Fiscal Policy: What is about?
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.
The fiscal policy is concerned with all those activities which are adopted by
the government to collect Revenue & Expenditures, so that economic stability
could be attained without Inflation and Deflation.
Fiscal policy refers to a government's spending and taxation policies
intended to maintain economic stability, which is indicated by levels
of unemployment, interest rates, prices and economic growth.
WHY IT MATTERS:
As the administrative body responsible for public wellbeing, a government
implements fiscal policy in an effort to defend the interests of businesses
and consumers from economic forces which, if left unchecked, could have
adverse consequences.
Stances of fiscal policy
The three main stances of fiscal policy are:
Neutral fiscal policy is usually undertaken when an economy is in
equilibrium. Government spending is fully funded by tax revenue and
overall the budget outcome has a neutral effect on the level of economic
activity.
Expansionary fiscal policy involves government spending exceeding tax
revenue, and is usually undertaken during recessions.
Contractionary fiscal policy occurs when government spending is lower
than tax revenue, and is usually undertaken to pay down government debt
Objectives:
Economic stabilization
Economic growth (GDP growth 3.986% in 2012-13)
Employment generation (Unemployment 3.8% in 2011 est.)
Reduction in inequalities of income and wealth
Increase in capital formation
Price stability and control of inflation (4.7% ; April 2013)
Effective mobilization of resources
Balanced regional development
Increase in national income
Development of infrastructure
Foreign exchange earnings (Foreign reserves $295.29 billion in Oct.2012)
Some of main Objectives:
Development by effective Mobilisation of Resources
The principal objective of fiscal policy is to ensure rapid economic growth
and development. This objective of economic growth and development can be
achieved by Mobilisation of Financial Resources.
The central and the state governments in India have used fiscal policy to
mobilise resources.
The financial resources can be mobilised by :-
1. Taxation : Through effective fiscal policies, the government aims to
mobilise resources by way of direct taxes as well as indirect taxes because
most important source of resource mobilisation in India is taxation.
2. Public Savings : The resources can be mobilised through public savings by
reducing government expenditure and increasing surpluses of public sector
enterprises.
3. Private Savings : Through effective fiscal measures such as tax benefits, the
government can raise resources from private sector and households.
Resources can be mobilised through government borrowings by ways of
treasury bills, issue of government bonds, etc., loans from domestic and
foreign parties and by deficit financing.
Efficient allocation of Financial Resources
The central and state governments have tried to make efficient allocation of financial
resources. These resources are allocated for Development Activities which includes
expenditure on railways, infrastructure, etc.
While Non-development Activities includes expenditure on defence, interest payments,
subsidies, etc. But generally the fiscal policy should ensure that the resources are
allocated for generation of goods and services which are socially desirable. Therefore,
India's fiscal policy is designed in such a manner so as to encourage production of
desirable goods and discourage those goods which are socially undesirable.
Reduction in inequalities of Income and Wealth
Fiscal policy aims at achieving equity or social justice by reducing income inequalities
among different sections of the society. The direct taxes such as income tax are charged
more on the rich people as compared to lower income groups.
Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly
consumed by the upper middle class and the upper class. The government invests a
significant proportion of its tax revenue in the implementation of Poverty Alleviation
Programmes to improve the conditions of poor people in society
Foreign Exchange Earnings
Fiscal policy attempts to encourage more exports by way of Fiscal Measures like,
exemption of income tax on export earnings, exemption of sales tax etc.
Foreign exchange provides fiscal benefits to import substitute industries. The foreign
exchange earned by way of exports and saved by way of import substitutes helps to solve
balance of payments problem.
Balanced Regional Development :- Another main objective of the fiscal
policy is to bring about a balanced regional development. There are various
incentives from the government for setting up projects in backward areas such
as Cash subsidy, Concession in taxes and duties in the form of tax holidays,
Finance at concessional interest rates, etc.
To achieve desirable price level :- The stability of general prices is necessary
for economic stability.
The maintenance of a desirable price level has good effects on production,
employment and national income. Fiscal policy should be used to remove;
fluctuations in price level so that ideal level is maintained
To Achieve desirable consumption level :- A desirable consumption level is
important for political, social and economic consideration. Consumption can be
affected by expenditure and tax policies of the government. Fiscal policy
should be used to increase welfare of the economy through consumption
INSTRUMENT OF FISCAL POLICY
Budget:
Budget refers a financial statement which shows
anticipated revenue and anticipated expenditure in an
accounting year.
or
Statement of estimated receipts and expenditures of the
government in respect of every financial year which
runs from 1 April to 31 March.
