fiscal policy (business environment)

1. M.COM BI SEM- 1
FISCAL
POLICY

2. FISCAL POLICY OF INDIA
Fiscal 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.

3. MEANING OF FISCAL POLICY
Fiscal 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.

4. 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.

5. 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 investment
4. To remove poverty and unemployment
5. To reduce economic inequality
6. To reduce regional disparities
7. employment generation

6. 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

7. 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 money
And to reduce purchasing power.

8. 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.

9. 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.

10. COMPON
ENTS OF
FISCAL
POLICY
Taxation
policy
Public
expendit
ure
policy
Deficit
financing
Public
debt
policy

11. PUBLIC EXPENDITURE POLICY
MAIN 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 infrastructure
4. Social welfare: government should spend huge amount
on public health education, safe drinking water, sanitation.

12. TAXATION POLICY
Taxes 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.

13. 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 POLICY
Public 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.

14. DEFICIT FINANCING
In 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 INDIA
Since independence government of India has been
making use of fiscal policy to mobilize resources for
economic development.

15. CONTRIBUTION OR ADVANTAGES OF FISCAL
POLICY
1. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. SUGGESTIONS FOR REFORMS IN FISCAL POLICY
To improve the efficiency:- to improve the efficiency of
the fiscal policy or to increase the revenue the govt. must
improve the tax administration
Special 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 PSUs
Strict implementation of various projects.
Reduction in subsidies.

23.  Exercise strict control over black money.
More direct taxes
Reduction 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.

24. 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.

25. FISCAL POLICY 2014
The 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.

26. 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.

27. 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.

28. 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.