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7/28/2019 Eco Envt of Business V
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Economic Environment
of Business
Indias Fiscal Policy
7/28/2019 Eco Envt of Business V
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: PGM, 2011
Fiscal Policy
Also referred to as Budgetary Policy
It is a policy under which the govt. uses
its revenue & expenditure programs toproduce desirable effects & avoidundesirable effects on national income,production & employment
Became popular after the GreatDepression
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Objectives of Fiscal Policy
Mobilization & Allocation of resources Provision of social goods
Distribution Equitable distribution of
resources Stabilization Through its effect on
aggregate demand & level of economicactivity
Economic Growth Employment Price Stability
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Instruments Public Expenditure
Public Expenditure consists of Govt.purchases of goods & services(eg.defence); Govt. transfer payments(eg.pensions); Public enterprises & Capitalformation
Increasing expenditure increases
aggregate demand which increases moneywith pvt. sector & this leads to an increasein wages & salaries which also increasesdemand (& vice versa)
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Public Expenditure (cont.)
But while decreasing expenditure only nonproductive expenditure should bedecreased & not developmental otherwisesupply side will also get affected
To increase equity govt. expenditureshould be directed towards eradicatingpoverty & providing subsidies to socially
desirable sectors & rations, etc.
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Instruments - Taxation
Taxation source of public revenue -taxes are either Direct (eg. income &wealth tax) or Indirect (eg. excise &custom)
Direct taxes are progressive & Indirecttaxes are regressive but this can berectified by taxing goods used by highincome groups
Indirect Taxes have a wider coverage butthey increase inflation
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Taxation (cont.)
Increasing Taxes decreases purchasingpower by affecting incomes & prices
Increasing Taxes also decreases rate of
return for business & therefore decreasesinvestment
Other govt. receipts include non-taxrevenue receipts like commercial &administration receipts & capital receiptslike grants, recoveries of loans &disinvestment
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Instruments Public Debt
Public Debt Borrowings from RBI,domestic & external
By borrowing govt. takes away purchasing
power & funds get transferred from pvt. topublic sector but govt. should spend thesefunds for production & not consumptionotherwise it adds to inflation
Govt. should avoid paying back loansduring inflation
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Trends in Indias Fiscal Policy
Public Expenditure has been increasingover the years but it is not reaching thepoor
Tax/GDP ratio has increased from 6.3% in1950-51 to 15.8% in 1991-92
Direct taxes have fallen from 40% to 16%of total taxes during the same period
Indirect taxes are being used for revenuegeneration & not allocational efficiency
Fiscal deficit is increasing
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Trends (cont.)
Main components of expenditure areSubsidies, Wages & Salaries, InterestPayments & Defence Expenditure
Till recently the tax rates were very high,there was a multiplicity of slabs, services& agriculture were not covered, therewere a no. of concessions & exemptions &widespread evasion
As compared to discretionary measures,automatic measures only minimize cyclicaleffects, they do not eliminate them
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Trends (cont.)
When a new measure is introduced thereare lags - Inside (Recognition, Decision &Action Lags) & Outside which mitigate its
effect
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Reforms in Indias Fiscal Policy
Fiscal Responsibility & BudgetManagement Act was introduced in 2004
Decrease interest payments & non interest
expenditure on subsidies, assistance tonon-viable & inefficient enterprises, staff &defence
Simplification of the tax structure by
reduction in the rates & the no. of slabs;introduction of VAT & service tax; betteradministration & enforcement
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Reforms (cont.)
Decrease deficit to 3% of GDP by March2009
Link fiscal & monetary policy & make fiscal
policy more equitable Optimal rate of taxation
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