Fiscal Policy1
Transcript of Fiscal Policy1
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Fiscal Policy and Budget
Presented By: Group 2
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Fiscal Policy-Meaning The word fisc means µstate treasury¶ and fiscal
policy refers to policy concerning the use of
µstate treasury¶ or the govt. finances to achievethe macroeconomic goals.
³any decision to change the level, compositionor timing of govt. expenditure or to vary the
burden ,the structure or frequency of the taxpayment is fiscal policy.´
- G.K. ShawG.K. Shaw
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O bjectives of Fiscal Policy
It has 2 major objectives:
i. GENERAL obj-. aimed at achievingmacroeconomic goals
ii. SPECIFIC obj-. relating to any typical
problems of an economy
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Fiscal Policy And
Macroeconomic Goals Economic Growth: By creating conditions for increase in
savings & investment.
Employment: By encouraging the use of labour-absorbing technology
Stabilization: fight with depressionary trends and
booming (overheating) indications in the economy
Economic Equality: By reducing the income and wealthgaps between the rich and poor.
Price stability: employed to contain inflationary and
deflationary tendencies in the economy.
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Instruments of Fiscal Policy Budgetary surplus and deficit
Government expenditure
Taxation- Direct and indirect
Public debt
Deficit financing
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Sources of Revenue Revenue receipts:
Tax - Direct and Indirect
Direct Taxes: Personal Income Tax , Corporate tax, Div. Distribution Tax,, Fringe Benefit taxes, Banking CashTransaction Tax
Indirect Taxes: Central Sales Tax, Customs, Service Tax,excise duty.
Non-tax commercial revenue from public enterprises, court
fees, fines etc. Capital receipts:
Small savings, PF, Recovery of loans, External loans.
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Heads of Expenditure
Revenue Expenditure includes:
Salaries, subsidies, interest payments, defense
Capital Expenditure
Buildings and construction, increase in
inventories like store and stock of food
grains, repayment of public debt
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Stances of Fiscal Policy
Balanced budget - (R=E) => Neutral fiscal policy
Budgetary Deficit - (R<E) => Expansionary fiscal policy Budgetary Surplus - (R>E) => Contractionary fiscal
policy
An accumulated deficit over several years (or
centuries) is referred to as the government debt A deficit is a flow. And a debt is a stock. Debt is
essentially an accumulated flow of deficits
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Deficits Revenue Deficit = Excess of revenue expenditure
over revenue receipts
Primary Deficit - Revenue Deficit - InterestPayments
Capital Deficit - Excess of capital expenditureover capital receipts
Monetized Deficit - Borrowing from RBI for financing budget deficit
Fiscal Deficit - Total receipts < Total expenditure
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Fiscal Deficit
Difference between the government's totalexpenditure and its total receipts
Fiscal deficit can be financed by
borrowing from the Reserve Bank of India(deficit financing)
market borrowing (money market, mainly from banks)
external borrowing disinvestment in PSU
