Fiscal policy


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Fiscal policy

  1. 1. Presented by: RAJESH KUMAR MBA(Finance), ACS, AIII
  2. 2.  “The policy of the government regarding the level of government spending and transfers and the tax structure”. OR  “Fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy.”
  3. 3. 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. (Source: Wikipedia)
  4. 4.  Economic stabilization  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 Oct.2012)
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  6. 6. Note:- Data on FDI have been revised since April 2011 to expand the coverage.
  7. 7.  “Budget refers a financial statement which shows anticipated revenue and anticipated expenditure in an accounting year.” or  “Statement of estimated receipts and expenditures of the government in respect of every financial year which runs from 1 April to 31 March.”
  8. 8. (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.
  10. 10.  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)
  11. 11. 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)
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  16. 16.  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)
  17. 17.  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)
  18. 18. 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)
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  20. 20.  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 2013-14)  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)
  21. 21.  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 year 2013-14) Revenue deficit = Revenue expenditure – Revenue receipts
  22. 22.  Fiscal Deficit : Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing 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)
  23. 23.  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 (SLR). * Fiscal deficit is 4.89 % of GDP (2013), The Economic Times
  24. 24.  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 payments. (Rs 1,71,814 Crore for the year 2013-14)  Gross primary deficit = Gross fiscal deficit – net interest liabilities  Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.
  25. 25. Revenue deficit Fiscal marksmanship
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  27. 27.  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 debt. (Public debt 67.59% of GDP in 2012 est.)
  28. 28. Interest on Outstanding Internal Liabilities of Central Government 2004-5 2005-6 2006-7 2007-8 2008-9 2009-10 2010-11 2011-12(RE) 2012-13(BE) 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 OUTSTANDI NG INTERNAL LAIBLITIES (end March) INTEREST ON INTERNAL LAIBILITIES (In Cr.) AVERAGE COST OF BORROWING (p.a.)
  29. 29.  Perspectives on the Appropriate Amount of Government Debt:  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 the ‘part’.  Unlike any one trader, the government can raise resources through taxation and printing money.
  30. 30.  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.
  31. 31. Note : Data for 2012-13 is as per Advance Estimates released by CSO.
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  34. 34.  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 looseness.  A narrow focus on deficit or debt can lead to neglect the long run growth.
  35. 35.  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 crisis.  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 inflation.
  36. 36. Question?