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College of Management Studies

( CMS)
IILM Academy of Higher Learning

Economic Environment and


Policy

A PROJECT REPORT
ON
FISCAL POLICIES...
FISCAL POLICY...
Fiscal policy is defined as that part of Government
economic policy which deals with

• TAXATION
• GOVERNMENT EXPENDITURE
• BORROWINGS
• DEFICIT FINANCING & MANAGEMAENT OF
PUBLIC DEBTS of a Economy.

It is the means by which a government adjusts its


levels of spending in order to monitor and influence a
nation's economy. It is the sister strategy to monetary
policy with which a central bank influences a nation's
money supply.

These two policies are used in various combinations in


an effort to direct a country's economic goals.
Fiscal policy is related to Income and Expenditure of
Government.

It refers to Budgetary policy of Government. It is


important for both developing and developed
countries.It is the policy which is concerned with the
management of Government's Taxation system, Public
expenditure and public debt to achieve definite
objectives.

OBJECTIVES OF FISCAL POLICY...


1) Mobilization of resources for rapid economic
development of the country.

2) To increase the rate of savingin the country so that


sufficient financial resources can be obtained from
with in the economy.

3) To increase the investment in the economy, so as


to promote capital formation.

4) Removal of poverty and unemploment.

5) Reduction in economic inequalities.

6) Reduction in regional disparities.

7) To achieve economic stability.

8) Optimum utilisation of resources.

9) To support private sector.

10)To achieve favourable balance in payments.

ADVANTAGES OF FISCAL POLICY...

1)CAPITAL FORMATION- it played a significant


role in capital formation of public and private
sectors. It leads to further economic development
of the nation.

2) INDUCEMENT OF RESOURCES- It has


provided incentives to private sector for investment
and production by several measures. To set up
industries in backward ares, several taxoncessions
has been given.

3)MOBILISATION OF RESOURCES- Helped in


mobilisation of resources . By making use of
measures like taxes, savings, public debt etc.
Government has mobilised sufficient resourses for
the projects necessary for economic development.

4)INCENTIVES OF SAVINGS- Provides several


incentives for savings households and corporate
sectors.
To encourage savings in household sector several
concessions and tax exemptions has been given
on life insurances, NSCs, Provident fund, Bonds
etc..
Tax concessions have also ben given to corporate
sector to enable them to save more and to
replough their profits.

5)DEVELOPMENT OF PUBLIC ENTERPRISES-


The policy has been providing finance for development
of public enterprises. Establishment of basic and heavy
industries involved huge capital and risk. But these
industries play important role in development of nation.
6)SOCIAL WELFARE- Goverment spend huge
amount on public health, eduction, safe drinking water,
welfare of weaker sections of society, child welfare,
women welfare. All this has promoted social welfare in
the economy.

7)ALLEVIATION OF POVERTY & GENERATION OF


EMPLOYMENT OPPORTUNITIES- Fiscal policy has
been endeavour to alleviate poverty. With a view to
provide employment to the poor people of the country
and to enhancing their income level.
Programs such as INTEGRATED RURAL
DEVELOPMENT PROGRAMME, JAWAHAR ROZGAR
YOJNA, NATIONAL RURAL EMPLOYMENT ACT.. is
initiated by Govt.
Subsidy given by the goverment food, kerosene oil,
LPG etc has also benefitted the poor people.

8)REDUCTION IN INEQUALITY OF  
INCOME AND WEALTH­ It reduce inequality of
wealth and income. By the way of progressive income
tax, hiah rates of taxes on luxuries, wealth tax, etc..
govt mobilized resources from the rich class and has
utilized the same on the welfare schemes for poor
people.

9)EXPORT PROMOTION- Goverment has made use


of fiscal policy to promote exports.
DRAWBACKS OF FISCAL POLICY...
1) INFLATION-Deficit financing results in increase in
money supply which results in fall of money and
leads to rises in prices.

2) DEFECTIVE TAX STRUCTURE- In India share of


direct taxes is less than the share of indirect taxes.
Such taxes are burden for poor. Indirect taxes
such as excise duty, VAT etc..are chareged on all
sections of society. So it effects poor section of
society.

3) POOR TAX ADMINISTRATION- Poor tax


administration leads to tax evasion. It failed to
check black money.

