1. Fiscal Policy

2. Meaning Of Fiscal Policy
“It refers to a policy concerning the use of state treasury or the
government finances to achieve the macro-economic goals” or
“Government policy of changing its taxation and public expenditure
programmes intended to achieve its objective”.
“Government uses its expenditure and revenue program to produce
desirable effects on National Income , production and employment”.

3. Counter Cyclical Fiscal Policy
Fiscal or Budgetary Policy:
Are the Revenue and Public Expenditure Policy
It is based on the relationship between them
It generates additional purchasing power during depression
Contracts purchasing power during expansion

4. Importance of Fiscal Policy
Government activities are enlarged.
Tax- Revenue and Expenditure accounts for large proportion of GNP.
Government effects the Economic activities through gap between government receipts and borrowings.
It indicates the level of overall borrowings by the government.
It is the indicator of fiscal health of the economy.

5. Objectives of Fiscal Policy
To mobilise resources for Economic Growth
To promote growth in Private Sector
Equitable distribution of Income and wealth
Restrain inflationary forces in the Economy

6. Tools of Fiscal Policy

7. Public Expenditure (Payments)
Revenue Expenditure
Interest Payments
Major Subsidies
Defense
Capital Expenditure
Expense on administration
Repayment of Loans
Extension of fresh loans to the state govt by the central
Loans to public enterprise
Expense on Irrigation project
Sectoral development

8. Public Revenue (Receipts)
Tax
Non- Tax Receipts
Fines and Penalties
Fees
Profits of PSU
Govt Interest
Grants and Gifts
Capital Receipts
Recovery of Govt loans
Disinvestment of PSU
Market Borrowings – Internal and International sources

9. Public Revenue (Receipts)
Direct Tax
Income Tax
Corporate Tax
Wealth Tax
Gift Tax
Indirect Tax
Sales Tax
Excise Tax
Custom
Service Tax

10. Effect of Public Expenditure on the Economy
An increase in PE raises the level of GNP.
PE increases the purchase of goods and services
Increases household incomes
Increases Govt Indirect tax revenues
Increase the flow of funds in the economy
Increases private Income and thereby the Private Expenditure

11. Effect of Public Revenue on the Economy
Total amount received.
Taxation is a measure of transferring funds from private purses to the public coffers.
Withdrawal of funds from the private use.
Has a deflationary impact on GNP
Reduces Disposable income and reduces private expenditure

12. Concept of Deficit
Deficit:
Total government expenditure is more than government receipts.
Budgetary Deficit: Total Expenditure – Total Revenue
Revenue Deficit: Revenue Expenditure – Revenue Receipts
Fiscal Deficit: Total Expenditure – Total Revenue (Excluding Govt Borrowing)
Primary Deficit: Fiscal Deficit – Interest Payments

13. What is Fiscal Deficit? Fiscal deficit:
Is the difference between what the government spends and what it earns.
It is expressed as a percentage of GDP.
India's fiscal deficit was brought down to 3.17% (Rs 1,43,653 crore)
of the gross domestic product in from 3.8% in
The government has promised to cut the deficit further to 2.5% of GDP (Rs 1,33,287 crore) by the end of ,

14. Q1 Receipts & Expenditure of the central Govt
S.No
Item 1
Revenue Receipts
1,26,279
1,33,886
1,49,510 a)
Tax Revenue
93,701
95,672
1,04,652 b)
Non- Tax Revenue
32,578
38,214
44,858 2
Revenue Expenditure
1,58,933
1,80,336
2,17,419
Interest Payments
59,478
65,637
77,882
Major Subsidies
14,041
18,248
21,269 c)
Defence Expense
20,977
26,174
29,861 3
Revenue Deficit (1-2)
32,564
46,450
67,909 4
Capital Receipt
50,872
82,435
1,06,824 A
Recovery of Loan
7,540
8,310
10,633 B
Other Receipt ( PSU disinvestment)
455
912
5,874 c
Borrowing and Other Liabilities
42,877
73,205
90,922 5
Capital Expenditure
31,403
35,985
38,920 6
Total Receipts ( 1+ 4) 7
Total Expenditure 8
Fiscal Deficit ( 1 + 4a + 4b – 7) 9
Budget Deficit ( 6 -7)
13,185
Nil 10
Primary Deficit ( 8- 2a)

15. Q2 Receipts & Expenditure of the central Govt
S.No
Item 1
Revenue Receipts a)
Tax Revenue
2,24,857
2,73,466 b)
Non- Tax Revenue
80,330
77,734 2
Revenue Expenditure
3,84,745
4,46,512
Interest Payments
1,26,540
1,33,945
Major Subsidies
44,633
46,358 c)
Defence Expense
43,967
48,625 3
Revenue Deficit (1-2) 4
Capital Receipt
1,93,261
163,144 A
Recovery of Loan
60,862
12,000 B
Other Receipt ( PSU disinvestment)
4,424 5
Capital Expenditure
1,13,703
67,832 6
Total Receipts ( 1+ 4) 7
Total Expenditure 8
Fiscal Deficit 10
Primary Deficit ( 8- 2a)
Calculate – Revenue Receipt, Revenue Deficit, Fiscal Deficit?

