WHAT IS FISCAL POLICY

?
Fiscal policy deals with the taxation and expenditure decisions of the
government to influence the economy.
Objectives
Increase in capital
formation
Degree of Growth
To achieve desirable price
level
To achieve desirable
consumption level
To achieve desirable
employment level
To achieve desirable
income distribution

Composition
Tax policy
Expenditure
policy
Investment or
disinvestment
strategies
Debt or
surplus
management

TYPES OF FISCAL
POLICY
Neutral Fiscal
Policy

Applies when the budget outcome

has neutral effect on the level of
economic activity where the govt.
spending is fully funded by the
revenue collected from the tax

Expansionary
Fiscal Policy

It is there when there is a higher

budget deficit where the govt.
spending is higher than the revenue
collected from the tax.

Contractionary
Fiscal Policy

It is when there is a lower budget

deficit where the govt. spending is
lower than the revenue collected from
the tax

TWO SCENARIOS (
CHANGE)
Surplus - When the government receives
more than it spends, it has a surplus.
Deficit
If the government spends more than it
receives it runs a deficit.

Fiscal
Deficit

Total
Expenditur
e
that is Revenue
Expenditure +
Capital
Expenditure

Revenue
Receipts

Recoverie
s of Loans

Other
Capital
Receipts

that is all Revenue and Capital

Receipts other than loans taken

FUNDING
Expenditure of government can
be funded by -

Taxation

Borrowings
Consumption of reserves
Sale of Fixed Assets

Internal Borrowing
Borrowings from central
bank
Borrowings from public
treasury bills and Govt
bonds
External Borrowing
World Bank
International Monetary
Fund
Foreign Investments

TAXATION
Direct
taxes

Indirect
taxes

Personal
Income
Tax

Central
excise

Corporate
Income
Tax

Service tax

Tax on Personal
Wealth and
professions
Tax on interest
and dividends
Security
transaction tax

Customs
duty
Central
sales tax

Taxes are the main source

of government revenues

Direct taxes are so

named since they are
charged upon and
collected directly from the
person or organization
that ultimately pays the
tax
Indirect taxes are
charged and collected
from persons other than
those who finally end up
paying the tax

DISTRIBUTION OF
POWER
India has a federal form
of government with
taxing powers and
spending responsibilities
being divided between
the central government
the state government
Cant give complete
ownership to Centre
Planned Expenditure
Non Planned
Expenditure

Expenditure
Central
Government

National Defense, foreign

policy, railways, national
highways, shipping, airways,
post and telegraphs, foreign
trade and banking

State
Government

law and order, fisheries, water

supply and irrigation, and
public health

Both Central forests, economic and social

planning, education, trade
and State
unions, industrial disputes,
Government
price control and electricity

PLANNING FISCAL
POLICY
Fiscal Policy Planning

Planning

Planning Commission

Setup in 1950 - Bring about a

steady and swift rise in the
living standards of Indian
citizens

Budget and 5 year plans to

be steered by PC

Providing employment
opportunities to all

Increase the production

levels in the agricultural as
well as industrial sectors

Budget
Revenue Budget
Expenditure Budget

5 year plans

Every financial Year the

government places before the
legislature , a statement of its
proposed taxing and spending
provisions for legislative debate
and approval
Union Budget , State Budget

GROSS FISCAL DEFICIT

1971-2010
India's expenditure norms remained conservative till the 1980s

TRENDS BEFORE
LIBERALIZATION
Composition of Central
Government Revenue

Composition of Central
Government Revenue
Expenditure

1970 71

1970 71

1990 91

1990 91

TRENDS AFTER GLOBAL

FINANCIAL CRISIS
Composition of Central
Government Revenue

Composition of Central
Government Revenue
Expenditure

2009-10

2009-10

2011-12

2011-12

AGGREGATE
DISBURSEMENTS

FISCAL DEFICIT ON LOCAL

INDUSTRY

EFFECTS OF FISCAL DEFICIT ON

CREDIT CYCLE & GOVERNMENT
REVENUE

EFFECTS OF FISCAL DEFICIT

ON CREDIT CYCLE & FARMERS
SUICIDE

KEYNESIAN VIEW

Favors large government expenditure through deficit financing in order

to employ unused resources
Public debt will prevent the rise in unemployment, limit the impact and
duration of the economic recession
Increased government spending financed by government borrowing.
Intellectual analysis of economic problems
Keynes: The deficit-loving interventionist

RICARDIAN VIEW
An increase in the
government deficit is
equivalent to a decrease
in government savings,
which shifts national
savings leftward. In a
Ricardian world, private
savings increases by an
offsetting amount, so the
final result is no change in
national savings.

NEO CLASSICAL
ECONOMICS
Argues that high government expenditure has a negative
impact on savings, which affects growth. A high government
deficit leaves little for the private sector for investment and puts
upward pressure on interest ratesalso referred as crowding
out.

AN INTERESTING
FACT
Indias total national debt : $426,000,000,000

Thickness of a Rs.1000 note = 0.15mm

Height ???

4000 Km (approx.)

In rupee: Rs. 26,377,000,000,000

CONSEQUENCES OF
REDUCING FD

How to reduce fiscal deficit:

1. Increase Tax Rate:
Decrease DI by T

MPC
Y
T
1 MPC

Decrease C by MPC T
Downward shift of AE line
Decrease in GDP

2. Reduce Government Spending

1
Y
G
1 MPC