Fiscal Policy-Maitri Satashia

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An Overview of Fiscal Policy on Indian

Economy

Submitted to:

Dr. R. S. Pundir

Associate Professor and HeadAgribusiness Economics and Policies

IABMI-AAUAnand-388110

Submitted by:Maitri Satashia

Reg.no: 04-2368-2014M.Sc. (Agri.)2-Semester

BACAAAU

Fiscal policy is the set of principles and decisions of a government regarding the level of public expenditure and mode of financing them.

It is about the effort of government to influence the economy’s output, employment and prices by altering the level of public expenditure, taxation and public debt.

Introduction

• The importance of fiscal policy in modern economies arises from the fact that the State under democracy is called upon to play an active and important role in promoting economic development and providing a vast number of essential public utilities and services like drinking water, sanitation, civil services, primary education, public health, social welfare, defence, etc.

• Most of these goods are characterized by the property viz. non-marketable; that it cannot be sold in the market to the consumer. But payment has to be regulated in another way, through taxation.

IMPORTANCE

• In the underdeveloped economies, public finance has to assume yet another role, whereas in developed economies, it aims at maintaining economic stability. In underdeveloped economies, desirous of achieving rapid economic development, the function of public finance is to promote rapid economic development of the country, besides maintaining economic stability.

1. To mobilize resources for financing the development programmes in the public sector

2. To promote development in the private sector

3. To bring about an optimum utilization of resources

4. To restrain inflationary pressures in the economy to ensure economic stability

Objectives

5. To improve distribution of income and wealth in the community for lessening economic inequalities

6. To obtain full employment and economic growth

7. Fiscal policy and capital formation

1. Size of fiscal measures

2. Fiscal policy as ineffective anti-cyclical measure

3. Administrative delay

Limitations

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Three Possible Stances & Methods of Funding

A Neutral position 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. Where, G = T

An Expansionary position is when there is a higher budget deficit where the govt. spending is higher than the revenue collected from the tax. Where, G > T

An Contractionary position is when there is a lower budget deficit where the govt. spending is lower than the revenue collected from the tax. Where, G < T

G-Govt. SpendingT-Tax Revenue

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Methods of Funding:

Governments spend money on a wide variety of things, from the military to services like education and healthcare, as well as transfer payments.

This expenditure can be funded in a number of different ways:Taxation RevenueSeignorage, the benefit from printing money Borrowing money Consumption of fiscal reserves Sale of fixed assets (e.g., land, buildings etc.)

Recent Fiscal History, 2002-03 to 2014-15 (Percent of GDP)

Source: Economic Survey, 2014-15

Fiscal Flow Indicators, 2002-03 to 2014-15 (Percent of GDP)

Source: Economic Survey, 2014-15

Expenditure Quality Indicators, 2002-03 to 2014-15 (Percent of GDP)

Source: Economic Survey, 2014-15

Fiscal Variables as a percentage of GDP

Source: Economic Survey, 2011-12

Central Government Expenditure on Health

Source: OECD, Economic Surveys, India

Fiscal Deficit AnalysisFiscal Deficit Analysis

Factors affecting fiscal sustainability

I. Rural Population

II. Increased Consumption Level

III. Rising young and working women population

Highlights: Budget 2015/16 FISCAL DEFICIT* Fiscal deficit seen at 3.9 percent of GDP in 2015/16* Will meet the challenging fiscal target of 4.1 percent of GDP* Remain committed to meeting medium term fiscal deficit target of 3 percent of GDP• Current account deficit below 1.3 percent of GDP

GROWTH* GDP growth seen at between 8 percent and 8.5 percent y/y* Nominal economic growth seen between 11 and 12 percent* Aiming double digit growth rate, achievable soon

REVENUES* Revenue deficit seen at 2.8 percent of GDP* Non tax revenue seen at 2.21 trillion rupees* Agricultural incomes are under stress* Net receipts under market stabilisation scheme estimated at 200 billion rupees

Highlights: Budget 2015/16 EXPENDITURE

• Plan expenditure estimated at about 4.65 trillion rupees

• Non-plan expenditure seen at about 13.12 trillion rupees

• Allocates 2.46 trillion rupees for defence spending

• Allocates 331.5 billion rupees for health sector

* If revenue improves, hope to raise budgeted allocations for rural job scheme by 50 billion rupees

CONCLUSIONS• Macro-economic circumstances have improved

dramatically in India, provided that fiscal discipline is maintained, India’s debt dynamics will consequently remain exceptionally favourable going forward.

• India must also reverse the trajectory of recent years and move toward the golden rule of eliminating revenue deficits and ensuring that, over the cycle, borrowing is only for capital formation.