Fiscal Policy of the Government of India

Introduction
Fiscal can be explained as Financial, so a policy in relation to Finance and something similar to Monetary policy. Now a monetary policy is formed by the Reserve bank of India and the fiscal policy is formed by the Central Government Ministry of Finance. The main aim of the Fiscal Policy is to see the three children are fine i.e. Public Debt, Public Expenditure and Public Revenue to achieve certain objectives like growth, stability, unequal distribution of Income, and etc.

Objectives of the Fiscal Policy

There are number of objectives of the fiscal policy however most of them are interrelated and go hand in hand, Use of resources for optimal output and Employment Generation

Every country has its own unused resources which tend to stay out of the focus and has a potential to earn big amount of money and yield better results for the society on the whole, the fiscal policy aims to find some of these resources i.e. in terms of possible way to earn tax revenue of find resources like the ones in Sanand, Gujarat to induce more and more industries to use the resources to the maximum. Employment generation goes hand in hand with maximum utilisation of the resources. Now when the government plans to introduce say a new tax for instance tax on Jewellery they will need a new department that will deal with the tax collection, calculation and etc and hence this will create utilisation of resources and for the department they will need man power which will give more employment. Another example is these Automobile industries in Sanand, Gujarat mainly Tata Motors, General Motors, Ford, Maruti Suzuki and etc have been given permission to use those unused land that way lying idle for a while now so setting these production plants has resulted into use of resources as well as has created huge employment opportunities. Reduce Unequal distribution of income

India since ages has had a problem of Unequal Distribution of Income, this means those who are rich are way too richer and those who are poor are way too poorer. Now with Fiscal policy the government has number of weapons or instruments to direct the flow of money and distribute it equally. Tax system is one of that, Tax earns the biggest revenue to the Government and helps the government direct the flow of money. More tax on those who earn more and Luxurious Items and less or no tax on those who earn less will eventually lead to similar incomes as seen in the graph below. Also when the government collect more tax from the public that earn more it can spend more to uplift the poor citizens and help them earn. So the fiscal policy has a decision to define a tax system that can reduce the huge difference that we have since long time along with Social Justice as well. Economic Growth, Stability and controlling Inflation

Fiscal policy includes Public expenses that are done with the motive of generating Economic growth and stabilising the same. Public expenses like building hospitals, roads, schools and etc can be exemplified as a part of Economics growth and maintenance of the same is a part of Economic Stability. Now Economic Stability can only be achieved if inflation is under control in a nut shell controlling the price rise. Now if the economic system has inflation like the current problem that India is facing the Fiscal policy can focus on collecting more tax and hence reduce the liquidity and Fiscal Policy of the Government of India Page 1

the purchasing power. And in case if the economic system has a problem of Deflation i.e. low liquidity and low prices then the government has to reduce the taxes and via increase in Public Expenditure can control deflationary pressure as well. All round development of the Country (Rural and Urban) via Allocation of resources

Explaining all round development means if there is growth and development it should be in Rural as well as Urban areas, so if the objective of Unequal distribution is achieved as well, and it can lead to all round development. For instance one of the biggest criticism China and India is facing is that these countries are developing at about 8-10% but there are so many people in the country who fail to earn enough to have their two time meal. So for instance if we go to Delhi or Bangalore we find too many rich people and high tech environment, now if we compare them with small cities somewhere in Manipur or Bihar there will be huge gap. With Fiscal policy the government can allocate resources in a way that can lead to all round development, hence the aim of the this point is to explain that the government objects to develop all the cities as well as the villages proportionately and not just to development main cities of the country via proper allocation of resources the government can achieve all the above stated objectives as well.

