Present

Fiscal Policy & Balance of Payment

MEMBER OF ROYAL GROUP

PATEL HEMAL R. PATEL VIVEK S. PATEL MITUL J.

CONTENTS
MEANING OBJECTIVES MACROECONOMICS GOALS INSTRUMENTS LIMITATIONS

Fiscal Policy-Meaning
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.
Fiscal policy is formed by the Central Government Ministry of Finance

Objectives of Fiscal Policy In INDIA

1. Use of resources for optimal output and Employment Generation 2. Reduce Unequal distribution of income 3. Economic Growth, Stability and controlling Inflation 4. Employment Generation 5.All round development of the Country (Rural and Urban) via Allocation of resources

 6 Balanced Regional Development 7 Reducing the Deficit in the Balance of Payment 8 Capital Formation 9 Increasing National Income 10 Development of Infrastructure 11 Foreign Exchange Earnings

Fiscal Policy And Macroeconomic Goals

Economic Growth: By creating conditions for increase in savings & investment. Employment: By encouraging the use of labor-absorbing technology Economic Equality: By reducing the income and wealth gaps between the rich and poor. Price stability: Full Employment scheme can affect in the economy.

Instruments of Fiscal Policy

Budgetary surplus and deficit Government expenditure Taxation- direct and indirect Public debt Budget

Budgetary surplus and deficit

A budget is a detailed plan of operations for some specific future period Keeping budget balanced (R=E) or deficit (R<E) or surplus (R>E) as a matter of policy is itself a fiscal instrument. An accumulated deficit over several years (or centuries) is referred to as the government debt A deficit is a flow. And a debt is a stock. Debt is essentially an accumulated flow of deficits

Government Expenditure
It includes : Government spending on the purchase of goods & services. Payment of wages and salaries of government servants Public investment Transfer payments

Taxation
Meaning : Non quid pro quo transfer of private income to public coffers by means of taxes. 1. Direct taxes- The term direct tax generally

means a tax paid directly to the government by the persons on whom it is imposed. Personal Income Tax, Banking Cash Transaction Tax

 2. Indirect taxes- The term indirect tax is contrasted with a direct tax which is collected directly by government from the persons (legal or natural) on which it is imposed Central Sales Tax, Customs, Service Tax, excise duty.

Public debt

1.

Internal borrowings
Borrowings from the public by means of treasury bills and govt. bonds

2.

Borrowings from the central bank (monetized deficit financing)

External borrowings 1. foreign investments 2. International organizations like World Bank & IMF(International Monetary Fund)

BUDGET
A budget is a detailed plan of operations for some specific future period It is an estimate prepared in advance of the period to which it applies.

Limitations of Fiscal Policy

Lack of Elasticity Inadequate Statistics Illiteracy Limited Sector Delay in decision Defective Tax Structure Huge investment with negative return in public sector

BUDGET FINANCIALS 2012-13

Where The Rupee Comes From

Where Does The Rupee Goes To

Balance of payment Outline

Balance of Payments Accounting Balance of Payments Accounts
The Current Account The Capital Account Change in forex reserves Errors & Omissions

BALANCE OF PAYMENT
Balance of payment (BoP) is an account of the international transactions of a country, and shows how the country is faring in trade, attracting capital from abroad, and the effect of that on its foreign exchange reserves.

Balance of Payments Accounting

The Balance of Payments is the statistical record of a countrys international transactions over a certain period of time presented in the form of double-entry bookkeeping.
when we say a countrys balance of payments we are referring to the transactions of its citizens and government.

The Current Account

The current account shows you the trade position of the country Includes all imports and exports of goods and services. Includes unilateral transfers of foreign aid. If the debits exceed the credits, then a country is running a trade deficit. If the credits exceed the debits, then a country is running a trade surplus.

The Capital Account

Capital Account Can Be Thought Of As The Investments Part Of The International Transactions. The FII money and FDI money is part of the equity investments while the external commercial borrowings, money deposited in banks by NRIs and trade credits are debt investments.

 The Capital Account Measures The Difference Between India Sales Of Assets To Foreigners And India Purchases Of Foreign Assets.

Change in forex reserves

The difference between the current account and the capital account is reflected in the change in the forex[Foreign Exchange reserves] 2010 11 Indias current account deficit was $45.9 billion but the capital account surplus was $62.0 billion and this resulted in increase in foreign exchange reserves of $13.1 billion. This doesnt exactly total up due to the effect of errors and omissions.

The Balance of Payments Identity

BCA + BKA + BRA = 0
where BCA = balance on current account BKA = balance on capital account BRA = balance on the reserves account

Under a pure flexible exchange rate regime, BCA + BKA = 0

Conclusion
The objectives of fiscal policy such as economic development, price stability, etc. can be achieved only if the tools of policy like Public Expenditure, Taxation, Borrowing and deficit financing are effectively used.

 Indias forex reserves had dwindled to lows of $5.1 billion in 1991 and as a result India had to borrow from the IMF by pledging its entire stock of gold.

 At over $290 billion, Indias position is far better than it was in 1991 but if you look at the example of any of our neighboring Asian tigers, or even the western countries when they were growing, all of them have grown by relying on exports and running trade surpluses, and thats what Indias goal should also be.