Fiscal Policy

.with respect to investment

Presented by:
RAJESH KUMAR
MBA(Finance), ACS, AIII

Meaning:
The policy of the government regarding the level of
government spending and transfers and the tax
structure.
OR
Fiscal policy is the use of government revenue
collection (taxation) and expenditure (spending) to
influence the economy.

Stages or Types:
1)Neutral fiscal policy : It is usually undertaken when an
economy is in equilibrium. Government spending is fully
funded by tax revenue and overall the budget outcome has a
neutral effect on the level of economic activity.
2) Expansionary fiscal policy: It involves government

spending exceeding tax revenue, and is usually

undertaken during recessions.
3)Contractionary fiscal policy: It occurs when
government spending is lower than tax revenue, and is
usually undertaken to pay down government debt.
(Source: Wikipedia)

Objectives:

Economic stabilization
Economic growth (GDP growth 3.986% in 2012-13)
Employment generation (Unemployment 3.8% in 2011 est.)
Reduction in inequalities of income and wealth
Increase in capital formation
Price stability and control of inflation (4.7% ; April 2013)
Effective mobilization of resources
Balanced regional development
Increase in national income
Development of infrastructure
Foreign exchange earnings(Foreign reserves $295.29 billion in
Oct.2012)

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Note:- Data on FDI have been revised since April 2011 to expand the coverage.

Budget:
Budget refers a financial statement which shows
anticipated revenue and anticipated expenditure in an
accounting year.
or
Statement of estimated receipts and expenditures of
the government in respect of every financial year which
runs from 1 April to 31 March.

Types of budget:
(a) Revenue Budget: The Revenue Budget shows the
current receipts of the government and the expenditure
that can be met from these receipts.
(b) Capital Budget: The Capital Budget is an account of
the assets as well as liabilities of the central
government, which takes into consideration changes in
capital. It consists of capital receipts and capital
expenditure of the government.

GOVERNMENT BUDGET

REVENUE BUDGET

REVENUE
RECEIPTS

TAX
REVENUE

DIRECT
TAX

REVENUE
EXPENDITURE

CAPITAL
RECEIPTS

PLAN CAPITAL
EXPENDITURE

NON-TAX
REVENUE

INDIRECT
TAX

CAPITAL BUDGET

PLAN
REVENUE
EXPENDITURE

NON-PLAN
EXPENDITURE

CAPITAL
EXPENDITURE

NON-PLAN
CAPITAL
EXPENDITURE

Capital Budget(Account):

Capital Receipts: The main items of capital receipts are loans

raised by the government from the public which are called
market borrowings, borrowing by the government from the
Reserve Bank and commercial banks and other financial
institutions through the sale of treasury bills, loans received
from foreign governments and international organizations, and
recoveries of loans granted by the central government.
(Rs 6,08,967 Crore for the year 2013-14)
Capital Expenditure: This includes expenditure on the
acquisition of land, building, machinery, equipment,
investment in shares, and loans and advances by the central
government to state and union territory governments, PSUs
and other parties. (Rs16,65,297 Crore for the year 2013-14)

Capital Expenditure:
Capital expenditure is also categorized as plan and non plan
in the budget documents:

a) Plan capital expenditure: Plan capital expenditure,

like its revenue counterpart, relates to central plan
and central assistance for state and union territory
plans. (Rs 5,55,322 Crore for the year 2013-14)
b) Non-plan capital expenditure: Non-plan capital
expenditure covers various general, social and
economic services provided by the government.
(Rs 11,09,975 Crore for the year 2013-14)

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Revenue Budget(Account):
Revenue Receipts: Revenue receipts are divided into
tax and non-tax revenues. Tax revenues consist of the
proceeds of taxes and other duties levied by the
central government. (Rs 10,56,331 Crore for the year 2013-14)
Revenue Expenditure: Broadly speaking, revenue
expenditure consists of all those expenditures of the
government which do not result in creation of
physical or financial assets.

(Rs 1,72,252 Crore for the year 2013-14)

Revenue Receipts:

1)

Tax revenues: It is an important component of revenue receipts,

comprise of direct taxes which fall directly on individuals (personal
income tax) and firms (corporation tax), and indirect taxes like excise
taxes (duties levied on goods produced within the country), customs
duties (taxes imposed on goods imported into and exported out of
India) and service tax. (Rs 8,84,078 Crore for the year 2013-14)
Non-tax revenue: The central government mainly consists of
interest receipts (on account of loans by the central government
which constitutes the single largest item of non-tax revenue),
dividends and profits on investments made by the government, fees
and other receipts for services rendered by the government. Cash
grants-in-aid from foreign countries and international organizations
are also included.
(Rs 1,72,252 Crore for the year 2013-14)

Tax Revenue:
a)

b)

Direct tax: Direct taxes which fall directly on

individuals (personal income tax) and firms
(corporation tax). Other direct taxes like wealth tax,
gift tax and estate duty.
(Rs 5,64,337 Crore
for the year 2013-14)
Indirect tax: Indirect taxes like excise taxes (duties
levied on goods produced within the country), customs
duties (taxes imposed on goods imported into and
exported out of India) and service tax.
(Rs 5,04,423 Crore for the year 2013-14)

