A

Project Report

On
Fiscal Policy is the Mirror of Government budget
In
Macroeconomics & Policy

IN PARTIAL FULFILLMENTOF THE REQUIRMENT OF THE AWARD

FOR THE DEGREE OF
Master of Business Administration
UNDER
Lovely Professional University, Punjab

(Session: -2019-2021)
 Fiscal policy is the mirror of the government Budget

Some Instruments of fiscal policy in India and how it works.

INTRODUCTION

Starting from simpler to complex, Fiscal Policy or the Budgetary Policy is the part of economic

policy of the government which is related to government INCOME and EXPENDATURE.

Fiscal policy measures are used by governments to stabilize the economy, mainly by

manipulating the levels and allocations of taxes and government expenditures. Fiscal measures

are mostly used along with monetary policy to achieve goals of the government. In the views

of Arthur Smithies, “Fiscal Policy is a policy under which the government uses its expenditure

and revenue programs to produce desirable effects and undesirable effects on country income,

manufacture and employability.” The Administration receives income by gathering taxes

from some individuals and makes expenses for the development of structure and welfare of the

individuals. It the government receives more than it spends, then it is called Surplus. But if the

government spends more than it receives it runs into a deficit also known as fiscal deficit. To

meet the additional expenditures, government needs to borrow from domestic or foreign

sources, draw upon its foreign exchange reserves. Too much foreign borrowings by

government leads to debt crises. Government is required to pay interest on its borrowings thus,

by opting for excessive borrowing the debt service burden of the government increases.

Unnecessary domestic borrowing by the administration may lead to an advanced interest taxes

and the local private sector being incapable to access funds resultant in the “flocking out” of

private speculation. So, it can be said that the economic deficit can be like a dual edged sword,

which is required to be tackled very sensibly. So, to conclude we can say that Fiscal policy of

the government deals with taxation, government expenditure, public debt, deficit financing.

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For e.g. – Due to this Covid-19 the governor of India stated that we would be able to analysis

how shortfall this virus leaves us and due to which it is quite possible we rise in a significant

better manner than we ever were.

Types of fiscal policy

There are two main types of fiscal policy.

Expansionary fiscal policy: It is most often used during a recession, times of high

unemployment or other low periods of the business cycle. It involves the government

expenditure more money or by letting down taxes. The goal line is to put more cash in the

hands of customers so they spend more and arouse the economy.

Contractionary fiscal: Such policy is mainly used to control. The conflicting of the expansion

of this fiscal policy, contractionary financial policy raises duties and cuts costs.

OBJECTIVES OF FISCAL POLICY

 To increase the employment opportunity. By incurring public expenditure such as

expenditure on construction of roads, dams, highways, public toilets etc government

creates employment in the economy. Thus, resulting in increase in per capita income as

well.

 To control inflation or to reduce price fluctuation; By the way of taxes government can

control inflation. If the prices in the economy are increasing due to high increased

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 demand for commodities, then government can control this by increasing the tax rates

and leaving less disposable income in the consumer’s hand and vice versa.

 To reduce inequalities of income and wealth; Government by the means of collecting

taxes attempts to reduce the inequalities in the income and wealth of the people of the

nation. Governments tax slabs are so created that richer people need to pay more taxes

and poor people needs to pay less taxes or even no tax from those who are not a position

to pay. The money collected by the way to taxes is then used for the welfare of the poor

people such as providing electricity and water subsidies to the farmers in Punjab, mid-

day meals, aata dal scheme for the yellow card holders etc.

 Balanced Regional Development: In a country like India where certain arears are quite

developed such as metro cities while other areas are not so developed such as Bihar

government undertakes various projects like building up dams on rivers, electricity,

schools, roads, industrial projects etc. to mitigate the regional imbalances in the

country. This is done with the assistance of public spending.

