Impact of globalization on fiscal policy
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  • 1. By : Patel Sonukumar Bharatbhai sonupatel48@gmail.com
  • 2. What is Globalization? Globalization is a process of interaction and integration among the people, companies and government of different nations. A process driven by international trade and investment – aided by information technology.
  • 3. India towards Globalization Till 90s the process of globalisation of the Indian economy was constrained by the barriers to trade and investment. Liberalisation of trade, investment and financial flows initiated in the nineties has progressively lowered the barriers to competition and hastened the pace of globalisation.
  • 4. Challenges Of Globalization Heterogeneous Workplace 2. Foreign Assignments 3. Virtual teams 4. Handling Cross Cultural Differences and Cultural Conflicts 1.
  • 5. What do you mean by Fiscal Policy? Fiscal policy deals with the taxation and expenditure decisions of the government.  Monetary policy, deals with the supply of money in the economy and the rate of interest. These are the main policy approaches used by economic managers to steer the broad aspects of the economy.
  • 6. In most modern economies, the government deals with fiscal policy while the central bank is responsible for monetary policy. Fiscal policy is composed of several parts  These include, 1. 2. 3. 4. Tax policy, Expenditure policy, Investment or disinvestment strategies Debt or surplus management.
  • 7. Fiscal and Monetary Policy Fiscal policy also feeds into economic trends and influences monetary policy.  When the government receives more than it spends, it has a surplus.  If the government spends more than it receives it runs a deficit.  To meet the additional expenditures, it needs to borrow from domestic or foreign sources, draw upon its foreign exchange reserves or print an equivalent amount of money.
  • 8. Effects 1. 2. 3. 4. 5. On a broad generalization, excessive printing of money leads to inflation. If the government borrows too much from abroad it leads to a debt crisis. If it draws down on its foreign exchange reserves, a balance of payments crisis may arise. Excessive domestic borrowing by the government may lead to higher real interest rates the domestic private sector being unable to access funds resulting in the “crowding out‟ of private investment.
  • 9. Challenges for Government So the challenge then for most developing country governments is to meet infrastructure and social needs while managing the government’s finances in a way that the deficit or the accumulating debt burden is not too great.
  • 10. Globalization and Fiscal Policy
  • 11. 1990 – 1991 ( Liberalization )
  • 12. 2000 – 2001 ( Globalization )
  • 13. 2005 - 2006
  • 14. Conclusion (from 1991 and 2001) Direct tax laid by the government gets increased by 100% Calculation -> (26 – 13)/13 = 100% Indirect tax decreased by 31% Calculation -> ( 45 – 65 ) / 65 = 31% Non – Tax Income increased by 32% Calculation -> ( 29 – 22 ) / 22 = 32%
  • 15. Government expenditures
  • 16. 1990 - 1991
  • 17. 2000 - 2001
  • 18. 2005 - 2006
  • 19. Conclusion Expenditures due to defense has decreased by 13.33% Calculation -> (13 – 15)/15 = 13.33% Interest payment by government has increased by 24.13% Calculation -> (36 – 29)/29 = 24.13% Subsidies provided by the government decreased by 41.2% Calculation -> (10 – 17)/17 = 41.2%
  • 20. Indian exports of services
  • 21. India’s -Export of Commercial Services India has become one of the top five exporters of services amongst developing countries. India’s exports of services are mainly to the European countries and the US. India’s export services growth rate was 33.3% in 2005-06, 36.9% in 2006-07, 25.9% in 2007-08 and 16.3 in 2008-09. (Recession) India has been deemed as a major exporter of services in the world with a market share of 2.72% in 2008 as against 0.6% in 1995.
  • 22. The Bright Side of Globalization The rate of growth of the Gross Domestic Product of India has been on the increase from 5.6 per cent during 1980-90 to 7% in the 1993-2001 period. The foreign exchange reserves (as at the end of the financial year) were $ 39 billion (2000-01), $ 107 billion (2003-04), $ 145 billion (2005-06) and $ 180 billion (in February 2007). As per the Forbes list for 2007, the number of billionaires of India has risen to 40 (from 36 last year) more than those of Japan (24), China (17), France (14) and Italy (14) this year.
