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DR. VASUDEV P. IYER
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FISCAL POLICY: MEANING, OBJECTIVES, INSTRUMENTSAND IMPACTS ON BUSINESS
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P l e a s e C o - o p e r a t e , T h a n k Y o u
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In the previous session
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Monetary Policy
Meaning
Objectives
Instruments
Impacts on business
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In this Session
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Meaning of f iscal pol icy
Objectives of f iscal policy
Instruments of f iscal policy
Impacts of f iscal pol icy on business
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MEANING OF FISCAL POLICY
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An attempt to inf luence th e level of
economic act ivity though changes
in government revenue and
expenditure.
Taxes: Direct and Indirect
Expenditure: Collective Goods
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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
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INSTRUMENTS OF FISCAL POLICY
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A u t o c ra c y - r u l e b y a s i n g l e i n d i v i d u a l
( d e s p o t i s m ) M o n a r c h y r u l e b y h e r e d i t a r y k i n g s
O l i g a r c h y - r u l e b y a s m a l l g r o u p o f i n d i v i d u a l s
( m i l i t a r y l e a d e r s , o n e p a r t y )
A r i s t o c ra c y - r u l e b y a c l a s s o f p e o p l e( m e r c h a n t s , n o b i l i t y )
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
A n d r o c ra c y - r u l e b y m e n
G y n a r c h y - r u l e b y w o m e n
A n a r c h y a b s e n c e o f g o v e r n m e n t
TYPES OF GOVERNMENT
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WHAT IS DEMOCRACY?
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I N D I A E L E C T S
I T S
K ING
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TAXATION
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T A X
D I R E C T
I N C O M E
W E A L T H
I N D I R E C T
COMMODITIES
S E R V I C E S
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CENTRAL GOVT. STATE GOVTs. LOCAL BODIES
INCOME TAX
SALES TAX (VAT)
CENTRAL EXCISE
CUSTOMS DUTIES
SECURITIES TRAN. TAX
SERVICE TAX
CAPITAL GAINS TAX
SALES TAX (VAT)
STAMP DUTY
STATE EXCISE
AGRI. INCOME TAX
ENTERTAINMENT TAX
PROFESSIONAL TAX
PROPERTY TAX
OCTROI DUTIES
TAX ON MARKETS
UTILITY TAX
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Source: Economic Survey, 2010-11
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The Direct Tax Code
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
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EXPENDITURE
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Source: Economic Survey, 2010-11
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44
54.5 48.8
35.2
28.1
36.7
0
10
20
30
40
50
60
E X P O N S A L A R Y
E X P O N S O C I A L
M A H A R A S H T R A S E X P E N D I T U R E O N S A L A R I E S A N D S O C I A L S E C T O R
( % O F T O T AL R E V E N U E )
S O U R C E : R B I , S T AT E F I N A N C E S : S T U D Y O F S T A T E B U D G E T S
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VOTE-ON-ACCOUNT
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T h e c o n s o l i d a t e d f u n d o f I n d i a
P r i o r a p p r o v a l o f t h e P a r l i a m e n t
V o te - o n - a c c o u n t c o v e r s o n l y t h e e x p e n d i t u r e s i d e o f t h e B u d g e t
N o d i s t i n c t i o n b e t w e e n c a r e t a k e r a n d n o r m a lg o v e r n m e n t
P o l i c y s t a t e m e n t c a n b e m a d e .
D u r a t i o n m a x . 6 m o n t h s o r t i l l t h e f u l l b u d g e t i sp r e s e n t e d w h i c h e v e r i s t h e e a r l i e s t .
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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
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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
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Vicious circle
Fiscal Deficit and
Monetization
Inflation and
downward pressureon 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
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The Philips curve is a
graphical representation
of the negative
relationship between
rates of unemployment
and rates of inflation
Inflation
Unemployment rate %5
4
8
10
The Philips curve
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Summary
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Meaning of f iscal policy
Objectives of f iscal policy
Instruments of f iscal policy
Impacts of f iscal policy onbusiness
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