Fiscal Policy

The policy of the government pertaining to public revenue, public expenditure, public debt known as Fiscal Policy. Fiscus (in Latin) refers to a purse and fisc (in English) is a royal or state treasury. Thus, fiscal policy is that under which the government uses its revenue and expenditure programs to produce desirable effects on national income, production and economy. It is thus used as a balancing device in the economy. Two major elements of fiscal policy are taxation and public expenditure.

Fiscal policy refers to the overall effect of the budget outcome on economic activity.
The idea of using fiscal policy to combat recessions was introduced by John Maynard Keynes in the 1930s Two main instruments of fiscal policy Revenue Budget Expenditure Budget

Kinds of Fiscal Policy

Reflationary Fiscal Policy It may be used to boost the level of economic activity during periods of recession or deceleration in economic activity. This is done by lowering taxes or increasing government expenditure. Deflationary Fiscal Policy During a boom, i.e., when the economy is growing beyond its capacity, inflation and balance of payment problems might result. This can be achieved by increasing taxes or by reducing government expenditure.

Three possible stances of fiscal policy are:

A neutral stance of fiscal policy implies a balanced budget where G = T (Government spending = Tax revenue). An expansionary stance of fiscal policy involves a net increase in government spending (G > T). A contractionary stance of fiscal policy (G < T)

OBJECTIVE OF FISCAL POLICY

1. To achieve desirable price level

2. To Achieve desirable consumption level

3. To Achieve desirable employment level 4. To achieve desirable income distribution 5. Increase in capital formation 6. Degree of inflation

METHODS OF FUNDING
Governments spend money on a wide variety of things, from the military to services like education and healthcare, as well as transfer payments.

This expenditure can be funded in a number of different ways: Taxation Seignorage, the benefit from printing money Consumption of fiscal reserves. Sale of assets (e.g., land).

Tools of Fiscal Policy

1.Taxation 2.Public expenditure- plan and non plan expenditure 3.Public debt 4.Deficit Financing: The government fails to match its expenses with what it earns and thus has to resort to deficit financing. Deficit, if any, should be used to finance capital expenditure that leads to asset formation and not on revenue expenditure, the benefits of which do not go beyond that particular year.

REVENUE RECEIPT
Revenue receipt are those which neither decreases the asset nor increases the liability of the government Classification of revenue receipts:

Revenue Receipts Tax Revenue Non Tax Revenue

Direct Tax

Indirect Tax

TAX REVENUE
Revenue Receipts (Tax Revenue)
10 9 8 8.5 7.1 7.5 9.3

8.8

Revenue Receipts

7 6 5 4 3 2 1 0 2004-05 2005-06 2006-07 Year 2007-08 2008-09

website: http//indiabudget.nic.in

DEV26-03-2012

Direct tax: when incidence and impact of tax falls on the same person.
Direct Taxes
4.5 4.1 3.5 2.6 1.8 2.8 2.2 1.6 1.8 2.3 PersonaL Income Taxes Corporation Tax 4.2

personal/corporation taxes

4 3.5 3 2.5 2 1.5 1 0.5 0 2004-05 2005-06

2006-07 years

2007-08

2008-09

website: http//indiabudget.nic.in

Indirect tax: when incidence and impact of tax can fall on different person. E.g. sale tax, import duty & excise duty

Indirect Taxes
Custom/Excise/Service taxes
3.5 3 2.5 2 1.5 1 0.5 0 Customs Excise Service Taxes 2004-05 1.8 3.1 0.5 2005-06 1.8 3.1 0.6 2006-07 2.1 2.8 0.9 Years 2007-08 2.2 2.6 1.1 2008-09 2.0 2.0 1.2 Customs Excise Service Taxes

website: http//indiabudget.nic.in

CHANGES IN CUSTOM DUTIES

Customs duty on nonagricultural products, reduced from 20% (2003-04)to 10%(2007-08) Duty on steel melting scrap and aluminum scrap reduced to Nil (from 5 per cent earlier). Customs duty on crude and non-refined sulphur reduced to 2% from 5% to boost domestic fertilizer production.

Customs duty on cigars, cheroots and cigarillos was

increased from 30% to 60%.

CHANGES IN EXCISE DUTY

CENVAT rate on all goods from 16% to 14% Excise duty was reduced from 16% to 8% on all drugs In the automobiles sector, excise duties were reduced on small cars from 16% to 12%; hybrid cars from 24% to 14%; electric cars from 8% to Nil In the food processing sector, excise duty was made fully exempt on packaged tender coconut water, paws, mudi (puffed rice), milk containing edible nuts and tea/coffee pre-mixes.

CHANGES IN SERVICE TAXES

Year
2004-05 2005-06 2006-07

Number of services
75 84 99

Tax rate (% )
10 10 12

Revenue (Crores)
14200 23055 37598

2007-08

106

12
12

51301
65000

2008-09 NA website: http//indiabudget.nic.in

COMPARISION OF DIRECT TAX AND INDIRECT TAX

Comparision between Direct Tax & Indirect Tax
7 6 5

DT/IT

4 3 2 1 0 Direct Tax Indirect Tax 2004-05 4.2 5.4 2005-06 4.6 5.6 2006-07 5.3 5.8 Years 2007-08 6.3 5.9 2008-09 6.5 5.3

Direct Tax Indirect Tax

website: http//indiabudget.nic.in
GAGANJEET PHOGAAT 26-03-2012

NON TAX REVENUE

Non Tax Revenue
3 2.6 2.5 2.2 2 1.8 Non Tax Revenue

Non Tax Revenue

2.1 2 1.5 1 0.5 0 2004-05 2005-06

2006-07 Year

2007-08

2008-09

website: http//indiabudget.nic.in

Revenue expenditure: which neither increases the asset nor decreases the liability of the government.
Revenue Expenditure
16 14 12.2 12.2 12.5 12.6 15.1