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Where The Rupee Comes From
Composition of Revenue Receipts - Rs.5,25,098 crs
82%
18%
Tax Revenue Non-tax Revenue
Composition of Tax Receipts
16%
26%
19%
14%
18%
Personal Tax Corporte Tax Excise TaxCustomes Duties Non-Tax Revenue
Contribution to Tax Receipts
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1 9 7 0 - 7 1
1 9 7 1 - 7 2
1 9 7 2 - 7 3
1 9 7 3 - 7 4
1 9 7 4 - 7 5
1 9 7 5 - 7 6
1 9 7 6 - 7 7
1 9 7 7 - 7 8
1 9 7 8 - 7 9
1 9 7 9 - 8 0
1 9 8 0 - 8 1
1 9 8 1 - 8 2
1 9 8 2 - 8 3
1 9 8 3 - 8 4
1 9 8 4 - 8 5
1 9 8 5 - 8 6
1 9 8 6 - 8 7
1 9 8 7 - 8 8
1 9 8 8 - 8 9
1 9 8 9 - 9 0
1 9 9 0 - 9 1
1 9 9 1 - 9 2
1 9 9 2 - 9 3
1 9 9 3 - 9 4
1 9 9 4 - 9 5
1 9 9 5 - 9 6
1 9 9 6 - 9 7
1 9 9 7 - 9 8
1 9 9 8 - 9 9
1 9 9 9 - 0 0
2 0 0 0 - 0 1
2 0 0 1 - 0 2
2 0 0 2 - 0 3
2 0 0 3 - 0 4
2 0 0 4 - 0 5
2 0 0 5 - 0 6
2 0 0 6 - 0 7
2 0 0 7 - 0 8
Direct Indirect
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Where Does The Rupee Goes To
Revenue Expenditure - Rs. 5,88,586 crs
9%
29%
12%18%
31%Defence Expendi ture
Interest Payments
Subsidies
Grants to States & Uts
Salaries & Transfer Payments
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 9 7
0 - 7 1
1 9 7
1 - 7 2
1 9 7
2 - 7 3
1 9 7
3 - 7 4
1 9 7
4 - 7 5
1 9 7
5 - 7 6
1 9 7
6 - 7 7
1 9 7
7 - 7 8
1 9 7
8 - 7 9
1 9 7
9 - 8 0
1 9 8
0 - 8 1
1 9 8
1 - 8 2
1 9 8
2 - 8 3
1 9 8
3 - 8 4
1 9 8
4 - 8 5
1 9 8
5 - 8 6
1 9 8
6 - 8 7
1 9 8
7 - 8 8
1 9 8
8 - 8 9
1 9 8
9 - 9 0
1 9 9
0 - 9 1
1 9 9
1 - 9 2
1 9 9
2 - 9 3
1 9 9
3 - 9 4
1 9 9
4 - 9 5
1 9 9
5 - 9 6
1 9 9
6 - 9 7
1 9 9
7 - 9 8
1 9 9
8 - 9 9
1 9 9
9 - 0 0
2 0 0
0 - 0 1
2 0 0
1 - 0 2
2 0 0
2 - 0 3
2 0 0
3 - 0 4
2 0 0
4 - 0 5
2 0 0
5 - 0 6
2 0 0
6 - 0 7
2 0 0
7 - 0 8
Revenue Expendi ture Capital Expendi ture
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R
a t i o of
G o v t .E
x p e n d i t ur e
R a t i o
of E x p e n d i t ur e
3 5 %
4 0 %
4 5 %
5 0 %
5 5 %
6 0 %
6 5 %
1980-81
1981-82
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
D e v e l o p m e n
t a l E x p e n d i t ur e
N o n - d e v e l o p m e n t a l E x p e n d i t ur e
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Fiscal Deficit and its Financing
1980-81
15%
32%
22%
30%
Ext ¡ ¢ £
¤
F¥
¢ £ ¢ ¦
¥
¢
g M£ ¡
k
t B§ ¡ ¡ §
w¥
¢
g
Oth ¡
B§ ¡ ¡ §
w¥
¢
g ̈
¡ £
w¥
¢
g f ¡ § ©
£
h B£
¤
£ ¢ ¦
1990-91
%
18%
50%
25%
2000-01
6%
62%
33%
-1%
2007-0
7%
77%
29%
-13%
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Fiscal Responsibility And Budget
Management (FRBM) Bill
Introduced in Lok Sabha in December 2000.
O bjectives include:
1. Long-term macroeconomic stability
2. Inter-generational equity in fiscal management.
It aimed at:1. Reducing revenue deficit
2. Reducing gross fiscal deficit3. Reducing the Public debt
4. No Borrowing from the RBI
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Sticking to FRBM Targets
Items Units
2005-
06
2006-
07
2007-
08*
Central Government Finances
Revenue deficit/ GDP % 2.6 2 1.5
Fiscal deficit/ GDP % 4.1 3.7 3.3
Gross Tax/ GDP % 10.3 11.4 12.0
Expenditure/ GDP % 14.2 14.1 14.0**
Debt/ GDP % 65.1 64.4 58.6
*From Budget proposals ** SBI share transfer excluded
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Fiscal Deficit
Fi al D fi it a a p r nt of GDP
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
6.50%
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08