M.COM BI SEM- 1

FISCAL POLICY

FISCAL POLICY OF INDIAFiscal policy is a part of economic policy of the government which is related to government income and expenditure. It includes public expenditure policy, taxation policy, public debt policy and deficit financing. It is aimed at achieving certain objectives like – rapid economic development, reduction in economic inequalities, capital formation, etc.

MEANING OF FISCAL POLICYFiscal is related to income and expenditure of government. It refers to budgetary policy of government. It is also known as income and expenditure policy or tax and expenditure policy of government. The fiscal policy is of great importance for both developed and developing countries. It is an instrument fir promoting economic growth, employment, social welfare, etc.

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy. It is the sister strategy to monetary policy through which a central bank influences a nation's money supply.

OBJECTIVES OF FISCAL POLICY OF INDIA

1.To mobilize resources for economic development of the country.2. To increase the rate of saving in the country so that sufficient financial resources can be obtained from within the economy.3. To increase the rate of investment4. To remove poverty and unemployment5. To reduce economic inequality6. To reduce regional disparities7. employment generation

TYPES OF FISCAL POLICY

1.Discretionary Fiscal Policy

Contractionary fiscal policy

Expansionary fiscal policy

2.Compensatory Fiscal Policy

3.Automatic Stabilization Fiscal Policy

4.Functional fiscal Policy

TYPES OF FISCAL POLICY:- The various types of fiscal policy are as follows:- 1.DISCRETIONARY FISCAL POLICY:- In this policy the government makes deliberate changes in the level and pattern of taxation, size and pattern of its expenditure and the size and composition of public debt. Policy can either be contractionary or expansionary. A. Contractionary fiscal policy:- when the govt. reduces its expenditure and increase the taxation rate, it is known as contractionary fiscal policy. This happens during inflation in order to control the supply of moneyAnd to reduce purchasing power.

B. Expansionary fiscal policy:- the fiscal policy is expansionary in nature, when the government increases its expenditure and decreases the tax rate. This policy is followed during the periods of deflation.2.COMPENSATOEY FISCAL POLICY:- The compensatory fiscal policy is a deliberate action taken by the government to compensate for deficiency in supply or excess of aggregate demand.In this process the government increases the tax rates and decreases the govt. expenditure. This type of policy will lower the aggregate demand and inflation will be reduced.3.AUTOMATIC STABILIZATION FISCAL POLICY:- Automatic fiscal policy means adopting a fiscal system with built in flexibility of tax revenue and government spending.

4. FUNCTIONAL FISCAL POLICY:- The concept of functional finance is much used in the developed capitalist countries of the west. According to learner, the fiscal policy should be used to bring economic stabilization in the economy. So, fiscal policy should be contra cyclical in nature. It means policy of deficit budget (when expenditure is greater than revenue) is adopted during depression and the policy of surplus budget(when revenue is greater than expenditure) is adopted during inflation.

COMPONENTS

OF FISCAL POLICY

Taxation policy

Public expendi

ture policy

Deficit financin

g

Public debt

policy

PUBLIC EXPENDITURE POLICYMAIN features of government policy regarding public

expenditure are as follows:-1. Development of public enterprise: Underdeveloped

countries lack in basic and heavy industries. Establishment of these industries requires huge capital investment.

2. Support to private sector: In order to accelerate the rate of economic growth in the country, government should encourage private sector.

3. Development of infrastructure: government should spent huge amount for development of infrastructure4. Social welfare: government should spend huge amount on public health education, safe drinking water, sanitation.

TAXATION POLICYTaxes are the main source of revenue of government. Government levies on both direct and indirect taxes in India. Main objectives of taxation policy are as follows:1. Mobilization of resources: taxes are the major sources of government revenue. Tax revenue in India has been rising every year.2. To promote saving: one of the important objectives of taxation policy is to promote savings. For this purpose various tax concessions, tax deductions are given.

3. To promote investment: to promote investment in remote and backward areas, tax concessions are given.4. To bring equality of income and wealth: to achieve this objective different kinds of direct taxes are levied.

PUBLIC DEBT POLICYPublic debt is obtained from

two kinds of sources:1. Internal debt: internal debt should

be mobilized that it has no adverse effect on private investment .

2. External debt: India cannot meet its financial requirements from internal debt alone .it has to borrow from abroad as well.

DEFICIT FINANCINGIn western sense, deficit financing refers to printing of new currency notes to fill gap between revenue and expenditure i.e. budgetary deficit. IN Indian sense, deficit financing refers to the loans taken from the Reserve Bank Of India to cover the deficit in the budget. The RBI provides this loan by creating new currency and reducing govt. cash balances. The new currency increases the money supply leading to increase in the size of aggregate demand. EVALUATION OF FISCAL POLICY OF INDIASince independence government of India has been making use of fiscal policy to mobilize resources for economic development.

CONTRIBUTION OR ADVANTAGES OF FISCAL POLICY1. Capital formation: fiscal policy has played a significant

role in the capital formation of public and private sectors. It leads to economic development of the nation.

2. Inducement to private sector: fiscal policy of India has provided incentives to private sector for investment and production by several measures.

3. Mobilization of resources: fiscal policy has also helped mobilization of resources. To execute the plan, resources have mainly been provided by internal resources.

5. Development of Public Enterprises: Fiscal policy has been providing finance for development of public enterprises. These public enterprises have been set up in the area of basic and heavy industries.6. Social Welfare: Through fiscal policy government spends huge amount on public health, education, safe drinking water, welfare of weaker sections of society, child welfare, woman welfare, welfare of aged persons, etc.

