Docstoc

The Fiscal Policy

Document Sample
The Fiscal Policy Powered By Docstoc
					          THE FISCAL POLICY


HARISH VENKATACHALAM

                       YADU KRISHNA .D

 APARNA RAGHAVAN

                         SANA NABI

     M. AMBIKA

                        SUMAN SINGH
                                     AGENDA


INTRODUCTION: WHAT IS FISCAL POLICY?


TYPES OF FISCAL POLICY.

FISCAL POLICY AS A TOOL

FISCAL POLICY IN DEVELOPING COUNTRIES.

FISCAL POLICY AND PRICE STABILITY.

FISCAL POLICY AND BUDGET DEFICIT.

MEASURES TO REDUCE FISCAL DEFICIT

CONCLUSION.
               INTRODUCTION
WHAT IS FISCAL POLICY ?
      Fiscal policy refers to the taxation, expenditure
  and borrowing by the government and is an effective
  tool of stabilizing the economy.
GOALS OF FISCAL POLICY.
• Achieving economic stability
• Controlling inflation and recession
• Achieving price stability.
TYPES OF FISCAL POLICY
• DISCRETIONARY FISCAL POLICY:
      Deliberate change in government expenditure and taxes to
 influence national output and prices.


• NON-DISCRETIONARY FISCAL POLICY:
   Built-in tax and expenditure mechanism so designed that
 taxes and government spending vary automatically with
 changes in national income.
DISCRETIONARY FISCAL POLICY
• Tool to cure recession.
      Recession is a phase when there is a lot of
  idle or unutilized productive capacity. There
  are two fiscal methods to get the economy
  out of recession.
         - Increase in government expenditure
         - Reduction of taxes.
DISCRETIONARY FISCAL POLICY
(contd.)

• Tool to control inflation:
           Inflation is a period when there is an
  increase in demand leading to increase in
  prices in the economy. Fiscal policy measures
  to control inflation are:
        - Reducing government expenditure.
        - Increasing taxes.
NON-DISCRETIONARY FISCAL POLICY
 Non-discretionary fiscal policies automatically raise
  aggregate demand in times of recession and reduce
  aggregate demand in times of inflation. It includes a
  built-in tax and expenditure pattern that vary with the
  changes in the National Income.

Such taxes are:-
      Personal Income Tax

     Corporate Income Tax

       Transfer Payments
   Corporate Dividend Policy
FISCAL POLICY IN DEVELOPING COUNTRIES

To mobilize resources for economic growth
  Capital formation is of strategic importance in the
 matter of rapid economic development and hence
 the importance of public finance in underdeveloped
 countries.
     - Tools for mobilizing resources
                   Taxation
           Government borrowings
ROLE OF TAXATION IN MOBILISING RESOURCES

  Taxation is an important instrument of resource
  mobilization to raise savings to national income ratio and
  also cuts down consumption and thereby controls
  inflation.

  Taxes can be imposed :
• Directly through highly progressive taxes on income and
  profits.
• Indirectly through excise duties and sales tax on luxury
  goods.
  ROLE OF TAXATION IN SAVINGS AND
            INVESTMENT
  The following measures can be taken to promote
  investments and savings:
• Interest on private savings such as bank deposits,
  National Savings Certificates be exempted from tax.
• Provide tax holidays to promote private investments.
• Reduction in excise duties on domestically produced
  goods.
GOVERNMENT BORROWINGS AND RESOURCE
MOBILISATION

• In developing economies government borrow in
  order to finance schemes of economic
  development.
• Government borrowings takes two forms:
    - Market loan: Government sells to the public
  negotiable government securities of varying
  terms and duration.
    - Small savings: Public borrowing which are not
  negotiable and are not bought and sold in capital
  market.
FISCAL POLICY AND PRICE STABILITY
• High degree of fiscal deficit leads to excess
  market borrowing by the government which
  leads to inflationary situation.
• To check the rate of inflation fiscal deficit has
  to be reduced through raising revenue of
  government and by reducing government
  expenditure.
FISCAL POLICY AND BUDGET DEFICIT

Budget deficit : government incurs more expenditure on
goods and services than its receipts from taxes and non-
tax revenue.

Excess expenditure financed by borrowing which leads to
rise in income.



Expansion in money supply ultimately leads to inflation.
MEASURES TO REDUCE FISCAL DEFICIT

  In Indian context the following measures can
  be adopted to reduce government
  expenditure:
 Reduction in expenditure on major subsidies.
 Reduction in expenditure on Leave Travelling
  Concessions
 Reduction of interest payments on past debts.
MEASURES TO REDUCE FISCAL DEFICIT
(CONTD.)

  Increase revenue from taxation:
• Adopting policy of moderate taxes as high rates of
  direct taxes leads to tax evasion.
• Preventing hoarding of black money through strict
  enforcement of tax laws.
• Only 2% of population pay income tax therefore to
  increase revenue from taxation tax base should be
  increased
    INDIAN SCENARIO-FRBM ACT
• The FRBMA was notified on July 2, 2004 and came
  into force on July 5, 2004. This Act requires the
  reduction of fiscal deficit and elimination of revenue
  deficit by March 31, 2009.
• The FRBMA requires the Government of India to
  reduce fiscal deficit by a minimum of 0.3 per cent of
  the GDP every year and revenue deficit by 0.5 per
  cent each year, so that the fiscal deficit is not more
  than 3 per cent of the GDP by March 31, 2009.
The reduction in fiscal deficit by adopting
measures of reducing public expenditure and
increasing public revenue will prevent excess
demand in the economy thus helping in
controlling inflation and achieving price
stability.

				
DOCUMENT INFO