“The policy of the government regarding the level of
government spending and transfers and the tax
“Fiscal policy is the use of government revenue
collection (taxation) and expenditure (spending) to
influence the economy.”
1)Neutral fiscal policy : It is usually undertaken when an
economy is in equilibrium. Government spending is fully
funded by tax revenue and overall the budget outcome has a
neutral effect on the level of economic activity.
2) Expansionary fiscal policy: It involves government
spending exceeding tax revenue, and is usually
undertaken during recessions.
3)Contractionary fiscal policy: It occurs when
government spending is lower than tax revenue, and is
usually undertaken to pay down government debt.
Economic growth (GDP growth 3.986% in 2012-13)
Employment generation (Unemployment 3.8% in 2011 est.)
Reduction in inequalities of income and wealth
Increase in capital formation
Price stability and control of inflation (4.7% ; April 2013)
Effective mobilization of resources
Balanced regional development
Increase in national income
Development of infrastructure
Foreign exchange earnings(Foreign reserves $295.29 billion in
Note:- Data on FDI have been revised since April 2011 to expand the coverage.
“Budget refers a financial statement which shows
anticipated revenue and anticipated expenditure in an
“Statement of estimated receipts and expenditures of
the government in respect of every financial year which
runs from 1 April to 31 March.”
(a) Revenue Budget: The Revenue Budget shows the
current receipts of the government and the expenditure
that can be met from these receipts.
(b) Capital Budget: The Capital Budget is an account of
the assets as well as liabilities of the central
government, which takes into consideration changes in
capital. It consists of capital receipts and capital
expenditure of the government.
REVENUE BUDGET CAPITAL BUDGET
Capital Receipts: The main items of capital receipts are loans
raised by the government from the public which are called
market borrowings, borrowing by the government from the
Reserve Bank and commercial banks and other financial
institutions through the sale of treasury bills, loans received
from foreign governments and international organizations, and
recoveries of loans granted by the central government.
(Rs 6,08,967 Crore for the year 2013-14)
Capital Expenditure: This includes expenditure on the
acquisition of land, building, machinery, equipment,
investment in shares, and loans and advances by the central
government to state and union territory governments, PSUs
and other parties. (Rs16,65,297 Crore for the year 2013-14)
Capital expenditure is also categorized as plan and non –plan
in the budget documents:
a) Plan capital expenditure: Plan capital expenditure,
like its revenue counterpart, relates to central plan
and central assistance for state and union territory
plans. (Rs 5,55,322 Crore for the year 2013-14)
b) Non-plan capital expenditure: Non-plan capital
expenditure covers various general, social and
economic services provided by the government.
(Rs 11,09,975 Crore for the year 2013-14)
Revenue Receipts: Revenue receipts are divided into
tax and non-tax revenues. Tax revenues consist of the
proceeds of taxes and other duties levied by the
central government. (Rs 10,56,331 Crore for the year 2013-14)
Revenue Expenditure: Broadly speaking, revenue
expenditure consists of all those expenditures of the
government which do not result in creation of
physical or financial assets.
(Rs 1,72,252 Crore for the year 2013-14)
Tax revenues: It is an important component of revenue
receipts, comprise of direct taxes – which fall directly on
individuals (personal income tax) and firms (corporation tax),
and indirect taxes like excise taxes (duties levied on goods
produced within the country), customs duties (taxes imposed
on goods imported into and exported out of India) and service
tax. (Rs 8,84,078 Crore for the year 2013-14)
1) Non-tax revenue: The central government mainly consists of
interest receipts (on account of loans by the central
government which constitutes the single largest item of non-
tax revenue), dividends and profits on investments made by
the government, fees and other receipts for services rendered
by the government. Cash grants-in-aid from foreign countries
and international organizations are also included.
(Rs 1,72,252 Crore for the year 2013-14)
a) Direct tax: Direct taxes – which fall directly on
individuals (personal income tax) and firms
(corporation tax). Other direct taxes like wealth tax, gift
tax and estate duty. (Rs 5,64,337 Crore for
the year 2013-14)
b) Indirect tax: Indirect taxes like excise taxes (duties
levied on goods produced within the country), customs
duties (taxes imposed on goods imported into and
exported out of India) and service tax.
(Rs 5,04,423 Crore for the year 2013-14)
Plan revenue expenditure: Plan revenue
expenditure relates to central Plans (the Five-Year
Plans) and central assistance for State and Union
Territory Plans. (Rs 4,43,260 Crore for the year
Non- plan revenue expenditure: Non-plan
expenditure, the more important component of
revenue expenditure, covers a vast range of general,
economic and social services of the government. The
main items of non-plan expenditure are interest
payments, defence services, subsidies, salaries and
pensions. (Rs 9,92,908 Crore for the year 2013-14)
Budget deficit: When a government spends more than
it collects by way of revenue, it incurs a budget deficit.
