Eco Project on Fiscal Policy 2nd Sem

7/29/2019 Eco Project on Fiscal Policy 2nd Sem

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CHAPTER: 1 INTRODUCTION OF FISCAL POLICY AND FOREIGN TRADE

Introduction of fiscal policy

In economics and political science, fiscal policy is the use of government revenue collection

(taxation) and expenditure (spending) to influence the economy.

The two main instruments of fiscal policy are government taxation and changes in the level and

composition of taxation and government spending can affect the following variables in the

economy:

Aggregate demand and the level of economic activity; The distribution of income; The pattern of resource allocation within the government sector and relative to the

private sector.

Fiscal policy refers to the use of the government budget to influence economic activity.Stances of fiscal policy:

The three main stances of fiscal policy are:

Neutral fiscal policy 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.

Expansionary fiscal policy involves government spending exceeding tax revenue, and isusually undertaken during recessions.


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Contractionary fiscal policy occurs when government spending is lower than taxrevenue, and is usually undertaken to pay down government debt.

However, these definitions can be misleading because, even with no changes in spending or tax

laws at all, cyclic fluctuations of the economy cause cyclic fluctuations of tax revenues and of

some types of government spending, altering the deficit situation; these are not considered to

be policy changes. Therefore, for purposes of the above definitions, "government spending"

and "tax revenue" are normally replaced by "cyclically adjusted government spending" and

"cyclically adjusted tax revenue". Thus, for example, a government budget that is balanced over

the course of the business cycle is considered to represent a neutral fiscal policy stance.

Methods of funding:

Governments spend money on a wide variety of things, from the military and police to services

like education and healthcare, as well as transfer payments such as welfare benefits. This

expenditure can be funded in a number of different ways:

Taxation Seigniorage, the benefit from printing money Borrowing money from the population or from abroad Consumption of fiscal reserves Sale of fixed assets (e.g., land)


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MEANING OF FOREIGN TRADE:

The definition of foreign trade is the export of all goods and services to foreign countries and

the import of all goods and services to the home country. You will probably find a lot of data on

the website of the Indian Government, especially the foreign affairs and economy departments.

Foreign Trade Policy is about a country's decision on which other countries they will do

business with. In the case of the U.S. we have NAFTA (North American Free Trade Agreement).

Congress decides what countries we "trade" with, although the forethought of how much or

little was apparently not addressed. This is why we have a huge deficit with China.

They import more of their products to us than we export to them. So, they make more money

on what they send to the U.S. but they do not buy an equal amount of what we send to them.

This is where regulation should be interjected. President Clinton signed NAFTA into law with the

idea it would be good for the U.S. to send products abroad, keeping the American worker on

the job. However it backfired because of the cheap imports from countries like China, our

workers were laid-off and companies went out of business because Americans were attracted

to the low prices of goods coming from other countries.

Wal-Mart is the best example of how China is crippling our economic situation. Wal-Mart is the

largest importer of foreign products and is the largest customer to China. Look at 10 items in

that store and 9, if not all 10 will have been made in China. As long as we buy Chinese goods,

our workers will continue to suffer job losses. China's Foreign Trade Policy seems to be to sell a

certain product under its cost, until and American company making the same product goes out

of business due to retail price. Then, China raises the price of that same product knowing it will


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still sell, because the American company that used to make that product is no longer in

business. This is an ingenious way to take over American businesses.

Presidential candidate Barack Obama has promised to regulate NAFTA so that it is fair. He

states he will forbid the outsourcing of automobiles to any other country and to only trade with

countries that import and export equally. If this becomes the case, then for every dollar Wal-

Mart sends to China, then China will have to buy the same amount of dollars of our goods.

Foreign Trade Policy does not in itself mean it has to be fair. It simply means two or more

countries agree to trade goods from each country to the other.

To understand the role of foreign trade in the Indian economy, you have to understand the

importance of foreign trade for any country. I'll explain this with a simple example:

Imagine that there are only two countries in the world, India and Denmark. Both countries have

1 000 citizens. These citizens eat only bananas and drink only milk (let's say they only eat

banana-milkshakes). Each country needs 50 000 bananas and 50 000 litres of milk to feed it's

population.

