FISCAL POLICY

The word fisc means state treasury and fiscal policy refers to policy concerning
the use of state treasury or the govt. finances to achieve the macroeconomic
goals.

Any decision to change the level, composition or timing of govt. expenditure or to

vary the burden ,the structure or frequency of the tax payment is fiscal policy. -
G.K. Shaw

The fiscal policy is concerned with all those activities which are adopted by the
government to collect Revenue & Expenditures, so that economic stability could
be attained without Inflation and Deflation.

Stances of fiscal policy

The three main stances of fiscal policy are:

1. Neutral fiscal policy is usually undertaken when an economy is in equilibrium.

Government spending is fully funded by tax revenue and overall the budget
outcome has a neutral effect on the level of economic activity.

2. Expansionary fiscal policy involves government spending exceeding tax

revenue, and is usually undertaken during recessions.

3. Contractionary fiscal policy occurs when government spending is lower than

tax revenue, and is usually undertaken to pay down government debt

Objectives:

Economic stabilization

Economic growth (GDP growth 3.986% in 2012-13)

Employment generation (Unemployment 3.8% in 2011 est.)

Reduction in inequalities of income and wealth

Increase in capital formation

Price stability and control of inflation (4.7% ; April 2013)

Effective mobilization of resources

Balanced regional development

Increase in national income

Development of infrastructure

Foreign exchange earnings (Foreign reserves $295.29 billion in Oct.2012)

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

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.

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

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 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

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.

To achieve desirable price level :- The stability of general prices is necessary for
economic stability.
 The maintenance of a desirable price level has good effects on production,
employment and national income. Fiscal policy should be used to remove;
fluctuations in price level so that ideal level is maintained

To Achieve desirable consumption level :- A desirable consumption level is

important for political, social and economic consideration. Consumption can be
affected by expenditure and tax policies of the government. Fiscal policy should be
used to increase welfare of the economy through consumption

INSTRUMENT OF FISCAL POLICY

Budget

Budget refers a financial statement which shows anticipated revenue and

anticipated expenditure in an accounting year.

or

Statement of estimated receipts and expenditures of the government in respect

of every financial year which runs from 1 April to 31 March.

Types of budget:

a) Revenue Budget: The Revenue Budget shows the current receipts of the
government and the expenditure that can be met from these receipts.

(b) Capital Budget: The Capital Budget is an account of the assets as well as
liabilities of the central government, which takes into consideration changes in
capital. It consists of capital receipts and capital expenditure of the government

Capital Budget(Account):

Capital Receipts: The main items of capital receipts are loans raised by the
government from the public which are called market borrowings, borrowing by the
government from the Reserve Bank and commercial banks and other financial
institutions through the sale of treasury bills, loans received from foreign
 governments and international organizations, and recoveries of loans granted by
the central government. (Rs 6,08,967 Crore for the year 2013-14)

Capital Expenditure: This includes expenditure on the acquisition of land,

building, machinery, equipment, investment in shares, and loans and advances by
the central government to state and union territory governments, PSUs and other
parties. (Rs16,65,297 Crore for the year 2013-14)

Capital Expenditure

Capital expenditure is also categorized as plan and non plan in the budget
documents:

a) Plan capital expenditure: Plan capital expenditure, like its revenue counterpart,
relates to central plan and central assistance for state and union territory plans.

b) Non-plan capital expenditure: Non-plan capital expenditure covers various

general, social and economic services provided by the government

Tax Revenue:

a) Direct tax: Direct taxes which fall directly on individuals (personal income tax)
and firms (corporation tax). Other direct taxes like wealth tax, gift tax and estate
duty

b) Indirect tax: Indirect taxes like excise taxes (duties levied on goods produced
within the country), customs duties (taxes imposed on goods imported into and
exported out of India) and service tax.

REVENUE EXPENDITURE

a) Plan revenue expenditure: Plan revenue expenditure relates to central Plans

(the Five-Year Plans) and central assistance for State and Union Territory Plans.

b) Non- plan revenue expenditure: Non-plan expenditure, the more important

component of revenue expenditure, covers a vast range of general, economic and
social services of the government. The main items of non-plan expenditure are
interest payments, defence services, subsidies, salaries and pensions.

Conclusion:

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

Indias fiscal situation requires immediate attention, high growth and low interest
rate will not take care of the problem in the long run.

Indias external position is relatively strong, in terms of trade flow, reserves,

foreign exchanges, but up to some extent monetary and exchange rate policies
are biased to compensate the fiscal deficit.