Fiscal Policy And Budget At A Glance Presentation Transcript

1. Too often in recent history liberal government have been wrecked on rocks of loose fiscal policy. Franklin D Roosevelt 2. FISCAL POLICY AND BUDGET AT A GLANCE Presented by Group 6 3. Contents Public Finance as Over the Years Public Finance, Keynes and Beyond Issues Related to Aggregate Demand Instruments of Fiscal Policy Instruments of Policy in Inflation Crowding Out Effect (Recession) Instruments of Fiscal Policy to Cure Recession The Essence of Taxation Government Expenditure Measures of Deficit Indias Fiscal Deficit Budget at a Glance Dream Budget 4. Public Finance As Over the Years A balanced budget Public debt considered a burden Everything true of an individual or family is also true of government Equal tax collection Policy of laissez-faire Adam Smith Alfred Marshall David Ricardo Thomas Malthus J B Say Irving Fisher 5. Public Finance, Keynes and Beyond The Great Depression Government Intervention Focus on Aggregate Demand Emerging importance of the Fiscal Policy 6. Issues Related to Aggregate Demand Y O X Y1 Y2 Y E G H R C + I C + I + G Z 45 Slope is equal to MPC National Income C, I, G Multiplier = 1 1- MPC 7. INSTRUMENTS OF FISCAL POLICY Government Expenditure Taxation 8. Instruments of Fiscal Policy in Inflation Y O X Y F Y 2 Y E Inflationary Gap H C + I + G 1 # C + I + G 2 Z 45 Expenditure (C, I, G) National Income J C + I + G 1 Y 1 # Y = G* 1 [1 MPC*(1-t)] G I I I Investment C + I + G Y O X National Income Interest I 2 I 1 r 1 r 2 O Y X C+I 1 +G 2 C+I 2 +G 2 C+I 1 +G 1 45 I Y 2 Y 1 Y F 45 9. Crowding Out Effect (Recession) E3 E2 E1 10. Instruments of Fiscal Policy to Cure Recession Y O X Y 1 Y F Y E 1 G H R C + I 1 + G 1 C + I 1 + G 2 45 45 Expenditure GNP Gap Deflationary Gap National Income Y = G* 1 1 - MPC Y O X M s 1 M s 2 E 1 E 2 M d 1 M d 2 r Rate of interest Quantity of money 11. The Essence of Taxation T/ Y Y Income O % of income paid in taxes Progressive Proportional Regressive The Laffer Curve Tax Rate Tax Revenues R2 R1 50% 60% Maximum Tax Revenues 12. Government Expenditure 13. Measures of Deficit Revenue Deficit = Expenditure Receipts Fiscal Deficit = (Total Expenditure) (Revenue Receipts + Non-debt Capital Receipts) Primary Deficit = Fiscal Deficit Interest Payments 14. Indias Fiscal Deficit 15. BUDGET AT A GLANCE Revenue Receipts Capital Receipts Total Receipts Non-Plan Expenditure Plan Expenditure Total Expenditure Revenue Deficit Fiscal Deficit Primary Deficit 16. Dream Budget Broadening of Tax Base Reform in Subsidies Resettlement of Slum Dwellers Employment for All Food for All Education for All Health and Social Security Justice for All