In India, the weather is good, the sun shines a lot so bananas grow easily. Therefore, one Indian

can produce 100 bananas per year. But India is also a dry country, so the cows in India don't

produce much milk. Therefore one Indian can only produce 50 liters of milk per year.

In Denmark, the weather isn't sunny, so bananas don't grow easily. Therefore, one Dane can

only produce 50 bananas per year. On the other hand is Denmark a perfect place for cows,

because it is a very green country. Therefore, one Dane can produce 100 litres of milk per year.


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Let's suppose that their is no foreign trade in our two-country-world. Denmark will produce 50

000 litres of milk and will use 500 inhabitants to do this. The other 500 Danes will be used to

produce bananas, resulting in a production of 25 000 bananas (500 workers x 50 bananas per

worker). So Denmark will come 25 000 bananas short to feed it's population.

India will produce 50 000 bananas (using 500 workers) and 25 000 litres of milk (using the other

500 workers), and also India will not be able to feed it's population.

So without foreign trade, both countries will not be able to produce enough food for the

population.

No suppose that there is foreign trade between India and Denmark. Now both countries can

produce the goods that they are best in, bananas for India and milk for Denmark.

The 1000 workers in India will be able to produce 100 000 bananas. They only need 50 000, so

the other 50 000 will be exported to Denmark. The 1000 workers in Denmark will be able to

produce 100 000 litres of milk. They only need 50 000 litres, so the other 50 000 litres will be

exported to India. As a result of this foreign trade, both countries will have enough food to feed

their population.

This example makes two things clear. One: foreign trade is for the benefit of all countries. Two:

when there is foreign trade, you will specialize in the production of those goods in which you

have an advantage to produce them.

Now let's focus on India. The role of foreign trade on the Indian economy is now easy to

determine:


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First of all, foreign trade has made India richer. Products which are difficult to produce for India

(engines,) can be imported, which is good for the Indian economy.

Second of all, and this is without doubt the biggest influence on the Indian economy, the rise of

foreign trade has forced India to specialise in the production of a few goods. These are mainly

ores (the Indian mines), foodproducts and cheap products that are easily built using cheap

labour.

So India has been one of those countries which competes with other economies by producing

labour intensive products. This has had a great influence on Indian economy, because it implies

a partial shift from agriculture to industrial production.


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CHAPTER: 2 Main Objectives of Fiscal Policy In India:

The fiscal policy is designed to achive certain objectives as follows :-

1. Development by effective Mobilization of Resources: The principal objective of fiscal policy

is to ensure rapid economic growth and development. This objective of economic growth and

development can be achieved by Mobilization of Financial Resources. The central and the state

governments in India have used fiscal policy to mobilise resources.

The financial resources can be mobilised by :-

Taxation: Through effective fiscal policies, the government aims to mobiliseresources by way of direct taxes as well as indirect taxes because most

important source of resource mobilisation in India is taxation.

Public Savings : The resources can be mobilised through public savings byreducing government expenditure and increasing surpluses of public sector

enterprises.

Private Savings : Through effective fiscal measures such as tax benefits, thegovernment can raise resources from private sector and households. Resources

can be mobilised through government borrowings by ways of treasury bills,

issue of government bonds, etc., loans from domestic and foreign parties and by

deficit financing.


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2. Efficient allocation of Financial Resources: The central and state governments have tried to

make efficient allocation of financial resources. These resources are allocated for Development

Activities which includes expenditure on railways, infrastructure, etc. While Non-development

Activities includes expenditure on defence, interest payments, subsidies, etc.

But generally the fiscal policy should ensure that the resources are allocated for generation of

goods and services which are socially desirable. Therefore, India's fiscal policy is designed in

such a manner so as to encourage production of desirable goods and discourage those goods

which are socially undesirable.

3. Reduction in inequalities of Income and Wealth: Fiscal policy aims at achieving equity or

social justice by reducing income inequalities among different sections of the society. The direct

taxes such as income tax are charged more on the rich people as compared to lower income

groups. Indirect taxes are also more in the case of semi-luxury and luxury items, which are

mostly consumed by the upper middle class and the upper class. The government invests a

significant proportion of its tax revenue in the implementation of Poverty Alleviation

Programmes to improve the conditions of poor people in society.