Types of budget:
(a) Revenue Budget: The Revenue Budget shows the
current receipts of the government and the expenditure
that can be met from these receipts.
(b) Capital Budget: The Capital Budget is an account
of the assets as well as liabilities of the central
government, which takes into consideration changes in
capital. It consists of capital receipts and capital
expenditure of the government.
GOVERNMENT BUDGET
REVENUE BUDGET CAPITAL BUDGET
REVENUE REVENUE CAPITAL CAPITAL
RECEIPTS EXPENDITURE RECEIPTS EXPENDITURE
PLAN CAPITAL NON-PLAN
TAX NON-TAX EXPENDITURE CAPITAL
REVENUE REVENUE EXPENDITURE
PLAN NON-PLAN
DIRECT INDIRECT REVENUE EXPENDITURE
TAX TAX EXPENDITURE
Capital Budget(Account):
Capital Receipts: The main items of capital receipts are loans raised by the
government from the public which are called market borrowings, borrowing
by the government from the Reserve Bank and commercial banks and other
financial institutions through the sale of treasury bills, loans received from
foreign governments and international organizations, and recoveries of loans
granted by the central government.
Capital Expenditure: This includes expenditure on the acquisition of land,
building, machinery, equipment, investment in shares, and loans and
advances by the central government to state and union territory governments,
PSUs and other parties.
CAPITAL EXPENDITURE:
Capital expenditure is also categorized as plan and non plan in the budget
documents:
a) Plan capital expenditure: Plan capital expenditure, like its revenue
counterpart, relates to central plan and central assistance for state and union
territory plans.
b) Non-plan capital expenditure: Non-plan capital expenditure covers
various general, social and economic services provided by the government.
Revenue Budget(Account):
Revenue Receipts :Revenue receipts are divided into tax and non-tax
revenues. Tax revenues consist of the proceeds of taxes and other duties
levied by the central government
Revenue Expenditure : Broadly speaking, revenue expenditure consists of
all those expenditures of the government which do not result in creation of
physical or financial assets.
Revenue Receipts:
Tax revenues: It is an important component of revenue receipts, comprise of
direct taxes which fall directly on individuals (personal income tax) and
firms (corporation tax), and indirect taxes like excise taxes (duties levied on
goods produced within the country), customs duties (taxes imposed on goods
imported into and exported out of India) and service tax.
Non-tax revenue: The central government mainly consists of interest
receipts (on account of loans by the central government which constitutes the
single largest item of non-tax revenue), dividends and profits on investments
made by the government, fees and other receipts for services rendered by the
government. Cash grants-in-aid from foreign countries and international
organizations are also included.
Tax Revenue:
a) Direct tax: Direct taxes which fall directly on individuals (personal
income tax) and firms (corporation tax). Other direct taxes like wealth tax,
gift tax and estate duty
b) Indirect tax: Indirect taxes like excise taxes (duties levied on goods
produced within the country), customs duties (taxes imposed on goods
imported into and exported out of India) and service tax.
REVENUE EXPENDITURE
a) Plan revenue expenditure: Plan revenue expenditure relates to central Plans
(the Five-Year Plans) and central assistance for State and Union Territory Plans.
b) Non- plan revenue expenditure: Non-plan expenditure, the more important
component of revenue expenditure, covers a vast range of general, economic and
social services of the government. The main items of non-plan expenditure are
interest payments, defence services, subsidies, salaries and pensions.
Conclusion:
The objectives of fiscal policy such as economic development, price
stability, social justice, etc. can be achieved only if the tools of policy
like Public Expenditure, Taxation, Borrowing and deficit financing are
effectively used.
Though there are gaps in India's fiscal policy, there is also an urgent need
for making India's fiscal policy a rationalised and growth oriented one.
The success of fiscal policy depends upon taking timely measures and
their effective administration during implementation
Indias fiscal situation requires immediate attention, high growth and low
interest rate will not take care of the problem in the long run.
Indias external position is relatively strong, in terms of trade flow,
reserves, foreign exchanges, but up to some extent monetary and
exchange rate policies are biased to compensate the fiscal deficit.
