The Fiscal Policy

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. Personal Such taxes Income 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.