4. Price Stability and Control of Inflation: One of the main objective of fiscal policy is to control

inflation and stabilize price. Therefore, the government always aims to control the inflation by

Reducing fiscal deficits, introducing tax savings schemes, Productive use of financial resources,

etc.


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5. Employment Generation: The government is making every possible effort to increase

employment in the country through effective fiscal measure. Investment in infrastructure has

resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial

(SSI) units encourage more investment and consequently generates more employment. Various

rural employment programmes have been undertaken by the Government of India to solve

problems in rural areas. Similarly, self employment scheme is taken to provide employment to

technically qualified persons in the urban areas.

6. Balanced Regional Development: Another main objective of the fiscal policy is to bring about

a balanced regional development. There are various incentives from the government for setting

up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form

of tax holidays, Finance at concessional interest rates, etc.

7. Reducing the Deficit in the Balance of Payment: Fiscal policy attempts to encourage more

exports by way of fiscal measures like Exemption of income tax on export earnings, Exemption

of central excise duties and customs, Exemption of sales tax and octroi, etc.

The foreign exchange is also conserved by Providing fiscal benefits to import substitute

industries, Imposing customs duties on imports, etc.

The foreign exchange earned by way of exports and saved by way of import substitutes helps to

solve balance of payments problem. In this way adverse balance of payment can be corrected

either by imposing duties on imports or by giving subsidies to export.


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8. Capital Formation: The objective of fiscal policy in India is also to increase the rate of capital

formation so as to accelerate the rate of economic growth. An underdeveloped country is

trapped in vicious (danger) circle of poverty mainly on account of capital deficiency. In order to

increase the rate of capital formation, the fiscal policy must be efficiently designed to

encourage savings and discourage and reduce spending.

9. Increasing National Income: The fiscal policy aims to increase the national income of a

country. This is because fiscal policy facilitates the capital formation. This results in economic

growth, which in turn increases the GDP, per capita income and national income of the country.

10. Development of Infrastructure: Government has placed emphasis on the infrastructure

development for the purpose of achieving economic growth. The fiscal policy measure such as

taxation generates revenue to the government. A part of the government's revenue is invested

in the infrastructure development. Due to this, all sectors of the economy get a boost.

11. Foreign Exchange Earnings: Fiscal policy attempts to encourage more exports by way of

Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax and

octroi, etc. Foreign exchange provides fiscal benefits to import substitute industries. The

foreign exchange earned by way of exports and saved by way of import substitutes helps to

solve balance of payments problem.


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CHAPTER: 3 Economic effects of fiscal policy:

Governments use fiscal policy to influence the level of aggregate demand in the economy, in an

effort to achieve economic objectives of price stability, full employment, and economic growth.

Keynesian economics suggests that increasing government spending and decreasing tax rates

are the best ways to stimulate aggregate demand, and decreasing spending & increasing taxes

after the economic boom begins. Keynesians argue this method be used in times of recession or

low economic activity as an essential tool for building the framework for strong economic

growth and working towards full employment. In theory, the resulting deficits would be paid for

by an expanded economy during the boom that would follow; this was the reasoning behind

the New Deal.

Governments can use a budget surplus to do two things: to slow the pace of strong economic

growth, and to stabilize prices when inflation is too high. Keynesian theory posits that removing

spending from the economy will reduce levels of aggregate demand and contract the economy,

thus stabilizing prices.

In the wake of the Great Recession that started in the United States after 2007, liberal

economists have developed renewed arguments in favor of Rooseveltian economic policies-

notably a degree of federal stimulus spending across public infrastructures and social services

that would benefit the nation as a whole and put America back on th e path to long term

growth.

But economists still debate the effectiveness of fiscal stimulus. The argument mostly centers on

crowding out: whether government borrowing leads to higher interest rates that may offset the


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stimulative impact of spending. When the government runs a budget deficit, funds will need to

come from public borrowing (the issue of government bonds), overseas borrowing, or

monetizing the debt. When governments fund a deficit with the issuing of government bonds,

interest rates can increase across the market, because government borrowing creates higher

demand for credit in the financial markets. This causes a lower aggregate demand for goods

and services, contrary to the objective of a fiscal stimulus. Neoclassical economists generally

emphasize crowding out while Keynesians argue that fiscal policy can still be effective especially

in a liquidity trap where, they argue, crowding out is minimal.