 Reducing the Deficit in the Balance of Payment: government announce various

export incentives to boost up the export of the domestic country. In the same way in

order to reduce import government applies various import duties and cess on the goods

coming from abroad. Hence the combine impact of these measures is improvement in

the balance of payment of the country. For e.g.- Salcorp which is one of the Apples

major component manufacturer i.e. chargers have recently bought Nokia’s plant near

Chennai for $30 million.

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  Increases National Income: It is the strength of the fiscal policy that is brings out the

desired results in the economy. Government by the way of taxes attempts to achieve

relative equal distribution of income and wealth. As a result, the commodities that were

earlier being demanded by only a particular section of the society comes within the

reach of others as well.

 Development of Infrastructure: when the government of the concerned country

spends money on the projects like railways, schools, dams, electricity, roads etc. to rise

the welfare of the countries people, it improves the substructure of the country. An

improved infrastructure is a crucial amount to further speed up the economic

development of the country.

 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. For e.g. – Due to the Covid-19 the RBI has decided

to invest $2 billion of INR into USDs as to increase the value of the Rupee.

INSTRUMENTS OF FISCAL POLICY

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Taxation Policy:

The assembly of tax rates has to be diverse in the context of circumstances prevailing in an

economy. Taxes control the size of non-refundable income in the hands of universal public.

During depression tax strategy has to be such as to inspire private ingesting and investment;

while during increase, tax policy duty curtails consumption and venture. Example; during the

recent slump in the auto sector government took following measures to overcome it; corporate

tax reduced…...

Taxes are the foremost source of income for the government;

Union Excise Duties are leading source of revenue for the Government of India. They are

levied on commodities produced within the country, but excluding those commodities on which

State excise is levied (viz., liquors and narcotic drugs). Present Union Excise Duty rate is

12.36%.

Customs duties include both import and export duties. These are the 2nd-most significant

source of revenue for the Chief Government Staff. 20% export duty is levied on all sugar

exports to ensure sufficient supply as well as to keep the prices in control.

Income tax;

The Union Budget 2020 introduced new income tax slabs regime. The new tax system is

optional and is co-exist with the old one with three slabs and various exemptions and

deductions available to the taxpayer. The new income tax slab came into effect from April 1,

2020.

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Tax Slabs:

TOTAL INCOME (Rs.) INCOME TAX RATE

Up to 2.5 lakh Nil

From 250001 to 500000 5 percent

From 500001 to Rs.750000 10 percent

From 750001 to Rs.1000000 15 percent

From 1000001 to Rs.1250000 20 percent

From 1250001 to Rs.1500000 25 percent

Above 1500000 30 percent

The main aim of the simplified tax regime was to increase the income and the purchasing power

of the people.

Corporation Tax: The tax on the NPs of combined stock corporations is called corporation

tax. corporate tax for any domestic company stands at 22% as of present and manufacturing

companies that will be set up after 1 October will have an option to pay 15% tax.

Capital Gains Tax: It is appropriate to capital advances resulting from the sale, conversation or

handover of capital assets. Currently 10% tax is levied on tong term capital gains.

Non-Tax Revenue:

This largest non-tax source of Central Government’s non tax revenue receipts is the interest it

earns mainly on the loans it has advanced to State Governments, to financial and industrial

enterprises in the public sector.

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Surplus Profits of the Reserve Bank of India (RBI):

The excess profits of the RBI are also a share of the profits of the Central Administration. In

recent ages, these have been rather considerable because of the huge fund borrowing by the

Administration from the RBI against Capital Bills for funding the Five-Year Plans. The surplus

earnings of RBI for the year ending June 2019 was 1.23 lakh crores.

Railways:

The railways in India are retained and run by the Government of India. Because of which they

pay a fixed payment to general profits, i.e., to the Central Administration, on the capital

financed in the railways. Also, a part of the NP made by the railways is also allocated to the

Central Administration. Freight earnings of Railways for the year 2019-2020 stood at Rs.

28,032.80 crores.