4) INEQUALITY OF INCOME- It failed to check


inequality of income.

5) FAILURE OF PUBLIC SECTOR- Various sectors


are running at losses. They failed to generate
adequate return on investment.

6) INCREASE IN NON-DEVELOPMENT INCOME-


Govt spend huge amount on non development
expenses such as defence, election, subsidies.The
policy failed to control these expenses.

7) INCRAESING INTEREST BURDEN- Under this


policy Govt has taken huge public debt both from
external and internal resources.This results in
undue burden on Govt.

8) FAILURE IN ERADICATING POVERTY AND


EMPLOYMENT- Fiscal policy fails in eradication of
poverty and unemployment problem successfully.

9) FAILED TO CHECK REGIONAL DISPARITIES-


Means unequal development of different regions
and states. Failed in reducing regional disparities.
REFORMS FOR FISCAL POLICY ...

1) REDUCTION IN NON DEVELOPMENTAL


EXPENDITURE.

2) AGRICULTURAL TAXATION.

3) INCREASE IN PROFITABILITY OF SECTOR


ENTERPRISES.

4) WIDE SCOPE OF TAXES.

5 ) MORE DIRECT TAXES.

6 ) REDUCTION IN TAX EVASION.

7) PROGRESSIVE TAX STRUCTURE.

8) DISINVESTMENT OF LOSS MAKING PSUs.

9) REDUCING THE PROBLEM OF OVERSTAFFING


IN GOVERNMENT DEPARTMENT.

10) REDUCTION IN SUBSIDIES.


11) ENCOURAGEMENT TO SAVINGS AND
INVESTMENTS

FISCAL POLICY OVERVIEW

● The Union Budget 2008-09 was presented in the


backdrop of impressive growth in the Indian economy
which clocked about 9 per cent of average growth in the
last four years.
● Riding on the path of fiscal consolidation, the Union
Budget 2008-09 was presented with fiscal deficit
estimated at 2.5 per cent of GDP and revenue deficit at 1
per cent of GDP.
● The global financial crisis in the second half of the
financial year which heralded recessionary trends the
world over, also impacted the Indian economy causing
the focus of fiscal policy to be shifted to providing growth
stimulus.
● The Country is facing difficult economic situation, the
cause of which is not emanating from within its
boundaries. However, left unattended, the impact of this
crisis is going to affect us in medium to long term.
● The Interim Budget 2009-2010 is being presented in the
backdrop of uncertainties prevailing in the world
economy. The impact of this is seen in the moderation of
the recent trend in growth of the Indian economy in 2008-
09 which at 7.1 per cent still however makes India the
second fastest growing economy in the World.
● During the first half of the fiscal year, the global spurt in
commodity prices (crude petroleum, food items and
metals) led to increases in domestic prices of essential
items and industrial inputs, putting a severe inflationary
pressure on the economy.
● Since there is no change in the tax base and rates, the
prospects of growth in direct tax collection in the ensuing
financial year will remain unchanged vis-a-vis the revised
estimate for the financial year 2008-09.
● The FRBM Act mandates the Central Government to
specify the annual target for assuming contingent
liabilities in the form of guarantees. Accordingly the
FRBM Rules prescribe a cap of 0.5 per cent of GDP in
any financial year on the quantum of guarantees that the
Central Government can assume in the particular
financial year.
● Assumption of contingent liability in the form of guarantee
by the sovereign helps to leverage private sector
participation in areas of national priorities. In the current
situation, wherein a large number of infrastructure
projects are being cleared for implementation under the
Public Private Partnership (PPP) mode, difficulties are
being faced in reaching financial closure due to the
current uncertainties in the global financial market.
● In order to have prudent management of debt and
greater focus on carrying cost as well as meeting
secondary market liquidity, the government has set up a
Middle Office which in due course will merge with the
proposed Debt Management Office.
● Central Government has stopped playing the role of
financial intermediary for State Government for domestic
market borrowings and the trends in the current year
shows that this transition has been very smooth resulting
in reduction in cost for the State Governments
● Delays in receipts of utilization certificate are broadly
indicative of poor implementation strategy, diversion of
funds or delay in utilization of funds for intended
purposes.
● The process of fiscal consolidation during the FRBM Act
regime has created necessary fiscal space to undertake
much needed social sector expenditure and provide for
higher infrastructure outlays.