Escolar Documentos
Profissional Documentos
Cultura Documentos
Assignment No: 02
Submitted by
EVALUATION
MARKS
1
Introduction to Fiscal Policy:
Before the Great Depression, which lasted from Oct. 29, 1929, to
the onset of America's entry into World War II, the government's
approach to the economy was laissez-faire. Following World War II,
it was determined that the government had to take a proactive role in
the economy to regulate unemployment, business cycles, inflation
and the cost of money. By using a mix of monetary and fiscal policies,
governments can control economic phenomena
2
expenditures, loans, transfers, debt management, budgetary deficit,
etc.
2. To raise the rate of savings and investment for increasing the rate
of capital formation;
3
Role of Fiscal Policy in Economic Development:
The fiscal policy of the country is trying to attain both these two
objectives during the plan periods.
4
During the First, Second and Third Plan, additional taxation
alone contributed nearly 12.7 per cent, 22.8 per cent and 34 per cent
of public sector plan expenditure respectively. The shares during the
Fourth, Fifth, Sixth and Seventh Plan were 27 per cent, 37 per cent
22 per cent and 15 per cent respectively.
5
increasing at a galloping rate. In 1992-93, the public expenditure as
percentage of GDP was around 30 per cent.
7
Accordingly, Dr. V.K.R.V. Rao observed, “Deficit financing is
the name of volume of those forced savings which are the result of
increase in prices during the period of the government investment.
Thus deficit financing helps the country by providing necessary funds
for meeting the requirements of economic growth but at the same
time it also create the problem of inflationary rise in prices. Thus the
deficit financing must be kept within the manageable limit.”
As the taxation has got its limit in a poor country like India due
to poor taxable capacity of the people, thus the Government is taking
recourse to public debt for financing its developmental expenditure.
In the post-independence period, the Central Government has been
raising a good amount of public debt regularly in order to mobilise a
huge amount of resources for meeting its developmental expenditure.
Total public debt of the Central Government includes internal debt
and external debt.
Internal Debt:
8
External Debt:
10
Fiscal policy of the country has been making constant
endeavour to reduce the inequality in the distribution of income and
wealth. Progressive taxes on income and wealth tax exemption,
subsidies, grant etc. are making a consolidated effort to reduce such
inequality. Moreover, the fiscal policy is also trying to reduce the
regional disparities through its various budgetary policies.
(i) Instability:
11
(ii) Defective Tax Structure:
Fiscal policy has also failed to provide a suitable tax structure for
the country. Tax structure has failed to raise the productivity of direct
taxes and the country has been relying much on indirect taxes.
Therefore, the tax structure has become burdensome to the poor.
(iii) Inflation:
12
Growing trend of tax evasion has made the tax machinery
ineffective for the purpose. Growing reliance on indirect taxes has
made the tax structure regressive.
The fiscal policy of the country should try to reduce the non-
developmental expenditure of the country. This would reduce the
volume of unproductive expenditure and can reduce the inflationary
impact of such expenditure.
The fiscal policy of the country should try to check the problem
of black money. In this direction schemes like VDIS should be
repeated. Tax rates should be reduced. Corruption and political
interference should be abolished. Smuggling and other nefarious
activities should be checked.
14
commercial lines. Accordingly, the policy of budgetary provisions for
maintaining the PSUs should gradually be eliminated.
The peak rate of income tax was reduced to 30 per cent in 1997-
98 budget. This has resulted in an increase in the share of direct taxes
in total revenue of the country from 19 per cent in 1990-91 to around
61 per cent in 2008-09.
15
cent of GDP has declined from 19.7 per cent of GDP in 1990-91 to
16.9 per cent in 2008-09.
16