  • 23. The Dark Side of Globalization The foremost casualty being the agriculture sector. Globalisation has lowered the per capita income of the farmers and increased the rural indebtedness. The agricultural growth of 3.2 percent observed from 1980 to 1997 decelerated to 2 percent subsequently. With more than half the population directly depending on this sector, low agricultural growth has serious implications for the inclusiveness of growth.
  • 24. Impact of Globalization 1. 2. 3. 4. 5. 6. 7. Government Purchases has increased Poverty has been reduced, Employment has increased, Begging by India for economic aid has stopped, Long-term inflation rate has gone down, Scarcity of goods have disappeared, The quality of products available have improved substantially
  • 25. Thank You
  • 26. What do mean by Aggregate Demand? Aggregate demand refers to the demand of goods and services i.e. is the willingness of firms, households, government, customer to buy goods and services.
  • 27. HOW FISCAL POLICY INFLUENCES AGGREGATE DEMAND Fiscal policy refers to the government’s choices regarding the overall level of government purchases or taxes. Fiscal policy influences saving, investment, and growth in the long run. In the short run, fiscal policy primarily affects the aggregate demand.
  • 28. Changes in Government Purchases When policymakers change the money supply or taxes, the effect on aggregate demand is indirect— through the spending decisions of firms or households. When the government alters its own purchases of goods or services, it shifts the aggregate-demand curve directly.
  • 29. Changes in Government Purchases There are two macroeconomic effects from the change in government purchases: The multiplier effect The crowding-out effect
  • 30. The Multiplier Effect Government purchases are said to have a multiplier effect on aggregate demand. Each dollar spent by the government can raise the aggregate demand for goods and services by more than a dollar. The multiplier effect refers to the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.
  • 31. Price Level 2. . . . but the multiplier effect can amplify the shift in aggregate demand. $20 billion AD3 AD2 Aggregate demand, AD1 0 1. An increase in government purchases of $20 billion initially increases aggregate demand by $20 billion . . . Quantity of Output Copyright © 2004 South-Western
  • 32. A Formula for the Spending Multiplier The formula for the multiplier is: Multiplier = 1/(1 - MPC) An important number in this formula is the marginal propensity to consume (MPC). It is the fraction of extra income that a household consumes rather than saves.
  • 33. A Formula for the Spending Multiplier If the MPC is 3/4, then the multiplier will be: Multiplier = 1/(1 - 3/4) = 4 In this case, a $20 billion increase in government spending generates $80 billion of increased demand for goods and services.
  • 34. The Crowding-Out Effect Fiscal policy may not affect the economy as strongly as predicted by the multiplier. An increase in government purchases causes the interest rate to rise. A higher interest rate reduces investment spending. This reduction in demand that results when a fiscal expansion raises the interest rate is called the crowding-out effect. The crowding-out effect tends to dampen the effects of fiscal policy on aggregate demand.
  • 35. (a) The Money Market Interest Rate Price Level Money supply 2. . . . the increase in spending increases money demand . . . r2 3. . . . which increases the equilibrium interest rate . . . (b) The Shift in Aggregate Demand $20 billion 4. . . . which in turn partly offsets the initial increase in aggregate demand. AD2 r AD3 MD2 Aggregate demand, AD1 Money demand, MD 0 Quantity fixed by the Fed Quantity of Money 0 1. When an increase in government purchases increases aggregate demand . . . Quantity of Output Copyright © 2004 South-Western
  • 36. The Crowding-Out Effect When the government increases its purchases by $20 billion, the aggregate demand for goods and services could rise by more or less than $20 billion, depending on whether the multiplier effect or the crowding-out effect is larger.
  • 37. Changes in Taxes When the government cuts personal income taxes, it increases households’ take-home pay. Households save some of this additional income. Households also spend some of it on consumer goods. Increased household spending shifts the aggregate- demand curve to the right. The size of the shift in aggregate demand resulting from a tax change is affected by the multiplier and crowding-out effects. It is also determined by the households’ perceptions about the permanency of the tax change.