16. Kinds of Fiscal Policy

17. Discretionary Fiscal Policy
1. Anti –Recessionary Fiscal Policy
Aggregate Demand Decreases
Private Investment Fall
Deflationary Gap

19. a) Increase In Govt Expenditure
How does Govt increase Expenditure?
1. Public Works
Building roads, dams, ports, telecommunication links, irrigation
works, electrification of new areas etc…
2. Govt buys various types of goods and materials
3. Employ Labour

20. Increase in Income of suppliers and sellers
What is going to be the effect?
a) Direct Effect
Increase in Income of suppliers and sellers
Increase in demand for capital good
b) Indirect Effect
Consumption Increases
Increase in demand for consumer goods
Expansion in output
Generates Employment and Income
How large should be the increase in expenditure?
“Magnitude of GNP gap caused by the deflationary gap.”

21. How to finance Govt Expenditure or Budget Deficit ?
a) Borrowing
1) Market Loans and Borrowings
2) Small Savings
Govt Borrowing is anti - inflationary
Borrow from the public
Govt competes with the businessman ( private investment)
Govt demand will raise the demand for loans
Raise the rate of interest
Will reduce pvt investment
b) Creation of New Money- Deficit Financing
Will not reduce pvt investment
Full expansionary rise in govt expenditure can be realised
“Monetisation of Budget deficit”

22. b) Reduction in Taxes What is going to be the effect?
Increase in the Disposable Income
Increase in Consumption
Employment will increase
National Income and output
Lead to increase in “Budget Deficit”
Need to be financed by Borrowing or Creation of Money.

23. Deficit Financing and Inflation
Countries (Developing) need to promote Economic Growth.
Resources required for development exceeds the amount which can be raised by normal ways: taxation, borrowing, surpluses etc.
Economic development can be achieved by Investment.
For Investment Govts needs to resort to Deficit Financing.
Does Deficit Financing leads to Inflation?
“NOT NECESSARY”
If the supply of output (Consumer goods) is also increasing with demand
But in short run it might turn inflationary in developing economies as there is dearth of capital and long term Investment projects does not add to supply of consumer goods.

24. Policy Option
What is better Govt Expenditure or Taxes for stabilization?
Depends on the Role of Public Sector.
If Public sector can overcome the failure of free market system.
However Public sector are inefficient and involves waste of scarce resources then Taxation are better options.
Also depends upon the magnitude of effect of Expenditure and Tax Multiplier.

25. 2. Anti –Inflationary Fiscal Policy
Aggregate Demand Increases
Private Investment Rises
Inflationary Gap

27. a) Reducing Govt Expenditure
How does Govt reduce Expenditure?
Reducing expenditure on non-development or unproductive heads like Defense, Subsidies, transfer payments
Decrease in income
Reduces excess demand

28. b) Increasing Taxes What’s going to happen?
Increase in Taxes (income, wealth, corporate)
Reduces the disposable income
Consumption reduces
Aggregate demand reduces
Leads to increase in “Budget Surplus”

29. Disposing Of Budget Surplus
1) Retiring Public Debt
Pay back the outstanding debt
Would weaken its anti-inflationary effect
Add money supply to the public
Public will spend money
Increase consumption demand
Expansion of money supply would lower rate of interest
2) Impounding of Public Debt
Surplus to be kept idle

30. Non- Discretionary Fiscal Policy
Taxes and Expenditure vary automatically with changes in
National Income.
With built in stabilizers recession and inflation will be shorter
and less intense.
1) Personal Income Taxes
Direct relationship in between tax revenue and level of income
Higher National Income, citizen have to pay higher taxes, which reduces the disposable income and the consumption demand.
Fall in national income in recession, lower taxes but aggregate demand does not fall.
2) Corporate Income Taxes
Companies pay percentage of profits as tax.
Revenue rises during inflation which reduces aggregate demand.
Revenue falls in recession which tend to offset the decline in demand.

31. Non- Discretionary Fiscal Policy
3) Transfer Payments ( Unemployment & Welfare benefits, subsidies,)
It’s a fiscal instrument which redistributes income in favor of poor.
In recession Transfer Payments increases, Govt Expenditure increases and increases aggregate demand
In prosperity phase, transfer payments decreases, reduces demand and inflation.
4) Corporate Dividend Policy
Corporate follow a stable dividend policy
Permits individual to spend more during recession
Less during prosperity phase
Success of this largely depend upon tax compliance, honest declaration
of income, a stable dividend policy and transparent economic system.

32. Implication of Large Fiscal Deficit
Borrow from within and outside the country Leads to increase in public debt and its burden
2) Financing through Deficit financing Leads to creation of Money and may lead to rise in prises or Inflation
3) Adversely effects Economic Growth
Due to large revenue deficit a smaller amount are left for productive investment in Infrastructure and social capital (education and health)
More borrowing by Government leaves less resources for Private sector Investment.

33. What should Govt do?
In India, to reduce Fiscal Deficit the Govt has been curtailing Capital Expenditure.
But it effects the Economic Growth
The Govt needs to cut Revenue Expenditure and raise Revenue receipts ( mobilising Taxation)

34. FRBM – Fiscal Responsibility and Budget Management
Fiscal Deficit : 6.4%
Revenue Deficit 08-09: 4.5%