Some classical and neoclassical economists argue that crowding out completely negates any

fiscal stimulus; this is known as the Treasury View[citation needed], which Keynesian economics

rejects. The Treasury View refers to the theoretical positions of classical economists in the

British Treasury, who opposed Keynes' call in the 1930s for fiscal stimulus. The same general

argument has been repeated by some neoclassical economists up to the present.

In the classical view, the expansionary fiscal policy also decreases net exports, which has a

mitigating effect on national output and income. When government borrowing increases

interest rates it attracts foreign capital from foreign investors. This is because, all other things

being equal, the bonds issued from a country executing expansionary fiscal policy now offer a

higher rate of return. In other words, companies wanting to finance projects must compete

with their government for capital so they offer higher rates of return. To purchase bonds

originating from a certain country, foreign investors must obtain that country's currency.

Therefore, when foreign capital flows into the country undergoing fiscal expansion, demand for


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that country's currency increases. The increased demand causes that country's currency to

appreciate. Once the currency appreciates, goods originating from that country now cost more

to foreigners than they did before and foreign goods now cost less than they did before.

Consequently, exports decrease and imports increase.

Other possible problems with fiscal stimulus include the time lag between the implementation

of the policy and detectable effects in the economy, and inflationary effects driven by increased

demand. In theory, fiscal stimulus does not cause inflation when it uses resources that would

have otherwise been idle. For instance, if a fiscal stimulus employs a worker who otherwise

would have been unemployed, there is no inflationary effect; however, if the stimulus employs

a worker who otherwise would have had a job, the stimulus is increasing labor demand while

labor supply remains fixed, leading to wage inflation and therefore price inflation.

(1) Fiscal Policy Affect the Macro Economy:

Fiscal policy affects aggregate demand, the distribution of wealth, and the economys capacity

to produce goods and services. In the short run, changes in spending or taxing can alter both

the magnitude and the pattern of demand for goods and services. With time, this aggregate

demand affects the allocation of resources and the productive capacity of an economy through

its influence on the returns to factors of production, the development of human capital, the

allocation of capital spending, and investment in technological innovations. Tax rates, through

their effects on the net returns to labor, saving, and investment, also influence both the

magnitude and the allocation of productive capacity.


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Macroeconomics has long featured two general views of the economy and the ability of fiscal

policy to stabilize or even affect economic activity. The equilibrium view sees the economy

quickly returning to full capacity whenever disturbances displace it from full employment.

Accordingly, changes in fiscal policy, or even in monetary policy for that matter, have little

potential for stabilizing the economy. Instead, inevitable delays in recognizing economic

disturbances, in enacting a fiscal response, and in the economys reacting to the change in

policy can aggravate, rather than diminish, business-cycle fluctuations. An alternative view sees

critical market failures causing the economy to adjust with more difficulty to these

disturbances. If, for example, consumers were to reduce their current spending in order to

consume more in the future, producers, who would not know the consumers future plans for

want of the appropriate futures markets for goods and services, would see only an indefinite

drop in demand, and this might encourage them, in turn, to reduce their hiring and capital

spending. In this world, changes in fiscal and monetary policyhave greater potential for

stabilizing aggregate demand and economic activity. How the economy reacts to fiscal policy

depends on whether it is at full employment or operating below its full capacity.

(2) Effects of a Tax Cut on Consumer Spending:

To illustrate the importance of the difference in these two views for fiscalpolicy stabilization,

consider the effects of a cut in personal taxesa classic countercyclical fiscal-policy action.

Lower taxes, everything else being constant, increase households disposable income, allowing

consumers to increase their spending. The consequences of the cut-how much is spent or


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saved, and the response of economic activitydepend on the way households make their

decisions and on prevailing macroeconomic conditions.

For example, whether the tax cut is perceived to be temporary or permanent will influence how

much consumers save. A temporary cut when the economy is at full employment will alter

households lifetime disposable income relatively little, and so m ight have little effect on

consumption. If the cut is, instead, perceived to be permanent, then households will perceive a

larger increase in their lifetime disposable income and so will likely increase their desired

consumption by much more than they would if they thought the cut were temporary.