Profits of Public Enterprises:

Municipal enterprises owned by the Central Management, e.g., the Steel Authority of India

(SAIL), Hindustan Machine Tools (HMT), Bharat Heavy Electricals Ltd. (BHEL), State

Trading Corporation (STC). The revenues of such Public Sector Units (PSUs) are additional

source of income for the Management of India. The net profit of BHEL for the year 2019 stood

at Rs. 1,215 crores, which was a source of revenue for the government.

Other Non-Tax Sources of Revenue:

The key source among them is the Departments Takes of the various bureaus of the Central

Administration by way of dues or penalties.

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Public Expenditure: Public expenditure refers the government expenditure that is government

spending in our nation. It is incurred by Central, State or local government of country. It can

be well-defined as the spending incurred by municipal authorities like central, state or local

management to satisfy the cooperative social wants of the people is known as public

expenditure. The public expenditure is classified by many types by economist:

1. Function Classification.

2. Revenue and capital expenditure.

3. Productive and Unproductive expenditure.

4. Development or known development expenditure.

5. Grant and Purchase Price

These are all the types which are explained by different economist but the view is same. The

public expenditure classified on the basis of function where government performed various

function like defense, social welfare, agriculture, infrastructure, Public health, maintenance of

government machinery. This expenditure is recurring type which changed year after year.

How to work in India: India Public spending classified as expansion expenditure comprising

chief plan spending and central support and non-development spending. The bulk of plan

expenditure is capital expenditure and the aim was to increase the productivity capacity of

economy. According to the recent news SEBI cuts time gap on capital after buyback to six

months from one year. Sanctuaries and Exchange board of India cut constraint on the fresh

fund raising by companies after the buyback to 6 months from one-year prior because of

Corona Virus Pandemic.

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The relaxation made by various industrial bodies and it expected to help businesses that have

been severely impact by the pandemic. Market regulators granted a onetime relaxation in its

primary market fund raising norms to make it easier from companies to raise capital amid the

current gloomy scenario. Due to the news norms, a company that has been listed in the stock

exchanges for 18 months that can raise fund via the right issue, as compared to the earlier norms

that allowed firms that were listed for at least three years to undertake a right offer.

Budget

A budget is an approximation of profits and costs over a specified upcoming period of time

and is frequently compiled and revaluated on an interrupted basis. Government makes various

types of budget such as annual budget, quarterly budget.

The most recent annual budget also known as union budget of India for the year 2020-2021

was presented on 1 February 2020, by the finance minister of India Nirmala Sitharaman.

Following were some significant announcements made by the government of India for different

sectors of the economy.

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Receipts for 2020- 2021 estimated at Rs. 22.46 lakh crore and Expenditure at Rs. 30.42 lakh

crores. Thus, the deficit of 7.96 lakh crores will be financed through borrowings.

Net market borrowing of the government for the financial year 2020 was at Rs.4.99 lakh crores

and for the financial year 2021 they are pegged at Rs.5.36 lakh crores.

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In order to add to its revenue side of the budget also announced to sell its part of holding in

LIC by the way of initial public offering. Such an attempt by the government is known

Disinvestment. Divestment is when government sells its shares in Public sector undertakings.

Public debt: The public debt is how much a country owns to leaders outside of itself.

Government needs to borrow from different sources when the current revenue falls short of

public expenditure. When current revenue falls shorts of public expenditures. Public debt refers

to loan incurred by the government to finance its activities when other sources of public income

fails to meet the recruitment. When liability has to be repaid sideways with the interest from

whom it was lent, it fixes not establish income somewhat it establishes public spending. Public

liability incurred when the management floats loans and plagiarizes internally or outside from

banks, people or international credit giving organization. Public borrowings like taxes. It is not

a compulsory resource of public income. There are various categories of public debt.