ndian Fiscal System Presentation Transcript

1. Indian Fiscal System 2. Fiscal System Fiscal system of a country refers to the revenue and capital resources that can be raised by government, the procedure to be observed in raising and spending funds and in case of a federation such as ours the provision that governs the relationship of the constituent unit of federation. It includes with in its purview taxation, expenditure, debt management and inter- governmental fiscal relation. 3. Fiscal System Indian fiscal system is based on the constitution of India which is federal in character. The constitution envisages two layers of government: the Union of central government and the state government. Local bodies do not find a place in the constitution and the function and resources allotted to them are delegated by the state government. 4. Division and functions The constitution distributes the legistative function and resources into three lists (ii) The Union list (defence, foreign relation, railway, currency ) (iv) The state list (education ,medical public health, police, law & order) The concurrent list ( Trade union, planning & price policy) 5. The taxes over which there is legislative jurisdiction of centre extends fall under four groups Group I The taxes which are levied and collected by the union and the proceed are retained by it. These are corporation tax, custom duties, taxes on capital value of asset .of individual. Group II The taxes levied and collected by the union but the proceed of which are shared with the states. These are Income tax and excise duties. 6. Group III The taxes which are levied and collected by the union and the proceed are assigned to states with in which they are leviable. These are succession and estate duties in respect to property other then agriculture land ,taxes on goods and passenger carried railway ,sea and air. Group IV The taxes which are levied by the union but the proceed are of which are collected and retained by state. These are stamp duties and duties on excise on medicine and toilet preparation containing alcohol. 7. Expenditure of Government The total expenditure consist of revennue expenditure(83%) and capital expenditure(27%) The total expenditure may also be classified plan(26%) and non plan expenditure(74%). 8. Non Plan expenditure Interest payment Defense expenditure Subsidies Grant to state and UT government Grant to foreign government Other non plan expenditure 9. General Service+ Organ of state + tax collection + Police + Pension + Write off loan +others Social Service + Edu. Sports & Youth affairs + Health and family welfare +water supply +housing+ Information and broadcasting+ Labour and employment +Welfare of ST,SC & OBC +others Economic Services + Ag. & Allied activities +Rural development+ Irrigation and flood control +energy + Industry & minerals +Transport+Communication +Science Tech.& Env. Postal Services Loan + advances 10. Receipt of Central Government Tax Revenue ( Corporation tax +Tax on income on other then Corporation Tax +Interest tax +Expenditure Tax +Custom +Union Excise Duties + Wealth Tax +Gift Tax +Other Tax +Taxes on UT + Service Tax) Non tax revenue : Fiscal Service +Interest Receipt +Dividend and profit + Other general service +Social service +Economic Service +UT without Legislature + Grant inaid and contribution. Capital Receipts : International debt Market +External assistance +Recovery of Loan +Small saving +State provident fund +Special deposit + Disinvestment +Others

11. Budget Deficit = Total Expenditure Total Revenue ( The excess of revenue expenditure over revenue receipts.It shows the deficit of government on current account) Revenue Deficit = Revenue Expenditure Revenue Receipts ( The excess pf all expenditure over all types of receipts including borrowings)

12. Fiscal Deficit = Revenue Deficit + Capital expenditure ( The excess of expenditure over revenue receipts and non debt capital receipts. It represent the total borrowing requirement of the central government ) Primary Deficit = Gross Fiscal deficit Interest Payments ( Fiscal deficit net of interest payments. It is the non interest deficit and reflects the current fiscal of the government.) Monetised Deficit : The part of fiscal deficit which is financed by RBI through printing of notes.

13. What is the fiscal deficit? The fiscal deficit (FD) measure the shortfall in government ability to fund its expenditure through regular sources. Sources of funds for a government are of to kind- revenue and capital The fiscal deficit is a measurable number which occurs in the government statement. To get more technical , FD is what you take away the total expenditure from the sum of revenue receipt (T& NT), recoveries of loan and other receipt

14. In case you are wondering what revenue expenditure is, it is administrative expenditure, and capital expenditure goes towards capital or asset formation. FD is important to annual budget. The budget is the government annual report, which differs from corporate annual report in one key area-a budget gives projection Or next years number alongside its performance for a finished year.

15. How is FD bridged ? FD represent the extent to which the government needs fund, but does not have them. One simple way getting funds you dont have is to Borrow. GoI is the largest borrower in India. Annual borrowings Of Govt. are probably larger then that of entire Corporate Sector. Besides, borrowing the govt. has another way of finding funds it does not have. Being the law maker of the land gives the govt. the power to create money which is simply printing additional notes .This is called monetization.

