Fiscal Policies are Relevant in India

Presented By:Shashank kulshrestha

Sharad prusty

Introduction

IS-LM Equilibrium

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Income, output

Interestrates

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Objectives

• Achieve Desirable Price Levels

• Achieve Desirable Consumption Level

• Achieve Desirable Employment Level

• Achieve Desirable Income Distribution

• Degree of Inflation

Role of fiscal policy in controlling inflation

• Most effective in controlling demand pull inflation

• Higher Direct Taxes

• Lower Government Spending

• Reduction in the amount the government sector borrows each year

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Statistical Data

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Growt rates and composition of Real GDP

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Fiscal policy overview in 2008

• The Central Government was mandated under the FRBM Act, 2003 to reduce its gross fiscal deficit-GDP ratio to three per cent and eliminate its revenue deficit by 2008-09.

• The fiscal correction process was set to continue in 2008-09 in tune with the legislative mandate with the Centre's gross fiscal deficit-GDP ratio budgeted to decline to 2.5 per cent during 2008-09.

• Fiscal consolidation of the Central Government under the FRBM Act, 2003 has been revenue-led, underpinned by a significant increase in the tax-GDP ratio.

• A steady increase in the tax-GDP ratio for the Central Government was led by direct tax revenues, the share of which in total taxes increased from 41.3 per cent in 2003-04 to 52.1 per cent in 2007-08 (RE).

• Within direct taxes, the share of corporation tax increased from 60.0 per cent in 2003-04 to 61.1 per cent in 2007-08 (RE). As proportion to GDP, corporation tax increased from 2.3 per cent to 4.0 per cent over the same period, while the personal income tax increased from 1.5 per cent to 2.2 per cent.

• In the case of indirect taxes, the services tax has emerged as a rapidly growing source of revenue. The share of the service tax in total indirect taxes increased from 5.3 per cent in 2003-04 to 18.0 per cent in 2007-08 (RE).

• As a proportion of GDP, the share increased from 0.3 per cent to 1.1 per cent over the same period. There is a need to bring more services into the tax net in consonance with the rise in the share of the services sector in GDP.

• On the indirect taxes side, the objective has been to integrate the taxes on goods (central excise) and services and finally move to a comprehensive Goods and Services Tax (GST).

• The stock of tax revenues raised but not realised increased by 10 per cent during 2006-07 to Rs. 99,293 crore at end-March 2007.

• The non development expenditure of the Central Government declined from 8.8 per cent of GDP in 2003-04 to 8.3 per cent in 2007-08 (RE) and is further budgeted to come down to 7.4 per cent in 2008-09. Although 80 per cent of non-plan expenditure is obligatory in nature on items like defence, interest payments, subsidy and transfers to the State Governments.

• The share of expenditure on education in the combined expenditure of the Centre and States was budgeted to increase from 10.0 per cent in 2007-08 to 10.8 per cent in 2008-09, and that of health from 4.9 per cent to 5.0 per cent.

• In order to improve transparency and accountability, Ministries are being encouraged to release summaries of their monthly receipts and expenditure to general public (through thei r website) and in particular, disclose scheme-wise funds released to different States.

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Major Achievements

• 12th Largest Economy in the World as per GDP in US Dollars

• 3rd Largest Economy in the World as per GDP in US Dollars (Purchasing Power Parity)

• 2nd Fast Growing Major Economy @ 9.2 %

• Trillion Dollar Economy

Challenges • The high inflation with its resultant tight monetary policy, and the current

account and fiscal deficits continue to remain a cause of concern for the country

• The high rate of inflation is not only because of the supply constraints, but is also attributed to the high capital inflows seen until the recent past as well as government’s off-budget borrowings to run its various programmes.

• The tight monetary policy being pursued by the government has already caused a slowdown in the credit-funded consumption, rise in the domestic cost of capital

• India’s fiscal policy does not quite complement the monetary policy to compress the demand, resulting in inflation rate still being in the high trajectory

• The combined fiscal deficit of the centre and the States is expected• To touch 10 percent of GDP this fiscal year, if off-budget liabilities are taken

into account• Need for the removal of supply constraints to reduce inflationary pressures.• Infrastructural bottlenecks remain to be another challenge for the

government

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