Revenue Deficit: The revenue deficit refers to the
excess of government’s revenue expenditure over
revenue receipts. (Rs 3,79,838 Crore for the
Revenue deficit = Revenue expenditure –
Fiscal Deficit : Fiscal deficit is the difference between
the government’s total expenditure and its total receipts
Gross fiscal deficit = Total expenditure – (Revenue
receipts + Non-debt creating capital receipts)
Non-debt creating capital receipts are those receipts
which are not borrowings and, therefore, do not give
rise to debt. Examples are recovery of loans and
the proceeds from the sale of PSUs. The fiscal
deficit will have to be financed through
borrowing. Thus, it indicates the total borrowing
requirements of the government from all sources.
(Rs 5,42,499 Crore for the year 2013-14)
Gross fiscal deficit = Net borrowing at home +
Borrowing from RBI + Borrowing from abroad
Net borrowing at home includes that directly borrowed
from the public through debt instruments (for example,
the various small savings schemes) and indirectly from
commercial banks through Statutory Liquidity Ratio
* Fiscal deficit is 4.89 % of GDP (2013), The
Primary deficit: To obtain an estimate of borrowing
on account of current expenditures exceeding revenues,
we need to calculate what has been called the primary
deficit. It is simply the fiscal deficit minus the interest
(Rs 1,71,814 Crore for the year 2013-14)
Gross primary deficit = Gross fiscal deficit – net
Net interest liabilities consist of interest payments
minus interest receipts by the government on net
Budgetary deficits must be financed by either taxation,
borrowing or printing money.
Governments have mostly relied on borrowing, giving
rise to what is called government debt.
The concepts of deficits and debt are closely related.
Deficits can be thought of as a flow which add to the
stock of debt.
If the government continues to borrow year after year,
it leads to the accumulation of debt and the government
has to pay more and more by way of interest.
These interest payments themselves contribute to the
(Public debt 67.59% of GDP in 2012 est.)
Interest on Outstanding Internal Liabilities of Central Government
1603785 105176 7.2
1752403 111476 7.0
1967870 128299 7.3
2247104 149801 7.6
2565991 170388 7.6
2874683 192567 7.5
3212521 212707 7.4
3738151 253995 7.9
4284660 296940 7.9
Source: Union Budget documents
Perspectives on the Appropriate Amount of
There are two interlinked aspects of the issue.
One is whether government debt is a burden and
two, the issue of financing the debt.
The burden of debt must be discussed keeping in
mind that what is true of one small trader’s debt
may not be true for the government’s debt, and
one must deal with the ‘whole’ differently from
Unlike any one trader, the government can raise
resources through taxation and printing money.
By borrowing, the government transfers the burden of
reduced consumption on future generations.
This is because it borrows by issuing bonds to the
people living at present but may decide to pay off the
bonds some twenty years later by raising taxes.
These may be levied on the young population that have
just entered the work force, whose disposable income
will go down and hence consumption.
Thus, national savings, it was argued, would fall. Also,
government borrowing from the people reduces the
savings available to the private sector.
To the extent that this reduces capital formation and
growth, debt acts as a ‘burden’ on future generations.
Note : Data for 2012-13 is as per Advance Estimates released by CSO.
India’s fiscal situation requires immediate attention, high
growth and low interest rate will not take care of the
problem in the long run.
In, fact growth rate in recent years have been significantly
lower, at present India's economic growth rate is 3.986 % in
the last quarter of 2013.
India’s external position is relatively strong, in terms of
trade flow, reserves, foreign exchanges, but up to some
extent monetary and exchange rate policies are biased to
compensate the fiscal deficit.
Coordination of fiscal policy with monetary and exchange
rate policy would be better than letting later to adjust fiscal
A narrow focus on deficit or debt can lead to neglect the
long run growth.
Govt. has to think about revenue enhancing tax reforms
because there has ample scope of improving indirect tax
structure. Tax reform is an essential step towards increasing
govt. revenue as well as reduce microeconomic distortion.
Fiscal adjustment is going to major agenda for the govt.
they have to plan it intelligently rather than seeing as a
Govt. has to reconstruct their expenditure.
Hence we can say that fiscal measures reduce the intensity
of business fluctuations (Inflation & Recession) but only
these alone are not sufficient to correct fluctuations
significantly , therefore the role of discretionary fiscal
policy and explicit changes in tax rates and Govt.
Expenditure are required to cure recession and curb