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FISCALPOLICYOFINDIAPREPARED BY:-

MEGHA OZA (1006)ALPA PATEL(1007)HELI MODI (1008)ROMA MEHTA (1009)JUHI AGRAWAL(1010)


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OVERVIEW

Fiscal policy play an important role in the economic

and social set up of the country.

An effective fiscal policy consists of policy decisions

relating to the entire financial structure of the

government including tax revenue, public

expenditure, loans, transfers, debt management,budgetary deficit, and so on.


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It tries to attain a proper balance among these units toachieve the best possible results in terms of economic

goals.

Harvey and Johnson defined it as Changes ingovernment expenditure and taxation designed to

influence the patter and level of activity.

According to G.K. Shaw, We define fiscal policy to

include any design to change the price level,composition or timing of government expenditure or tovary the burden, structure of frequency of the taxpayment.


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OBJECTIVES

To mobilize adequate resources for financing various

prog and projects adopted for economic development.

To raise the rate of savings and investment forincreasing the rate of capital formation.

To promote necessary development in the privatesector through fiscal incentive.

To arrange an optimum utilization of resources.


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To control the inflationary pressures in economy in

order to attain economic stability

To remove poverty and unemployment

To attain the growth of public sector

To reduce regional disparities

To reduce the degree of inequality in the distribution

of income and wealth


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ASPECTS OF FISCAL POLICY

Taxation policy

Public expenditure policy

Public debt policy

Deficit financing policy


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TAXATION POLICY

Important sources of revenue of the government of

India. The government levies both direct and indirect

taxes.

Direct taxes are progressive in nature while most

indirect taxes are regressive in nature.


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Objectives :

Mobilization of resources for financing economic

development

Formation of capital by promoting saving and investmentthrough time deposits, investment in government bonds,

units, insurance, and so on.

Attainment of quality in the distribution of income andwealth through the imposition of progressive direct taxes.

Attainment of price stability by adopting an anti-inflationary taxation policy.


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PUBLIC EXPENDITURE POLICY

It has been creating a serious impact on theproduction and distribution patterns of theeconomy.

Features of the policy:

Development of infrastructure. Development ofpower projects, railways, road, transportationsystem, bridges, irrigation projects, hospitals,educational institutions.


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Development of public enterprises. The

development of heavy and basic industriesinvolves huge investment and risk.

Support to private sector. Providing necessary

support to the private sector for the establishment

of industry and other projects

Social welfare and employment programs.Attaining various social welfare programs and

stress on employment generation programs.


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DEFICIT FINANCING POLICY

Deficit financing indicates the government taking a

loan from the reserve bank of India in the form of

issuing fresh currency.

Considering the low level of income, low savings rate

and capital formation, the government is increasingly

taking recourse to deficit financing.


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It is a kind of forced savings.

Deficit financing helps the country by providing

necessary funds.

Must be kept within the manageable limit.


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PUBLIC DEBT POLICY

In the post independence period, the central governmenthas been raising a good amount of public debt in order tomobilize resources to meet its developmentalexpenditure.

Internal debt:

Amount of loan raised, from within the country by thegovernment. It is raised from the open market by issuingbonds and cash certificates.

Borrowing from commercial banks and RBI.


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External debt:

Loan from external sources, from abroad, in theform of foreign capital, technical know-how, and

capital goods.

Borrowing from international funding agencies.

Inter-governmental loans from various developedcountries.


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RECENT FISCALPOLICYREFORMS

Reduction of rates of direct taxes

Reform in indirect taxes

Reduction in volume of subsidies

Reduction in fiscal deficit.

Disinvestment in public sector


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SUGGESTIONSFORNECESSARY

REFORMSIN FISCAL POLICY:

o Progressive taxes :- The tax structure of thecountry should try to infuse more progressiveelements so that it can put a heavier burden on therich and lighter burden on the poor. Necessary

amendments must be made in respect of irrigationtax, sales tax,excise duty ,land revenue, propertytaxes, and so on.

o Agricultural taxation :- the tax net of countryshould be extended to the agricultural sector fortapping the huge amount of revenue from richagriculturists.


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Broad based taxation:- A broad based tax netwould cover increasing numbers of the populationwith taxable capacity.

Checking tax evasion: Adequate measures must betaken to check the problem of tax evasion in thecountry. Tax laws should be made stricter forprosecuting tax evaders. The tax machinery should be

made more efficient and honest to gear up itsoperations. Tax rate should be reduced to encouragethe growing trend of tax compliance.


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Increasing reliance on direct taxes:- The tax

machinery should rely more on direct taxes than

indirect taxes. Accordingly the tax machineryshould try to introduce wealth tax, estate duty, gift

tax, expenditure tax, and so on.