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Revenue Expenditure:
Plan revenue expenditure: Plan revenue expenditure
relates to central Plans (the Five-Year Plans) and
central assistance for State and Union Territory Plans.
(Rs 4,43,260 Crore for the year 2013-14)
Non- plan revenue expenditure: Non-plan
expenditure, the more important component of revenue
expenditure, covers a vast range of general, economic
and social services of the government. The main items
of non-plan expenditure are interest payments, defence
services, subsidies, salaries and pensions. (Rs 9,92,908
Crore for the year 2013-14)

Measures of Government Deficit:

Budget deficit: When a government spends more than
it collects by way of revenue, it incurs a budget deficit.
Revenue Deficit: The revenue deficit refers to the
excess of governments revenue expenditure over
revenue receipts.
(Rs 3,79,838 Crore for the
year 2013-14)
Revenue deficit = Revenue expenditure
Revenue receipts

Fiscal Deficit : Fiscal deficit is the difference between

the governments total expenditure and its total receipts
excluding borrowing
Gross fiscal deficit = Total expenditure (Revenue
receipts + Non-debt creating capital receipts)
Non-debt creating capital receipts are those receipts
which are not borrowings and, therefore, do not give
rise to debt. Examples are recovery of loans and

the proceeds from the sale of PSUs. The fiscal

deficit will have to be financed through
borrowing. Thus, it indicates the total borrowing
requirements of the government from all sources .
(Rs 5,42,499 Crore for the year 2013-14)

Gross fiscal deficit = Net borrowing at home +

Borrowing from RBI + Borrowing from abroad
Net borrowing at home includes that directly borrowed
from the public through debt instruments (for example,
the various small savings schemes) and indirectly from
commercial banks through Statutory Liquidity Ratio
(SLR).
* Fiscal deficit is 4.89 % of GDP (2013), The
Economic Times

Primary deficit: To obtain an estimate of borrowing

on account of current expenditures exceeding revenues,
we need to calculate what has been called the primary
deficit. It is simply the fiscal deficit minus the interest
payments.
(Rs 1,71,814 Crore for the year 2013-14)

Gross primary deficit = Gross fiscal deficit net

interest liabilities
Net interest liabilities consist of interest payments
minus interest receipts by the government on net
domestic lending.

Revenue
deficit

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Fiscal
marksmanship

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Debt:
Budgetary deficits must be financed by either taxation,
borrowing or printing money.
Governments have mostly relied on borrowing, giving
rise to what is called government debt.
The concepts of deficits and debt are closely related.
Deficits can be thought of as a flow which add to the
stock of debt.
If the government continues to borrow year after year, it
leads to the accumulation of debt and the government has
to pay more and more by way of interest.
These interest payments themselves contribute to the debt.
(Public debt 67.59% of GDP in 2012 est.)

Interest on Outstanding Internal Liabilities of Central Government

OUTSTANDI
NG
INTERNAL
LAIBLITIES
(end March)

INTEREST
ON
INTERNAL
LAIBILITIES
(In Cr.)

AVERAGE
COST OF
BORROWING
(p.a.)

2004-5

1603785

105176

7.2

2005-6

1752403

111476

7.0

2006-7

1967870

128299

7.3

2007-8

2247104

149801

7.6

2008-9

2565991

170388

7.6

2009-10

2874683

192567

7.5

2010-11

3212521

212707

7.4

2011-12(RE)

3738151

253995

7.9

2012-13(BE)

4284660

296940

7.9

Source: Union Budget documents

Perspectives on the Appropriate Amount of

Government Debt:

There are two interlinked aspects of the issue. One

is whether government debt is a burden and two,
the issue of financing the debt.
The burden of debt must be discussed keeping in
mind that what is true of one small traders debt
may not be true for the governments debt, and one
must deal with the whole differently from the
part.
Unlike any one trader, the government can raise
resources through taxation and printing money.

By borrowing, the government transfers the burden of

reduced consumption on future generations.
This is because it borrows by issuing bonds to the
people living at present but may decide to pay off the
bonds some twenty years later by raising taxes.
These may be levied on the young population that have
just entered the work force, whose disposable income
will go down and hence consumption.
Thus, national savings, it was argued, would fall. Also,
government borrowing from the people reduces the
savings available to the private sector.
To the extent that this reduces capital formation and
growth, debt acts as a burden on future generations.

Note : Data for 2012-13 is as per Advance Estimates released by CSO.

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Conclusion:

Indias fiscal situation requires immediate attention, high growth

and low interest rate will not take care of the problem in the long
run.
In, fact growth rate in recent years have been significantly lower,
at present India's economic growth rate is 3.986 % in the last
quarter of 2013.
Indias external position is relatively strong, in terms of trade flow,
reserves, foreign exchanges, but up to some extent monetary and
exchange rate policies are biased to compensate the fiscal deficit.
Coordination of fiscal policy with monetary and exchange rate
policy would be better than letting later to adjust fiscal looseness.
A narrow focus on deficit or debt can lead to neglect the long run
growth.

Govt. has to think about revenue enhancing tax reforms

because there has ample scope of improving indirect tax
structure. Tax reform is an essential step towards increasing
govt. revenue as well as reduce microeconomic distortion.
Fiscal adjustment is going to major agenda for the govt.
they have to plan it intelligently rather than seeing as a
crisis.
Govt. has to reconstruct their expenditure.
Hence we can say that fiscal measures reduce the intensity
of business fluctuations (Inflation & Recession) but only
these alone are not sufficient to correct fluctuations
significantly , therefore the role of discretionary fiscal
policy and explicit changes in tax rates and Govt.
Expenditure are required to cure recession and curb
inflation.

Thank you..

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