FISCAL POLICY

1. FISCAL POLICY

2. Meaning
• Fiscal policy deals with the taxation and
expenditure decisions of the government.
These include, tax policy, expenditure policy,
investment or disinvestment strategies and
debt or surplus management.
- Kaushik Basu ( Former Chief Economic Adviser )

3. • In economics and political science, fiscal policy
is the use of government revenue collection
(mainly taxes) and expenditure (spending) to
influence the economy.
• Fiscal policy can be used to stabilize the
economy over the course of the business
cycle.

4. OBJECTIVES OF FISCAL POLICY
• 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.

5. Methods of funding
• Taxation
• Seigniorage, the benefit from printing
money
• Borrowing money from the population
or from abroad
• Consumption of fiscal reserves
• Sale of fixed assets (e.g., land)

6. Borrowing
• A fiscal deficit is often funded by issuing bonds,
like treasury bills or consoles and gilt-edged
securities. These pay interest, either for a fixed
period or indefinitely. If the interest and capital
requirements are too large, a nation may
default on its debts, usually to foreign creditors.
Public debt or borrowing refers to the
government borrowing from the public

7. Fiscal Policy there are three possible
positions
• A Neutral position 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.
• An Expansionary position is when there is a
higher budget deficit where the govt. spending is
higher than the revenue collected from the tax.
• An Contractionary position is when there is a
lower budget deficit where the govt. spending is
lower than the revenue collected from the tax.

8. The Two Main instruments of fiscal
policy
• Revenue Budget
• Expenditure Budget

9. Direct Tax
• Individual Income Tax &
Corporate Tax.
• Wealth Tax @ 1%
• Tax deducted at source
Indirect Tax
• central excise (a tax on
manufactured goods)
• VAT @ 12.5%
• service tax @ 12%
• customs duty
• Educational cess @ 3%

10. Expenditure Budget
• The central government is responsible for issues that usually concern
the country as a whole like national defence, foreign policy, railways,
national highways, shipping, airways, post and telegraphs, foreign trade
and banking.
• The state governments are responsible for other items including, law
and order, agriculture, fisheries, water supply and irrigation, and public
health.
• Some items for which responsibility vests in both the Centre and the
states include forests, economic and social planning, education, trade
unions and industrial disputes, price control and electricity.

11. The Expenditure budget includes four main revenue
expenditures
• Total expenditure is Rs.16,65,297 crores
(11.5% increase)

12. Fiscal Deficit
• Fiscal Deficit = Total Expenditure (that is Revenue
Expenditure + Capital Expenditure) – (Revenue
Receipts + Recoveries of Loans + Other Capital
Receipts)
• Currently the deficit is 5.3 % of GDP

13. #
Fiscal Responsibility and Budget Management Act-
2003(FRBM)
The main purpose of FRBM was:
1. To reduce deficit as a ratio of GDP should be brought
down by 0.5 % every year
2. Fiscal deficit as a ratio of GDP should be reduced by
0.3% every year and brought down to 3 % by 2007-
08.
3. The total liabilities of the union gov’t should not rise
by more than 9% per year.
4. The union gov’t should not give guarantee to land
raised by PSUs and state gov’t for more than 0.5% of
GDP in the aggregate.

14. Trend in Indian Fiscal Policy since 1990s
The combined Receipts and expenditures of the state and central
government as the % of GDP
1990-99 2000-01 2004-05 2007-08 2009-10 BE
Total Receipts 26.0 28.5 28.2 27.8 31.4
Rev. Receipts 18.1 17.5 19.5 22.2 21.6
Cap. Receipts 7.9 11.0 8.7 5.6 9.8
Total Exps 26.8 28.6 27.6 27.4 31.9
Revenue Exps 22.3 24.5 23.2 22.4 27.1
Capital Exps. 4.5 11.0 4.4 5.0 4.8
Note: BE: budget estimated
Source: RBI, various Issues

15. 199
0-99
2000-
01
2004-
05
2007
-08
2009-
10 BE
Revenue
Deficit
4.2 7.0 3.6 0.2 5.5
Fical
deficit
7.7 9.9 7.5 4.2 10.2
Primary
deficit
2.7 3.7 1.3 (-
)1.3
4.6
Revenue, Fiscal and Primary deficit as the % of GDP
Note: BE: budget estimated
Source: RBI, various Issues

16. The combined of state and central government debt as the % of GDP
year Central and state public Debt
1990-99 63.2
2000-01 70.6
2004-05 81.4
2007-08 75.1
2009-20 BE 76.5
Note: BE: budget estimated
Source: RBI, various Issues

17. Major Changes in Budget(2013-14) to
curb Deficit
• One year surcharge of 10 % on the Superrich.
• Increased Duties on Imported or domestic luxury
vehicles such as SUV’s, Mobiles (>Rs.2000), set top
boxes, A/c restaurants and Cigarettes.( bring in
Rs.18,000 crores)
• Disinvestment Proceedings to be around Rs.55,000
Crore for this fiscal.
• No additional subsidy for fuel, food and fertilizer
prices.
• Buyers of immovable property other than agriculture
land will have to pay a tax of 1% of the sale where the
value exceeds Rs.50 lakh.

18. Conclusion
• Fiscal deficit
• Current account deficit
• Currency depreciation
• Lower growth
• Supply side gap in Food (inflation)
• ?????
• Only 42800 earn more than 1 crore and 1.9
lakh people earn more than 10 lakhs!!!!!!