Measures of Fiscal Policy Features of the Indian Tax System

Tax system in India is very rigid and unclear. Every country has its own Tax system depending upon type of income there citizens have, developed countries have a simple and clear system as the government there is very efficient in mobilising resources gained from Tax and hence because unequal distribution of income in Under develop and developing nations the tax system is rigid. The economy does yield enough for the government to collect taxes as they want/estimate and but the whole mechanism does not work the way it is supposed to work. The features of the Tax system can be divided into two i.e. +s and s. +s of the Indian Tax system Increasing Receipts

Since 1950 there has been huge increase in Tax and Non-Tax receipts, in 1950-51 the net Tax income was 357 Crores of the Central government which increased to 9,388 Crores in 1980-81 and in 2001-02 it increased to 5,63,685 Crores. The reason behind this seems to be increasing base of the Tax structure and the awareness about the importance of paying taxes, moreover there has been similar increase in the income of the people (also because of high Inflation and reduction in the internal value of Indian Rupee) which has enable the government to earn more in terms of Tax and Non-Tax income. The Non- Tax revenue also a similar hike in 1950-51 the income was 49 Crores which increased to 2.20 lac Crores in 2010-11 which are explained by a reason of increasing Privatisation and Liberalisation. Examples of Tax Revenue are Income tax, corporate tax, wealth tax and etc. Examples of Non-Tax Revenue are Fines, Penalties, income on lending to state government or private companies. Direct and Indirect Taxes

Fine balance has been maintained in the direct and indirect tax over the years, in 2009-10 the direct taxes were 44% and indirect taxes stood at 56%. An imbalance between these taxes can Fiscal Policy of the Government of India Page 2

create problems with income inequality suggested OECD (Organization for Economic Cooperation and Development). SLAB system

The Income tax Slab system has been fantastic feature of the Tax system, according to the recent change incomes upto Rupees 1,80,000 there shall be no tax liability of an individual. This has given rise to incomes to those who earn low and those who earn more than 8,00,000 shall be liable to pay 30% tax on the same and hence this would make them earn about 5,60,000. This shows how much impact the Income Tax Slabs have on the income disparity. Service Tax (Good as well as bad)

The service tax was first introduced in the Union Budget in 1994-95 as a result of a recommendation of Raja Chelliah Committee (Tax Reforms). A service tax is a tax that is levied on services provided to a consumer for instance on those like communication services, education providers, Entertainment, General Insurance and etc. One of the best illustrations of service tax is that we pay on while buying a movie ticket or while buying cold drinks and popcorn in a multiplex, those high prices are a result of service tax they pay over the services they provide. Currently there are 112 services over which the service tax is levied. The service tax is levied at 10% according to the union budget 2010-11. Tax on Luxury Items

Taxes on Luxury goods and services have been increased over the years with introduction of more of these goods and services, this has been in vision to reduce the income inequalities. While there is an increase in service tax people those who use them have to pay more hence expenses increase and savings decrease to bring the disparity closer as those who earn a minimum amount will not be able to have these Luxuries. -s of the Indian Tax system Tax on Agriculture

The agriculture department has not been taxed enough, about 65% of the whole of India is involved in agriculture sector and 20% of the total National Income comes from Agriculture sector but the Tax received from the same stands at 0.0060% which was about 26 Crores (Agriculture Income Tax). The balance that all the sectors have into their share in Taxes has been largely odd, further due to number of reasons the revenue has been highly decreasing in the agriculture sector. Tax Arrears

There have been so many instances of taxes not being paid, according to March 2008 survey the amount of unpaid Direct taxes came to 80,160 Crores and indirect taxes came to 23,622 Crores. And there are more unpaid taxes in relation to excise and customs. These arrears are a result of ignorance, inefficient & lengthy law process and tax system. The consequence of not paying taxes shall be made clear to the citizens; there should be change in the tax laws to reduce these arrears which will help in recovering the arrears as well.

