Notes on Fiscal policy along with detailed points

Overview of Fiscal policy

1. FISCAL POLICY

2. WHAT IS FISCAL POLICY? Fiscal policy is the means by which a government adjust its spending levels and tax rates to monitor and influence a nations economy. It is the sister strategy to monetary policy through which a central bank influences a nation’s money supply. This two policies are used in various combinations to direct a country’s economic goal.

3. OBJECTIVES General objectives of fiscal policy To maintain and achieve full employment To stabilize the price level T o stabilize the growth rate of economies To maintain equilibrium in the balance of payments To promote the economic development of underdeveloped countries

4. OBJECTIVES Fiscal policy in India always has two objectives: IMPROVING THE GROWTH PERFORMANCE OF THE ECONOMY ENSURING SOCIAL JUSTICE TO THE PEOPLE

5. OBJECTIVES Fiscal policy in India is designed to achieve certain objectives:

6. MOBILIZATION OF RESOURCES   The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of Financial Resources. The central and state governments in India have used fiscal policy to mobilise resources. The financial resources can be mobilised by:- a.  Taxation:   Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation. b. Public Savings:   The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises. c. Private Savings:  Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issuance of government bonds, etc., loans from domestic and foreign parties and by deficit financing.

7. REDUCTION IN INEQUALITIES OF INCOME AND WEALTH Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society.

8. PRICE STABILITY AND CONTROL OF INFLATION One of the main objectives of fiscal policy is to control inflation and stabilize price. Therefore , the government always aims to control the inflation by reducing fiscal deficits, introducing tax savings schemes, productive use of financial resources, etc.

9. EMPLOYMENT GENERATION The government is making every possible effort to increase employment in the country through effective fiscal measures. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on  small-scale industrial (SSI)  units encourage more investment and consequently generate more employment. Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas. Similarly , self employment scheme is taken to provide employment to technically qualified persons in the urban areas.

10. BALANCED REGIONAL DEVELOPMENT There are various projects like building up dams on rivers, electricity, schools, roads, industrial projects etc run by the government to mitigate the regional imbalances in the country. This is done with the help of public expenditure.

11. REDUCING THE DEFICIT IN THE BALANCE OF PAYMENT Some time government gives export incentives to the exporters to boost up the export from the country. In the same way import curbing measures are also adopted to check import. Hence the combine impact of these measures is improvement in the balance of payment of the country.

12. INCREASES NATIONAL INCOME It’s the strength of the fiscal policy that is brings out the desired results in the economy. When the government want to increase the income of the country then it increases the direct and indirect taxes rates in the country. There are some other measures like: reduction in tax rate so that more peoples get motivated to deposit actual tax. 

13. DEVELOPMENT OF INFRASTRUCTURE When the government of the concerned country spends money on the projects  like railways, schools, dams, electricity, roads etc to increase the welfare of the citizens, it improves the infrastructure of the country . A improved infrastructure is the key to further speed up the economic growth of the country.

14.   FOREIGN EXCHANGE EARNINGS When the central government of the country gives incentives like, exemption in custom duty, concession in excise duty while producing things in the domestic markets, it motivates the foreign investors to increase the investment in the domestic country.

15. THREE MAIN STANCES OF FISCAL POLICY NEUTRAL STANCES: This result in large tax revenue government. Spending is fully funded by Tax revenues and overall budget has a neutral effect on level of economic activity.(G=T) EXPANSIONARY STANCES: Government expenditure is more than tax receipts.(G>T) CONTRACTIONARY STANCES: Government expenditure is less than the taxes and revenue received.(G<T)

16. FUNDING The expenditure of government can be funded in different ways: Taxation Borrowings Consumption fiscal reserves Sale of fixed assets

17. INSTRUMENTS OF FISCAL POLICY Budgetary Surplus and Deficit Government expenditure Taxation - Direct and Indirect Taxes Public debt

18. BUDGETARY SURPLUS AND DEFICIT A budget is a detailed plan of operations for some specific future period. An accumulated deficit over several years (or centuries) is referred to as the government debt. A deficit is a flow. And a debt is a stock. Debt is essentially an accumulated flow of deficits.

19. GOVERNMENT EXPENDITURE It includes: Government spending on the purchase of goods and services Payment of wages and salaries of government servants Public investments Transfer payements

20. TAXATION Direct taxes Corporate taxes, Income tax Indirect taxes Central sales tax, Customs, Service tax, Excise duty

21. PUBLIC DEBT

22. BUDGET A budget is a detailed plan of operations for some specific future period. It is an estimate prepared in advance of the period to which it applies. It is also known as Annual Financial Statement of the year.

23. TYPES OF BUDGET IN INDIA UNION BUDGET STATE BUDGET

24. UNION BUDGET All the receipts and disbursements are kept under two headings: Consolidated fund of India Public account of India

25. STATE BUDGET Estimates of receipts and expenditures are presented by State Government to their Legislature before the beginning of the financial year As in the case of Union budget, there is a consolidated Fund, a public account and a Contingency Fund for each state.

26. COMPONENTS OF BUDGET Revenue receipts Capital receipts Revenue Expenditure Capital Expenditure

27. STRUCTURE OF BUDGET

28. HIGHLIGHTS OF BUDGET 2017 Total expenditure is Rs. 21, 47,000 crore . Plan, non-plan expenditure to be abolished; focus will be on capital expenditure, which will be 25.4 %. Rs. 3,000 crore under the Department  of Economic Affairs for implementing the Budget announcements. Expenditure for science and technology is Rs. 37,435 crore . Total resources transferred to States and Union Territories is Rs 4.11 lakh crore . Recommended 3% fiscal deficit for three years with a deviation of 0.5% of the GDP. Revenue deficit is 1.9 % Fiscal deficit of 2017-18 pegged at 3.2% of the GDP. Will remain committed to achieving 3% in the next year.