WHAT IS FISCAL POLICY
?
Fiscal policy deals with the taxation and expenditure decisions of the
government to influence the economy.
Objectives
Increase in capital
formation
Degree of Growth
To achieve desirable price
level
To achieve desirable
consumption level
To achieve desirable
employment level
To achieve desirable
income distribution
Composition
Tax policy
Expenditure
policy
Investment or
disinvestment
strategies
Debt or
surplus
management
TYPES OF FISCAL
POLICY
Neutral Fiscal
Policy
Applies when the budget outcome
has neutral effect on the level of
economic activity where the govt.
spending is fully funded by the
revenue collected from the tax
Expansionary
Fiscal Policy
It is there when there is a higher
budget deficit where the govt.
spending is higher than the revenue
collected from the tax.
Contractionary
Fiscal Policy
It is when there is a lower budget
deficit where the govt. spending is
lower than the revenue collected from
the tax
TWO SCENARIOS (
CHANGE)
Surplus - When the government receives
more than it spends, it has a surplus.
Deficit
If the government spends more than it
receives it runs a deficit.
Fiscal
Deficit
Total
Expenditur
e
that is Revenue
Expenditure +
Capital
Expenditure
Revenue
Receipts
Recoverie
s of Loans
Other
Capital
Receipts
that is all Revenue and Capital
Receipts other than loans taken
FUNDING
Expenditure of government can
be funded by -
Taxation
Borrowings
Consumption of reserves
Sale of Fixed Assets
Internal Borrowing
Borrowings from central
bank
Borrowings from public
treasury bills and Govt
bonds
External Borrowing
World Bank
International Monetary
Fund
Foreign Investments
TAXATION
Direct
taxes
Indirect
taxes
Personal
Income
Tax
Central
excise
Corporate
Income
Tax
Service tax
Tax on Personal
Wealth and
professions
Tax on interest
and dividends
Security
transaction tax
Customs
duty
Central
sales tax
Taxes are the main source
of government revenues
Direct taxes are so
named since they are
charged upon and
collected directly from the
person or organization
that ultimately pays the
tax
Indirect taxes are
charged and collected
from persons other than
those who finally end up
paying the tax
DISTRIBUTION OF
POWER
India has a federal form
of government with
taxing powers and
spending responsibilities
being divided between
the central government
the state government
Cant give complete
ownership to Centre
Planned Expenditure
Non Planned
Expenditure
Expenditure
Central
Government
National Defense, foreign
policy, railways, national
highways, shipping, airways,
post and telegraphs, foreign
trade and banking
State
Government
law and order, fisheries, water
supply and irrigation, and
public health
Both Central forests, economic and social
planning, education, trade
and State
unions, industrial disputes,
Government
price control and electricity
PLANNING FISCAL
POLICY
Fiscal Policy Planning
Planning
Planning Commission
Setup in 1950 - Bring about a
steady and swift rise in the
living standards of Indian
citizens
Budget and 5 year plans to
be steered by PC
Providing employment
opportunities to all
Increase the production
levels in the agricultural as
well as industrial sectors
Budget
Revenue Budget
Expenditure Budget
5 year plans
Every financial Year the
government places before the
legislature , a statement of its
proposed taxing and spending
provisions for legislative debate
and approval
Union Budget , State Budget
GROSS FISCAL DEFICIT
1971-2010
India's expenditure norms remained conservative till the 1980s
TRENDS BEFORE
LIBERALIZATION
Composition of Central
Government Revenue
Composition of Central
Government Revenue
Expenditure
1970 71
1970 71
1990 91
1990 91
TRENDS AFTER GLOBAL
FINANCIAL CRISIS
Composition of Central
Government Revenue
Composition of Central
Government Revenue
Expenditure
2009-10
2009-10
2011-12
2011-12
AGGREGATE
DISBURSEMENTS
FISCAL DEFICIT ON LOCAL
INDUSTRY
EFFECTS OF FISCAL DEFICIT ON
CREDIT CYCLE & GOVERNMENT
REVENUE
EFFECTS OF FISCAL DEFICIT
ON CREDIT CYCLE & FARMERS
SUICIDE
KEYNESIAN VIEW
Favors large government expenditure through deficit financing in order
to employ unused resources
Public debt will prevent the rise in unemployment, limit the impact and
duration of the economic recession
Increased government spending financed by government borrowing.
Intellectual analysis of economic problems
Keynes: The deficit-loving interventionist
RICARDIAN VIEW
An increase in the
government deficit is
equivalent to a decrease
in government savings,
which shifts national
savings leftward. In a
Ricardian world, private
savings increases by an
offsetting amount, so the
final result is no change in
national savings.
NEO CLASSICAL
ECONOMICS
Argues that high government expenditure has a negative
impact on savings, which affects growth. A high government
deficit leaves little for the private sector for investment and puts
upward pressure on interest ratesalso referred as crowding
out.
AN INTERESTING
FACT
Indias total national debt : $426,000,000,000
Thickness of a Rs.1000 note = 0.15mm
Height ???
4000 Km (approx.)
In rupee: Rs. 26,377,000,000,000
CONSEQUENCES OF
REDUCING FD
How to reduce fiscal deficit:
1. Increase Tax Rate:
Decrease DI by T
MPC
Y
T
1 MPC
Decrease C by MPC T
Downward shift of AE line
Decrease in GDP
2. Reduce Government Spending
1
Y
G
1 MPC
