: 865596 (89%)

Capital non-plan exp : 104304 (11%) Total plan exp: 521025 Total Rev. plan exp : 420513 (81%) Total cap plan exp: 100512 (19%) Total expenditure 1490925 Total capital exp. (Plan+non plan)

204816 (13.73%)Plan capital exp growth: 22% Plan revenue exp growth: 21.5%


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Employee pension scheme has grown tomore than one-third of the countrys GDPi.e. liabilities not backed by assets

Dismantling of APM subsidy on kerosene

and LPG to be part of budget


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Contd..

a) Int. and pre- payment 444061(29.8%of TE )

b) Defence 113829(7.6)

c) Subsidies 190015(12.74)d) Gen. Services(police, pensions)

98794(6.6)Total (a+b+c+d) 846699(56.8)e) Social services 20784(1.4)f) Eco. Services 24105(1.6)g) Postal deficit 5727(0.4)


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Concepts Of Fiscal Deficit

* Budget Deficit- Excess of total Budgetaryexpenditure over total budgetary receipts.

*Revenue Deficit-Revenue Deficit- Excess of revenue expenditure overrevenue receipts. Revenue Expenditure are those thatdoes not result in capital formation.

*Fiscal Deficit-Excess of total expenditure over govtown receipts (excluding). This measure was adopted by

IMF as the principal policy target in evaluating theperformance of countries seeking assistance.*Primary Defcit-Fiscal Deficit less interest payment.


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Critical examination between the

fiscal deficit and growth* Indias fiscal deficit is one of the highest in the world* It is argued that large structural primary deficits and

interest payments relative to GDP have had an adverse

effect on growth in recent years

* There is a clear need to bring down the combined debt-GDP ratio from its current level.

* High level of fiscal deficit relative to GDP tend not onlyto cause sharp increase in debt equity ratio, but alsoadversely affect savings and investment andconsequently growth.


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GDP growth rate and Fiscal deficit

macro 11 fiscal policy

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