1. Internal or External Debt.

2. Short term or long-term debt.

3. Funded or unfunded debt.

4. Voluntary or compulsory loan.

5. Redeemable or Irredeemable Loans.

6. Productive or unproductive or Reproductive /dead weight debt.

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How it works in India: Public debt is completely liabilities of the Central government against

the consolidated fund of India. The government’s revenue from taxes and other sources fall

short of its spending requirements, then government borrows the fund from marketable or non-

marketable securities. In India the scope of the public liability is immense as a large chunk of

annual expenditures around 26% is just the notice cost of previous debt. In 2019-20 survey

total responsibilities of the central administration at end march 2020 stood at 94 lakh crores

and 92% which was public liability. The SK Singh Group on FBRM had imagined a debt to

GDP ratio of 43% for the central administration and 19% for state pointing for a total of 61%

general management Liability to GDP.

In the budget 2015 speech, our past Finance minister Arun Jaitley had envisaged creation of a

statutory body called Public debt management Agency. As the RBI sets interest rates or

conducted purchase and sales of the government bonds. It raised the issue of conflict of interest.

When the time PDMA comes into the place, Government created an interim arrangement that

deals with the management of public debt. The Public Debt Management Cell will gradually

pave way for PDMA in India.

Conclusion

So, to conclude we can say that the Budgetary Policy or the Fiscal policy or the Income and

Expenditure policy of the government plays a very important role in controlling and influencing

the economy and for the welfare of the people. The instruments of the Fiscal Policy help the

government to run the economy smoothly. As the most recent example of the govt expenditure

can be seen when the government announced Rs. 1.9 lakh crores relief set for giving safety net

for persons hit the firmest by the Covid-19 lockdown, along with assurance cover for front-line

medical staffs. This was a great step taken towards the welfare of the people.

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At the same time to cut down on the government expenditure dearness allowance increment of

48 lakh has been freeze for this year. Thus, we can say that Fiscal Policy of the government

plays a very important role in controlling the various ups and downs that occur in the economy.

Government also undertakes public debt through its open market operation activities so as to

meet its expenses.

Since India is a developing country so a good amount of the government funds goes towards

its development of Infrastructure, creation of assets creation of assets like schools, colleges,

hospitals, roads, bridges, dams, railway lines, airports, seaports, acquisition of equipment and

machinery by the government, including those for defence purposes. However, in India both

the Union government and state governments have often been criticized for spending too little

on creating assets. For example, 84-91% of the Unification government’s expenditure goes into

the profits account. High profits spending of the Union administration has often been

responsible for low fiscal growth.

Having a glance at the short comings of the fiscal policy the scope of fiscal policy is limited.

Most of the sectors remains unaffected it. For e.g.; in India burden of taxation is borne by urban

Sector, agriculture sector enjoy exemption from it. Over 95% of India's employed population

is portion of the unorganised subdivision. These people working in unorganized sector do not

pay taxes.

Due to the more expenditure and less revenue, Government of India faces the problem of

mounting fiscal deficit. Discrepancy financing, beyond a specific limit, converts into a potent

basis of increase. It has an adverse effect on economic development. Moreover, due to low

literacy rates existing in the country

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most of the public fail to rise the significance of financial policy. They try their best to avoid

taxes.

Thus, to conclude we can say that Fiscal Policy is an effective tool of the government to control

the up and down in the economy. However, it assumes limited scope. Fiscal Policy when

combined with monetary policy can help to achieve better results.

References

 Jha, R. (2006) ‘Pro-poor economic policy within the Globalized Economy’, in G.A.

Corina (ed.), Proper Macroeconomics: Potential and Limitations, Hound mills,

Basingstoke: Palgrave Macmillan.

 Lao-Araya, K. (2003) ‘Emerging tax issues: implications of globalization and

technology’, ERD Policy Brief No. 16, Asian Development Bank, Manila.

 Rudra, N. (2004) ‘Openness, welfare spending and inequality within the developing

world’, International Studies Quarterly, 48: 683–709.

 Sah, R. (1983) ‘How Much Redistribution is feasible through Commodity taxes?’

Journal of Public Economics, 20: 89–101.

 Arestin, P. and Sawyer, M. (2004b), “On the effectiveness of monetary policy and of

fiscal policy”, Review of Social Economy, Fall (Forthcoming)

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