QIS COLLEGE OF Engineering & Technology
Venga mukala palem,ongole-523002,
Prakasam (Dt), A.P
Fiscal policy deals with the taxation and expenditure
decisions of the government. These include, tax
policy, expenditure policy, investment or disinvestment
strategies and debt or surplus management.
- Kaushik Basu ( Former Chief Economic Adviser )
1)Capital Formation: The Fiscal policy of the country has been
playing an important role in raising the rate of capital formation in
the public and private sectors. It has created a favorable impact on
public and private sector investment of the country.
2) Mobilization of Resource: the Fiscal policy of the country has
been helping to mobilize a considerable amount of resources
through taxation, public debt and other sources for financing its
various developmental projects.
3) Incentives to savings: the fiscal policy of the country has been
providing various incentives to raise the savings rate both in
household and corporate sector through various budgetary policy
changes viz. tax exemption, tax concession etc…,
4) Inducement to Private sector: The private sector of the country has been getting
necessary inducements from the fiscal policy of the country to expand its activities. Tax
concessions, tax exemptions, subsidies and so on incorporated in the budgets have been
providing adequate incentives to the private sector units engaged in industry,
infrastructure, and export of the country
5) Reduction of inequality: the Fiscal policy of the country has been making constant
Endeavour to reduce the inequality in the distribution of income and wealth. Progressive
taxes on income and wealth tax exemption, grant and so on are making a concerted effort
to reduce such inequalities.
6) Export Promotion: The Fiscal Policy has been making constant efforts to promote
through its various budgetary policies in the form of concessions, subsidies and so on.
7) Alleviation of poverty and Unemployment: It makes constant efforts to alleviate
poverty and unemployment through its various poverty eradication and employment
Defective Tax Structure
Negative Return of the Public Sector
1. Instability: The Fiscal Policy of the country has failed to help attain stability in various
fronts of the economy. The growing volume of deficit financing has created inflationary
rise in price levels.
2. Defective Tax Structure: The Fiscal policy has also failed to provide a suitable tax
structure for the country. The tax structure has failed to raise the productivity of direct taxes.
3. Inflation:- The fiscal policy of the country has failed to contain the inflationary rise in
price level. The increasing volume of public expenditure on non-development heads and
deficit financing has resulted demand-pull inflation.
4. Negative Return of the Public Sector: The negative return on capital invested in the
public sector units has become a serious problem for the Government of Indian. The
government has to keep huge budgetary provisions and thereby creating a huge drainage of
scarce resources of the country.
5. Growing Inequality: The fiscal policy of the country has failed to contain the growing
inequality in the distribution of income and wealth throughout the country. The growing
trend of tax evasion has made the tax machinery ineffective for the purpose while the
growing reliance on indirect taxes has made the tax structure regressive
OBJECTIVES OF FISCAL POLICY
• Increase in capital formation.
• Degree of Growth.
• To achieve desirable price level.
• To achieve desirable consumption level.
• To achieve desirable employment level.
• To achieve desirable income distribution.
The Two Main instruments of fiscal
Individual Income Tax &
Wealth Tax @ 1%
Tax deducted at source
central excise (a tax on
VAT @ 12.5%
service tax @ 12%
Educational cess @ 3%
The central government is responsible for issues that usually concern the country
as a whole like national defense, foreign policy, railways, national
highways, shipping, airways, post and telegraphs, foreign trade and banking.
The state governments are responsible for other items including, law and
order, agriculture, fisheries, water supply and irrigation, and public health.
Some items for which responsibility vests in both the Centre and the states
include forests, economic and social planning, education, trade unions and
industrial disputes, price control and electricity.
The Expenditure budget includes four main revenue expenditures
Total expenditure is Rs.16,65,297 corers (11.5%
Features of fiscal policy
The features of fiscal policy can be explained as below
Common according year for income tax:
Taxation policy has adopted standard accounting year April march for the
purpose of income tax. The change is intended to reduce the malpractices
and raise revenue of tax.