16. How to make sense of FD number ? Is it good or bad? FD to some extent is fine. One typically looks at ratio of FD to gross domestic product. This ratio should ideally remain around 4% for a country like India. So says the IMF.A much higher number is bad news. Typically many nation and definitely developing nation, will run FD as govt, has the government has large role to play in the economy in areas like infrastructure, education, social support ( India does not have this), defense, Civil admn. and so on. Government, Needs are likely to more then its income in a growing economy.

17. Why is FD so important? FD has a lot of impact on govt. policy. For example, if it turns out to be very high in a year the govt will have to either borrow a lot or print a lot of money. Borrowing a lot will push up interest rate their by making the economy costlier and reducing Competitiveness of goods produced Vis-vis those made by other country. Printing lots of money breeds inflation, which is also bad beyond a point. Sustained high deficits can lead to very high accumulation of debt by the govt. leading to what is called internal debt trap.

18. How to keep FD in control? It is important keep FD within a limit for this there are obvious ways Increase revenue or cut expenses or both. Revenue can be increased in three fashion- increase tax rate or tax more things or reduce tax evasion. One example of tax more things is taxing agricultural income,

currently free from levy in India. In cutting expenses GoI has traditionally taken easier route. Like cutting infrastructure spending instead harder ones like cutting subsidies or freezing recruitment.

Meaning of Fiscal Policy

The fiscal policy is concerned with the raising of government revenue and incurring of government expenditure. To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned with government expenditure and government revenue. Image Credits Center for American Progress. Fiscal policy has to decide on the size and pattern of flow of expenditure from the government to the economy and from the economy back to the government. So, in broad term fiscal policy refers to "that segment of national economic policy which is primarily concerned with the receipts and expenditure of central government." In other words, fiscal policy refers to the policy of the government with regard to taxation, public expenditure and public borrowings. The importance of fiscal policy is high in underdeveloped countries. The state has to play active and important role. In a democratic society direct methods are not approved. So, the government has to depend on indirect methods of regulations. In this way, fiscal policy is a powerful weapon in the hands of government by means of which it can achieve the objectives of development.

Main Objectives of Fiscal Policy In India

The fiscal policy is designed to achive certain objectives as follows :-

1. Development by effective Mobilisation 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 the state governments in India have used fiscal policy to mobilise resources. The financial resources can be mobilised by :1. 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.

2. Public Savings : The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises. 3. 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, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing.

2. Efficient allocation of Financial Resources

The central and state governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc. But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable.

3. 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.

4. Price Stability and Control of Inflation

One of the main objective 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.

5. Employment Generation

The government is making every possible effort to increase employment in the country through effective fiscal measure. 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 generates 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.

6. Balanced Regional Development

Another main objective of the fiscal policy is to bring about a balanced regional development. There are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc.

7. Reducing the Deficit in the Balance of Payment

Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption of income tax on export earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc. The foreign exchange is also conserved by Providing fiscal benefits to import substitute industries, Imposing customs duties on imports, etc. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or by giving subsidies to export.

8. Capital Formation
The objective of fiscal policy in India is also to increase the rate of capital formation so as to accelerate the rate of economic growth. An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of capital deficiency. In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to encourage savings and discourage and reduce spending.

9. Increasing National Income

The fiscal policy aims to increase the national income of a country. This is because fiscal policy facilitates the capital formation. This results in economic growth, which in turn increases the GDP, per capita income and national income of the country.

10. Development of Infrastructure

Government has placed emphasis on the infrastructure development for the purpose of achieving economic growth. The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is invested in the infrastructure development. Due to this, all sectors of the economy get a boost.

11. Foreign Exchange Earnings

Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax and octroi, etc. Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem.

Conclusion On Fiscal Policy

The objectives of fiscal policy such as economic development, price stability, social justice, etc. can be achieved only if the tools of policy like Public Expenditure, Taxation, Borrowing and deficit financing are effectively used. Though there are gaps in India's fiscal policy, there is also an urgent need for making India's fiscal policy a rationalised and growth oriented one. The success of fiscal policy depends upon taking timely measures and their effective administration during implementation.