RE as % of GDP

12 10 8 6 4 2 0 2004-05 2005-06 2006-07 Years 2007-08 2008-09 Series1

website: http//indiabudget.nic.in

SHARE OF REVENUE EXPENDITURE COMPONENT

Revenue expenditure
5.0 4.0 3.0 2.0 1.0 0.0 Interest Payment Major Subsidies Defense Expenditure 2004-05 2005-06 2006-07 2007-08 2008-09 4.0 1.4 1.4 3.7 1.2 1.3 3.6 1.3 1.3 Years 3.6 1.4 1.1 3.6 2.3 1.4 Interest Payment Major Subsidies Defense Expenditure

website: http//indiabudget.nic.in

Components of RE

Revenue deficit: its the difference between revenue expenditure and revenue receipt of the Government
Revenue Defecit
5 4.5

Revenue Deficit (as % of GDP)

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2004-05 2005-06 2006-07 Years 2007-08 2008-09 2.5 2.6 1.9 1.1 Series1

website: http//indiabudget.nic.in
GAGAN ANAND 26-03-2012

Capital receipt: Are those which either decreases the asset or increases the liability of the Government.
Capital Receipts
8.0

Capital Receipts

Recovery of Loans 6.0 4.0 2.0 0.0 Recovery of Loans Other Receipts (PSU Diisinvestment) Borrowings and other Liabilities 2004-05 2005-06 2006-07 2007-08 2008-09 2.0 0.1 0.3 0 0.1 0 0.1 0.8 0.2 0 Other Receipts (PSU Diisinvestment) Borrowings and other Liabilities

4.0

4.1

3.5 Years

2.7

6.1

website: http//indiabudget.nic.in

Capital Expenditure: Are those which either increases the asset or decreases the liability of the Government
Capital Expenditure
capital Expenditure (as % of GDP)
4 3.5 3 2.5 2 1.5 1 0.5 0 2004-05 2005-06 2006-07 Years 2007-08 2008-09 1.9 1.7 1.8 Series1 2.5 3.6

website: http//indiabudget.nic.in

COMPARISION OF REVENUE & CAPITAL EXPENDITURE

Comparision between RE & CE
16 14 12 10 8 6 4 2 0 Revenue Expenditure Capital Expenditure 2004-05 12.2 3.6 2005-06 12.2 1.9 2006-07 12.5 1.7 Years 2007-08 12.6 2.5 2008-09 15.1 1.8

RE/CE

Revenue Expenditure Capital Expenditure

website: http//indiabudget.nic.in

Planned expenditure : These are the expenses that form a part of the governments five year plan. For ex- salaries and pension
Plan Expenditure
6

Planned Expenditure (as % of GDP)

5.3 4.2 4.1 4.3

5 4 3 2 1 0 2004-05 2005-06 2006-07 Years 3.9

Series1

2007-08

2008-09

website: http//indiabudget.nic.in
DEEPIKA 26-03-2012

Non plan expenditure: These are the expenses that dont form a part of the governments five year plan and include defense expenses, subsidies, grants to the states
Non Plan Expenditure
12

Non Plan Expenditure (as % of GDP)

11.6 11.5 11 10.5 10 9.5 9 2004-05 2005-06 2006-07 Years 2007-08 10.2 10.0 10.7

11.6

Series1

2008-09

website: http//indiabudget.nic.in

Fiscal Deficit: when a Government total expenditure exceed the revenue that it generated (excluding money from borrowing)
Fiscal Defecit
7.0

Fiscal defecit (as % of GDP)

6.0 5.0 4.0 Series1 3.0 2.0 1.0 0.0 2004-05 2005-06 2006-07 Years 2007-08 2008-09

website: http//indiabudget.nic.in

The limitations of Fiscal Policy

1. A sizeable portion of most developing economies is non-monetized, rendering fiscal measures of the government ineffective and selfdefeating. 2. Lack of statistical information as regards the income, expenditure, savings, investment, employment etc. makes it difficult for the public authorities to formulate a rational and effective fiscal policy. 3. Fiscal policy cannot succeed unless people understand its implications and cooperate with the government in its implication. This is due to the fact that, in developing countries, a majority of the people are illiterate. 4. Large-scale tax evasion, by people who are not conscious of their roles in development, has an impact on fiscal policy. 5. Fiscal policy requires efficient administrative machinery to be successful. Most developing economies have corrupt and inefficient administrations that fail to implement the requisite measures vis--vis the implementation of fiscal policy

India Union Budget 2010-2011 General Proposals and Announcements

Fiscal deficit for the FY 2011 is estimated at 5.5% 18.9% growth rate registered by manufacturing industry in 2009 Indian Economy is expected to register a 10% GDP growth in the coming years A 7.2% economic growth is estimated to be registered in the current fiscal The future years are expected to witness gradual segmentation of incentives Direct Tax Code and General Sales Tax to be launched in April 2011 A supreme level Fiscal Stability and Development Council to be established by the central government Issue of additional banking licenses by the Reserve Bank of India to private players and non-banking financial organizations 6 months extension of the refund term for farmer loans up to June 30th 2011 Undertaking of the introductory development activities for Delhi-Mumbai industrial corridor Rs 25000 crores increase by the government via Disinvestment route Setting up of Technology advisory group under the governance of Nandan Nilekani Allocation of Rs 1900 crore for UID authority Allocation of Rs 147,000 crore for defence