FISCAL POLICY: MEANING, OBJECTIVES, INSTRUMENTS AND IMPACTS ON BUSINESS

DR. VASUDEV P. IYER

Please Co-operate, Thank You

In the previous session

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Monetary

Policy

Meaning Objectives Instruments

Impacts

on business

In this Session
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Meaning of fiscal policy Objectives of fiscal policy Instruments of fiscal policy Impacts of fiscal policy on business

MEANING OF FISCAL POLICY

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An attempt to influence the level of

economic activity though changes in government revenue and expenditure.

Taxes: Direct and Indirect Expenditure: Collective Goods

OBJECTIVES OF FISCAL POLICY

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1) Economic growth 2) Mobilisation of financial resources 3) Capital formation 4) Price stability 5) Reducing income inequalities 6) Balanced regional development 7) Employment generation 8) Development of infrastructure: Physical and social

INSTRUMENTS OF FISCAL POLICY

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THE INDIAN CONSTITUTION

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TYPES OF GOVERNMENT
Autocracy - rule by a single individual

(despotism) Monarchy rule by hereditary kings Oligarchy - rule by a small group of individuals (military leaders, one party) Aristocracy - rule by a class of people (merchants, nobility) D e m o c r a c y r u l e b y t h e c o m m o n p e o p l e Androcracy - rule by men Gynarchy- rule by women Anarchy absence of government

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WHAT IS DEMOCRACY?

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INDIA ELECTS ITS KING

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TAXATION
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INCOME DIRECT WEALTH TAX

COMMODITIES

INDIRECT SERVICES

CENTRAL GOVT.

STATE GOVTs.

LOCAL BODIES

INCOME TAX SALES TAX (VAT) CENTRAL EXCISE CUSTOMS DUTIES

SECURITIES TRAN. TAX

SALES TAX (VAT) STAMP DUTY STATE EXCISE

AGRI. INCOME TAX ENTERTAINMENT TAX

PROPERTY TAX OCTROI DUTIES TAX ON MARKETS UTILITY TAX

SERVICE TAX
CAPITAL GAINS TAX

PROFESSIONAL TAX

Source: Economic Survey, 2010-11

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Source: Economic Survey, 2010-11

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The Direct Tax Code

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Discussion paper in public domain in August, 2009

Three fold strategy To minimise tax exemptions To remove ambiguities in tax laws To check tax evasion

EXPENDITURE
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Source: Economic Survey, 2010-11

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M AH AR A S H T R A S E X P E N D I T U R E O N S AL AR I E S AN D S O C I AL S E C TO R ( % O F TO TAL R E V E N U E )

60
54.5

50
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48.8
36.7

40 30 20 10
35.2

EXP ON SALARY

28.1

EXP ON SOCIAL

0
S O U R C E : R B I , S TAT E F I N A N C E S : S T U D Y O F S TAT E B U D G E T S

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THE BUDGET
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The Budget

Revenue Account

Capital Account

Revenue Receipts

Revenue Expenditure

Capital Receipts

Capital Expenditure

TAXES AND NON TAX PAYMENTS

Defence Exp. Interest payments Subsidies

Mkt Borrowings, Disinvestment receipts

Repayment of debt Construction of assets

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VOTE-ON-ACCOUNT
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The consolidated fund of India Prior approval of the Parliament

Vo te - o n - a cco u nt co v e r s o n l y t h e ex p e n d i t u r e s i d e o f

the Budget
No distinction between caretaker and normal

government
Policy statement can be made. Duration max. 6 months or till the full budget is

presented whichever is the earliest.

TYPES OF DEFICITS
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REVENUE DEFICIT: REVENUE EXPENDIUTRE LESS REVENUE RECEIPTS

FISCAL DEFICIT: TOTAL EXPENDIUTRE LESS {REVENUE RECEIPTS+RECOVERIES OF LOANS+ OTHER RECEIPTS}

PRIMARY DEFICIT: FISCAL DEFICIT LESS INTEREST PAYMENTS

Source: Economic Survey, 2010-11

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Source: Economic Survey, 2010-11

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IMPACTS ON BUSINESS
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Increase in fiscal deficit Deficit must be financed Borrowing from the market Interest rate increases Crowding out of private investment

Vicious circle
Fiscal Deficit and Monetization

Inflation and downward pressure on exchange rate

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MONETARY-FISCAL POLICY INTERACTION

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Policy co-ordination must for successfully

outcome
Apparent trade-offs does exist. The Phillips Curve Hypothesis Trade-offs between Inflation and Unemployment

The Philips curve

The Philips curve is a

Inflation

graphical representation
of the negative relationship between rates of unemployment and rates of inflation
5 10
Unemployment rate %

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Summary
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Meaning of fiscal policy Objectives of fiscal policy

Instruments of fiscal policy

Impacts of fiscal policy on

business

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