4. Incentives for saving: fiscal policy has provided several incentives for savings to household and corporate sectors. To encourage savings in the household sectors several tax concessions are provided.

7. Alleviation of Poverty and Generation of employment Opportunities: Fiscal policy has been endeavoring to alleviate poverty. With a view of providing employment to the poor people of the country and to enhancing their level of income, considerable public expenditure was incurred on several programmers initiated in this respect

8. A tool to control recession: fiscal policy is a significant tool to counter the negative impact of economic recession. In the year 2012-2013 and 2013-2014, fiscal policy is deficit was 4.9 percent and 4.6 percent of GDP respectively. Such fiscal measures have promoted demand and thereby production.

1.Weak Policy Making Machinery:- fiscal policy has to solve lot of problems in the under developed countries where policy making machinery is weak and the implementation of particular type of fiscal policy takes a very long time.2. Political Factors:- in India all economic decisions taken by the govt. are influenced by the political factors. Major proportion of economic decisions taken by the govt. regarding revenue and expenditure of the govt. are influenced by the vote bank rather by the economic rationality.

3.Defective Tax Structure: In India share of direct taxes is less than the share of indirect taxes. Such tax structure proves burdensome for the poor.4.Failure Of Public Sector: Various public sector units are running at losses. Huge investment in public enterprises has failed to generate adequate return on this investment. Some public sector undertakings have failed to pay even interest on the capital invested therein.

5. Increasing Interest Burden: under fiscal policy government has taken huge public debt both from internal and external sources. This has resulted into undue interest burden on government exchequer.6.Increase In Non-Development Expenditure: In fiscal policy government is spending huge amount on non- development expenses like- defiance expenses, election expenses, subsidies, foreign travels, interest payments, grants to states/UTs, etc. These expenses are of unproductive nature and put undue burden on government exchequer. Fiscal policy has failed to control non- development expenditure.

7.Inelastic :- although fiscal policy is considered as an important instrument in the hands of the government used to manage its revenue and expenditure. The critics are of view that it is not an easy to manipulate the fiscal instruments as desired. A simple modification in the fiscal instrument may require modifications in certain other economic instruments also. So this become the shortcoming of fiscal policy.8. Problems Of Statistical Data :- it is an established fact that implications of a decision largely depends upon the quality of the decision, while the quality of decision is ultimately depends upon the quality of information available to make decisions. There may be problem of data available which becomes the limitation of fiscal policy.

SUGGESTIONS FOR REFORMS IN FISCAL POLICYTo improve the efficiency:- to improve the efficiency of the fiscal policy or to increase the revenue the govt. must improve the tax administrationSpecial efforts regarding tax collection:- special efforts are required to be directed towards the identification of tax avoidance and tax evasion in the economy to raise the tax collections.Investments :- it is also suggested that the govt. must make investments only in those area that are of strategic importance to the country and change their priorities regarding government expenditure. Disinvestment of loss making PSUsStrict implementation of various projects.Reduction in subsidies.

Exercise strict control over black money.More direct taxesReduction in non-development expenditure.Agriculture tax:- agriculture sector should brought under tax act. Consequently, revenue of the govt. will increase and there will be no need on the part of the govt. either to resort deficit financing or to depend on public debt.The Shifting Approach Of Fiscal Policy After Liberalization The government of India has introduced various kinds of fiscal reforms since 1991. After making liberalization, privatization and globalization (LPG) of Indian Economy the govt. has shifted its philosophy from regulating the fiscal situations towards managing the fiscal situations.

As part of the fiscal policy reforms- the govt. has disinvested from all the loss making public sector undertakings. The various kinds of fiscal policy reforms initiated by the govt. since 1991 are stated as follows:- Emphases on elimination of inflationary pressure. Emphases on reduces the accumulation of public debt. Reduction of subsidies. Improvement in the quality of public utilities. To make only strategic government investments. To reduce the non plan expenditure. To improve the basic infrastructure in the economy. To increase the tax revenue of the govt.

the major policy initiatives of the government are directed towards reduction of govt. expenditure and increasing its revenue.

FISCAL POLICY 2014The fiscal policy of 2014-15 has been calibrated with two fold objectives – first-to aid economy in growth revival; and second- to continue on the path of fiscal consolidation by containing fiscal deficit so as to leave space for private sector credit as the investment cycle picks up.

2.Government has re-prioritized expenditure and made additional allocations in consonance with policy for equitable growth, providing fillip to growth while focusing on the social and welfare sector.

3.Guiding Principles For Fiscal Policy: adoption of the fiscal consolidation targets also set the guiding principles for fiscal policy from the medium term prospective. It entails constriction of fiscal space over the period 2014-15 to 2016-17.

4.Time expenditure management has to be fine tuned further to meet the challenges of inclusive growth which caters to the development of poor and gives impetus to the economic growth of the economy. 5.The amended FRBM (Fiscal Responsibility and Budget Management act provides elimination of ERD while limiting RD to 2% by 31st March,2015.6. The roadmap of fiscal consolidation adopted by the government in financial year 2012-13 is aligned with the fiscal deficit targets laid down in the amended FRBM Rules, 2012. Government has been steadfast in adhering to these targets.

7.With the general budget 2014-15, the fiscal deficit roadmap is on track and expected to achieve 3% goalpost in next two fiscal years. Therefore, the task of fiscal consolidation is half done with respect to fiscal deficit.

8.Basic Customs Duty on specified telecommunication products not covered by the Information Technology Agreement is being increased from NIL to 10%.

9.Education cess and Secondary & Higher Education (SHE) cess is being levied on imported electronic products so as to provide parity between domestically produced goods and imported goods.