Long term fiscal policy
Since 1986 budget the govt of India has introduced long term fiscal policy
to provide greater certainties in its budgetary policies and to improve the
overall environment of business.
Impact on rural employment
Generation of employment of India has introduced new employment
schemes like jawahar rojgar yojna or strengthened the existing schemes like
integrated rural development program or national rural employment
Unaccounted money has been a constant feature of Indians economy.
Fiscal measures have generally failed to reduce the certain of block
Reliance on indirect taxes:
The tax policy is increasingly becoming regressive in nature by
large dependence on indirect taxes like excise duty (or) custom duty as
compared to that on direct taxes like income
Taxes, corporation tax etc
Inadequate public sector contribution: Contrary to repeated
assertion by the govt of India, public sector continues to be a drain on
the meager resources of the govt.
Introduction of MODVAT:
In 1986 the introduction of MODVAT has helped to reduce
cumulative impact of indirect taxes on manufactured products
Fiscal Deficit = Total Expenditure (that is Revenue Expenditure +
Capital Expenditure) – (Revenue Receipts + Recoveries of Loans
+ Other Capital Receipts)
Currently the deficit is 5.3 % of GDP
Major Changes in Budget(2013-14) to curb
One year surcharge of 10 % on the Superrich.
Increased Duties on Imported or domestic luxury vehicles
such as SUV’s, Mobiles (>Rs.2000), set top boxes, A/c
restaurants and Cigarettes.( bring in Rs.18,000 crores)
Disinvestment Proceedings to be around Rs.55,000 Crore
for this fiscal.
No additional subsidy for fuel, food and fertilizer prices.
Buyers of immovable property other than agriculture land
will have to pay a tax of 1% of the sale where the value
exceeds Rs.50 lakh.
Current account deficit
Supply side gap in Food (inflation)
Only 42800 earn more than 1 crore and 1.9 lakh
people earn more than 10 lakhs!!!!!!
Subbarao, RBI Governor (2012) explained that, India is unique in the sense
that we are one of the economies in the world that is supply constrained. There is
shortage of infrastructure both in quantum and quality. We need to improve that so that
corporates become more competitive, so that economic production becomes more
competitive. First on infrastructure, second, we need to improve supply of
food, especially of protein foods. Third, is skilled labour. It is one thing to have a huge
labour force but another to have a labour force that is not adequately skilled. The skill
shortage is going to be a big threat.
 Dr. Rajiv Kumar Bhatt: Associate Professor of Economics at Banaras Hindu University “Recent Global Recession
and Indian Economy: An Analysis” International Journal of Trade, Economics and Finance, Vol. 2, No. 3, June 2011
 Dr. Kausik Basu: Former Chief Economic Advisor “Fiscal Policy in India: Trends and Trajectory” Supriyo De
 Dr. Sunita Mishra “Has our monetary policy been successful in checking inflation?” International Journal of
Research in Finance & Marketing, http://www.mairec.org May 2012
 Reserve Bank of India – www.rbi.org.in
 Project on Monetary Policy of Reserve Bank of India
 Shweta Punj “Who will blink first? Chidambaram-Subbarao differences erupt into the open after monetary
policy review” November, 2012
 Sharanarthy Jaswanth “Inflation Vs Growth”, Business line, 2011
 Jagdish Bhagwati “RBI overplaying inflation; must focus on growth now”, PTI Nov 21, 2012
 Venky Vembu “Inflation vs growth: Stiglitz is wandering in the wrong continent”, Oct 18, 2012
 India’s Reserve Bank and Government Lock Horns in Growth vs. Inflation Debate, November 1, 2012
 D H Pai Panandiker “The growth versus inflation dilemma”, July 19, 2012
 “Should policy focus on growth or inflation?” DEBATE Business Standard / May 16, 2012
 RBI Governor Duvvuri Subbarao “People are making too much of the finance minister's response”
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