THE FISCAL

POLICY

HARISH VENKATACHALAM

YADU KRISHNA .D

APARNA RAGHAVAN

SANA NABI

M. AMBIKA

SUMAN SINGH
AGENDA
 INTRODUCTION
WHAT IS FISCAL POLICY ?
Fiscal policy refers to the taxation,
expenditure and borrowing by the
government and is an effective tool of
stabilizing the economy.
GOALS OF FISCAL POLICY.
• Achieving economic stability
• Controlling inflation and recession
• Achieving price stability.
• DISCRETIONARY FISCAL POLICY:
Deliberate change in government expenditure and taxes to
influence national output and prices.

• NON-DISCRETIONARY FISCAL POLICY:

Built-in tax and expenditure mechanism so designed that
taxes and government spending vary automatically with
changes in national income.
• Tool to cure recession.
Recession is a phase when there
is a lot of idle or unutilized
productive capacity. There are two
fiscal methods to get the economy
out of recession.
- Increase in government
expenditure
- Reduction of taxes.
• Tool to control inflation:
Inflation is a period when
there is an increase in demand
leading to increase in prices in the
economy. Fiscal policy measures to
control inflation are:
- Reducing government
expenditure.
- Increasing taxes.
 Non-discretionary fiscal policies
automatically raise aggregate demand in
times of recession and reduce aggregate
demand in times of inflation. It includes a
built-in tax and expenditure pattern that
vary with the changes in the National
Income.

Such taxes Income

Personal are:- Tax
Corporate Income Tax

Transfer Payments
Corporate Dividend Policy
To mobilize resources for
economic growth
Capital formation is of strategic
importance in the matter of rapid
economic development and hence the
importance of public finance in
underdeveloped countries.
Taxation
- Tools Government
for mobilizing resources
borrowings
 Taxation is an important instrument of
resource mobilization to raise savings to
national income ratio and also cuts down
consumption and thereby controls inflation.

Taxes can be imposed :

• Directly through highly progressive taxes on
income and profits.
• Indirectly through excise duties and sales tax
on luxury goods.
 ROLE OF TAXATION IN
SAVINGS AND INVESTMENT
The following measures can be taken to promote
investments and savings:
• Interest on private savings such as bank deposits,
National Savings Certificates be exempted from tax.
• Provide tax holidays to promote private investments.
• Reduction in excise duties on domestically produced
goods.
• In developing economies government
borrow in order to finance schemes of
economic development.
• Government borrowings takes two
forms:
- Market loan: Government sells to
the public negotiable government
securities of varying terms and
duration.
- Small savings: Public borrowing
which are not negotiable and are not
bought and sold in capital market.
• High degree of fiscal deficit leads to
excess market borrowing by the
government which leads to
inflationary situation.
• To check the rate of inflation fiscal
deficit has to be reduced through
raising revenue of government and
by reducing government
expenditure.
FISCAL POLICY AND
BUDGET DEFICIT
 In Indian context the following
measures can be adopted to
reduce government expenditure:
 Reduction in expenditure on major
subsidies.
 Reduction in expenditure on Leave
Travelling Concessions
 Reduction of interest payments on
past debts.
 Increase revenue from taxation:
• Adopting policy of moderate taxes as high
rates of direct taxes leads to tax evasion.
• Preventing hoarding of black money
through strict enforcement of tax laws.
• Only 2% of population pay income tax
therefore to increase revenue from
taxation tax base should be increased
 INDIAN SCENARIO-FRBM
ACT
• The FRBMA was notified on July 2, 2004
and came into force on July 5, 2004. This
Act requires the reduction of fiscal deficit
and elimination of revenue deficit by
March 31, 2009.
• The FRBMA requires the Government of
India to reduce fiscal deficit by a minimum
of 0.3 per cent of the GDP every year and
revenue deficit by 0.5 per cent each year,
so that the fiscal deficit is not more than 3
per cent of the GDP by March 31, 2009.
 The reduction in fiscal deficit by
adopting measures of reducing
public expenditure and increasing
public revenue will prevent excess
demand in the economy thus helping
in controlling inflation and achieving
price stability.