Simplified tax structure:- The tax structure and

rules of the country should be simplified to

encourage tax compliance among people and to do

away with unnecessary harassment of tax payer.


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Reduction of non-development

expenditures:- The fiscal policy of the country

should try to reduce the non-development

expenditures of the country. This would reduce the

volume of unproductive expenditure and the

inflationary impact of such expenditure.

Checking black money:- The fiscal policy of

the country should try to check the problem of

black money . In this direction, schemes like VDIsshould be repeated . Tax rates should be reduced.

Corruptions & political interference should be

abolished .


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Raising the profitability PSUs:- The govt.

should try restructure its policy on public sector

enterprises so that efficiency and the rate of return

on capital invested can be raised efficiently. PSUs

should be managed in a rational manner with least

government interference and on commercial lines.Accordingly, the policy of budgetary provisions

for maintaining PSUs should gradually be

eliminated


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MERITS

Capital formation:

Plays an important role in raising the rate of capital

formation in the public and private sectors.

Following is the percent of gdp for respective years:

195010.2%

198022.9%

199724.8%

2000-200427%


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Mobilization of resources:

Helps to mobilize considerable amount of

resources for the developmental projects.

Incentives to savings:

Provides incentives to raise savings rate both in

households and corporate sector.This can be done by various budgetary policies.


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Inducement to private sector:

Private sector gets necessary inducements fromfiscal policy to expand its activities.

By tax concessions, tax exemptions, subsidies and

so on.

Reduction of inequality:

Reduces inequality in distribution of wealth and

income.

Subsidies and grants incorporated in budgets.


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Alleviation of poverty and unemployment:

It makes constant effort to alleviate poverty andunemployment.

E.g.- IRDP,JRY. Policy

Export promotion:

Promotes exports through various budgetary

policies in form of concessions, subsidies and so on.


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SHORTCOMINGSInstability:

Fails to attain stability in various fronts of the economy.

Defective tax structure:

Fails to provide suitable tax structure for the country.

Failed to raise productivity of direct taxes.

Inflation:

Failed to contain inflationary rise in price level.

Increasing public expenditure and deficit financing has

resulted in demand pull inflation.


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Negative return of the public sector:

Negative return on capital investment has becomeserious problem for government.

To prevent it government has to keep budgetary

provisions.

Growing inequality:

Growing inequality in distribution of wealth and

income.

Indirect taxes makes the tax structure regressive.


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AN ASSESSMENT

1. Economic crisis :-

o India faced a severe macroeconomic crisis in1991.

o Reforms in the form of removal of controls &trade barriers along with modernisation ofregulatory instituitions took place.

o A high fiscal deficit of around 9.5% of GDP.

o In 1996-97 fiscal deficit fell to 6.4% of GDP &growth accelarated to 7.5%.


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Indias current fiscal situation is potentially

grave.

Prime solution lies in controlling the fiscal

deficit.

Complicating factors are:-

the existence of off-budget items.

Fiscal policy cannot be analysed in isolation


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2. The Indian Fiscal situation:-

o

Before independence there was a consensus onplanned economic development & state dominance.

o A National Planning Commission was established

in 1950.

o During 1950-80 Indias economic growth averaged3.75% per year.

o In 1980s policy makers began with somepiecemeal reforms.


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3. Financial Repression:-

o India has been a financially repressed economysince 1960s especially since 1969.

o The links of these repression come aboutthrough its implicit tax on the financial system

& growth sequences.

o Repressionists policies included various interest

rate controls, directed credit programmes &

required liquidity & reserve ratios.


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4. Fiscal adjustment:-

o

Crises in Argentina & Indonesia had very higheconomic & social costs.

o India was still in a stable position for the moment.

o The major concern in adjustment is its potential

cost in slowing down economic development.

o The adjustment should be such that it benefits

rather than hurt the poor.


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5. Long-term Fiscal policy changes :-

o The most serious medium & long-term issue that

must be anticipated is the future of the pensionsystem.

o Some demographic trends will help.

o The increase in life expectancy will increase thenumber of years for which pensions are paid,

relative to the number of working years.

o Sufficiently rapid growth of GDP & employmentthe difficulty will ease.


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In general looking at the longer term & at

broader public welfare concerns have three

benefits.

I. Better planning of public expenditure.

II. Improves the pattern of near-term public

expenditure towards spending.

III. Emphasises the need for self-insurance to meet

unavoidable expenditures.


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BIBLIOGRAPHY

Business environment by Shaikh

Saleem

www.wikepadia.com
http://www.wikepadia.com/http://www.wikepadia.com/


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