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Refer for recent news on Tax Arrears: http://www.dnaindia.com/money/report_ahmedabadowes-rs4800-crore-to-income-tax-department_1360764 Tax Evasion

Some of the features of the tax system have allowed people to evade paying taxes; HUL (Hindu Undivided Family) is one of them. People pay taxes on the name of the family being undivided and save a lot of tax. This has led to an increase in the amount of black money that is in the circulation in the market. Lack of Continuity

With an unstable economy there comes an unstable system as well. The tax system has undergone huge changes since its inception. The Income Tax slabs increases every year, there are new items that are included every year, in a nutshell there are changes in the tax system that do not yield much of growth or development in terms of reducing income inequalities and an efficient use of the same. Narrow Base

There are a number of taxes which do not yield enough for the government to make maximum utilisation. Taxes like wealth tax, income tax, capital gain and etc only cover 0.7% of the Population. Because of Tax evasion and improper tax system people who earn more can even avoid tax through number of ways. Refer: http://www.deccanherald.com/content/187531/only-277-percent-indias-population.html High tax on basic necessity

Excessive tax on basic necessities like fuel has been a huge concern. The government earns plenty on the taxes levied on such basic items that every single citizen needs, the result is high inflation and increasing cost of living. Taxes are usually levied to manage the flow of income but in India taxes on basic necessity has crossed all limits, over that the government has not been able to subsidise the oil producing companies increasing the pressure for them to increase prices of the same.

Public Expenditure
In simple terms a public expenditure is the amount spent by the government for the welfare of the citizens, for instance Defence expenditure, Interest Payments, Medical expenses, Infrastructure expenses and etc. Public expenditure can basically be divided into two State Government Expenses (Capital Account Expenditure) and Central Government Expenses (Revenue Account Expenditure).

Public expenditure (Old) The table includes some of the most important expenditures of the Central and State Government.

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Central Government Expenses (Revenue Account Expenditure) Defence(Security) Judiciary and Legislation (Law) Administration expenses (Salaries and Pensions) Interest Payment (Public Debts) Social Service Expenses (Grant and Subsidies)

State Government Expenses (Capital Account Expenditure) Interest payment (State Debt) Promotional expenses (Tourism) Social Welfare expense (Welfare) Irrigation and power (Welfare Agriculture) Communication (Administration)

Some expenses are a common i.e. are made by both state and centre, like Infrastructure (the local roads are a part of State government expenses and the highways or express highways are a part of Centre) the centre has NHAI for that purpose, Medical Facilities like 108 and Civil hospital are expenses of State government and Polio booth and AIDS campaign are a part of Centres expenses. Public expenditure (New as found in Budget 1987-'88) Planned Expenditure- Agriculture expenses (Subsidies and irrigation), Industrial expenses (SEZs and Tax Holidays), Science and Technology (Bhabha Atomic Research Centre), Social and Economics Services (salaries to the employees and Grants to the non-profitable organisations). Non-Planned Expenditure- Interest payments (Public and State Debt), Defence, Pensions, Loans and finance to the state and foreign embassy expenses.

Public Debt
Public debt is the total amount of borrowing by the government (State or the Central Government) internally or externally. Now there are questions like Public debt a good or bad idea? The answer is it is good upto an extent that i.e. to an extent the government can pay or else this might land the government into a so called Debt trap. A Debt Trap is simply a chain of borrowing to pay the debts. There are two types of Debts Internal and External. Internal debt (Rs. 33 Lac Cr.) is borrowings by the government from within the country in terms of Treasury bills issued by the government, loans from the financial sector and etc. External debt (Rs. 1.37 Lac Cr.) is borrowings from outside the country in terms of Bonds issued in the international market, loans from international institutions like IMF, World bank or any foreign country. Public Debt has had increase since India started Developing and as the debt increased the interest payment increased, in 2008-09 it was 31.5 % of the non-planed expenses and further increased to 33.8% in 2010-11 excessive interest payments have been a major concern for the Indian government now. Refer: http://en.wikipedia.org/wiki/European_sovereign_debt_crisis#cite_note-15 reference link in Wikipedia, this is just for information purpose) (Check the

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