FISCAL POLICY AND ITS IMPACT ON ECONOMIC GROWTH AND SOCIAL DEVELOPMENT SUBMITTED BY – ISHA SHARMA(133) SUGANDHI (316) ROHIT JHAKAR(141) KARAN NANDA(170) SHEFALI ARORA(184) PRACHI AGARWAL(338)
Definition Fiscal Policy is the main part of Economic Policy and Fiscal Policy's first word Fiscal is taken from French word Fisc it means treasure of Govt. So we can define fiscal policy as the revenue and expenditure policy of Govt. of India .It is prime duty of Government to make fiscal policy . By making this policy , Govt. collects money from his different resources and utilize it in different expenditure . Thus fiscal policy is related to development policy . All welfare projects are completed under this policy
OBJECTIVE OF FISCAL POLICY Development of Country Employment Inequality Fixation of govt. policy
Techniques of Fiscal Policy Taxation Policy -> If Govt. will increase taxes , more burden will be on the public and it will reduce production and purchasing power of public .-> If Govt. will decrease taxes , then public's purchasing power will increase and it will increase the inflation.
Govt. Expenditure Policy There are large number of public expenditure like opening of govt schools , colleges and universities , making of bridges , roads and new railway tracks . In all above projects govt has paid large amount for purchasing and paying wages and salaries all these expenditure are paid after making govt. expenditure policy . Govt. can increase or decrease the amount of public expenditure by changing govt. budget . So , govt. expenditure is technique of fiscal policy by using this , govt. use his fund first on very necessary sector and other will be done after this .
3. Deficit Financing Policy If Govt.'s expenditures are more than his revenue , then govt. should have to collect this amount . This amount is deficit and it can be fulfilled by issuing new currency by central bank of country . But , it will reduce the purchasing power of currency . More new currency will increase inflation and after inflation value of currency will decrease . So, deficit financing is very serious issue in the front of govt. Govt. should use it , if there is no other source of govt. earning .
Public Debt PolicyIf Govt. thinks that deficit financing is not sufficient for fulfilling the public expenditure or if govt. does not use deficit financing , then govt. can take loan from world bank , or take loan from public by issuing govt. securities and bonds . But it will also increase the cost of debt in the form of interest which govt. has to pay on the amount of loan . So, govt. has to make solid budget for this and after this amount is fixed which is taken as debt. This policy can also use as the technique of fiscal policy for increase the treasure of govt.
Stances of fiscal policy The three possible stances of fiscal policy are neutral, expansionary and contractionary. The simplest definitions of these stances are as follows: A neutral stance of fiscal policy implies a balanced economy. This results in a large tax revenue. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. An expansionary stance of fiscal policy involves government spending exceeding tax revenue. A contractionary fiscal policy occurs when government spending is lower than tax revenue.
Fighting Recession: ExpansionaryFiscal Policy The economy is below potential income during a recession. There is a RECESSIONARY GAP – the diff. b/w equilibrium income and potential income when potential income exceeds equilibrium income. Assuming that government knows the value of the multiplier, the right amount of spending could be injected into the economy to close the recessionary gap.
Fighting Inflation: ContractionaryFiscal Policy When inflation begins to accelerate beyond potential output, fiscal policy works in reverse by decreasing expenditures that are too high. If the quantity of aggregate demand exceeds potential income at that price level, there will be excess demand and pressures for inflation. Output may temporarily exceed potential output because firms and workers may be slow to raise prices and wages.
Soon shortages and accelerating inflation will drive the economy back to its potential income. Government should decrease its expenditures by an amount that reflects the magnitude of the multiplier. This expenditure reduction would remove the inflationary gap – the difference between equilibrium income and potential income when equilibrium income exceeds potential income.
Effectiveness of Fiscal Policy There are two ways to think about the effectiveness of fiscal policy – in the model and in reality If the model is correct in describing the economy, and if government acts quickly enough in a countercyclical way, depressions can be avoided. “Countercyclical fiscal policy – fiscal policy in which the government offsets any change in aggregate expenditures that would create a business cycle.”
Real World Examples- Fiscal Policy in World War II Taxes rose during World War II, but government expenditures rose much more. The deficit increased and real income rose by more than the increase in the deficit. One would normally expect a huge inflation. The wartime expansion was accompanied by wage and price controls and rationing. Although World War II expanded the economy, that doesn’t mean wars are good for the economy.- The production of military goods increased, but the production of consumer goods decreased.
Recent Fiscal policy The deficit picture in the 1990s changed from a large deficit to a large surplus. Economic theory would predict a slow down in the economy – but the economy boomed in the mid-1990s. There are two explanations for this seeming paradox The contractionary effect of the surplus was offset by booms in consumer and investment spending.
Much of the surplus resulted from an increase in income in a booming economy, not from discretionary fiscal policy. The economy exceeded economists‘ estimate of potential income, without generating inflation, by far more than anyone thought. Economists began revising their estimates of potential income.
Limitation of Fiscal Policy After issuing new notes for payment of govt. of expenses , inflation of India is increasing rapidly and in this inflation , prices of necessary goods are increasing very fastly. Living of poor person has become difficult . So , these sign shows the failure of Indian fiscal policy. Govt. fiscal policy has failed to reduce the black money . Even large amount of past minister is in the form of black money which is deposited in Swiss Bank.
After taking loan from world bank under the fiscal policy's debt technique , govt. has to obey the rules and regulations of world bank and IMF . These rules are more harmful for developing small domestic business of India. These organisation are inter related with WTO and they want to stop Indian domestic Industry. After expending large amount for generating new employment under fiscal policy , rate of unemployment is increasing fastly and big lines on govt. employment exchange can be seen generally in working days . Database of employment exchanges are full from educated unemployed candidates .