So far, we have been considering the effect of a tax cut on households consumption

expenditures with everything else held constant. However, lower taxes will increase the

governments fiscal deficit. Suppose that the economy tends to remain near full employment

and that households do not expect their disposable income to rise any higher than it would

have risen without the change in fiscal policy. Even if the tax cut is longlasting, many will

conclude that future taxes will need to be higher than they otherwise would have been in order

to retire the extra public debt resulting from the tax cut. In the extreme case, households will

not feel that their disposable income has risen, because they have completely internalized the

increase in the public debt arising from the tax cut, treating it as though it were equivalent to

personal debt.

Yet even in the full-employment view, consumption might increase as a result of the tax cut if

capital markets are imperfect. Consumers who are liquidity constrained, living from paycheck to

paycheck, will likely increase their spending even if they internalize the public debt. So the


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effect of the tax cut will depend on its incidence over different types of taxpayers. Consumption

will also increase if the government can borrow at a lower rate of interest than the consumer.

However, consumption can increase more significantly when the economy is not at full

employment and if the tax cut is seen as an instance of a continuing fiscal policy that stabilizes

economic activity, or if the tax cut otherwise raises households expected income by increasing

the economys future productive capacity. Although the tax cut entails an increase in public

debt, higher current and future income diminishes the burden of servicing or repaying this

debt. In this case, the tax cut is essentially an investment in a public good that redounds to the

benefit ofhouseholds.

(3) Effects on Interest Rates, Capital Formation, and International Capital Flows:

Over time, an increase in the budget deficit resulting from a tax cut will increase the public

debt. That increase raises important issues concerning the long-run effects of the tax cut on

interest rates, capital investment, and future economic welfare. The rich range of possible

consequences makes this a very controversial and interesting topic.

Fiscal policies that increase the deficit will result in future taxes being higher than they

otherwise would have been, but, depending on the policies effects on incentives for investing

in human or physical capital, they might also raise future living standards. Policies that absorb

slack resources or foster investment might reduce government saving, as reflected in the

greater budget deficit, while they increase total saving, as reflected in the greater rate of capital

formation. This additional saving might be supplied by the increase in national income, or it


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deficit, which is equal to the quantity of capital inflows from abroad, will increase at least

enough to offset the increase in the budget deficit less the induced increase in private saving.

The future levels of the capital stock and real output will not fall, but future domestic

consumption will be reduced because an increased share of the return to capital will accrue to

foreign nationals unless the fiscal policy fosters a greater utilization of the stock of capital,

greater capital formation, or greater net returns on capital to compensate for the outflow. The

concurrent large budget and current account deficits that occurred in the early 1980s and again

in the last few years have led many to believe that increases in the current account deficit

would generally accompany large increases in the budget deficit, and gave rise to the term

twin deficits.


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CHAPTER: 4 FOREIGN TRADE POLICY:

Export Performance and the Foreign Trade Policy (FTP):

In the wake of global economic slowdown, Indias merchandise exports faced significant

adverse impact. Exports, which had grown by 48.1% during April to September, 2008, suffered a

decline during the next 12 months from October, 2008 to September, 2009, due to the

shrinkage of the demand worldwide and particularly the contraction in demand in the

traditional markets of our exports. In May, 2009, the exports declined by as high as 34.2% in

US$ terms. The downward trend was arrested from October, 2009 onwards and our exports

ended up with an export figure of US$ 178.75 billion in 2009-10 against US$ 185.30

billion in 2008-09, which indicates an overall decline of 3.5% in dollar terms. The growth in

exports since October, 2009 can be attributed to growth in some sectors, but is primarily due to

the lower base effect of the exports in the corresponding months of previous financial year.

This year, exports have registered a growth of about 27% in US$ terms and it is expected that

we exceed the merchandise export target of US$ 200 billion by the end of 2010-11.

Foreign Trade Policy, 2009-14:

The Foreign Trade Policy (FTP), 2009-14 was announced on 27th August, 2009 in the backdrop

of a fall in Indias exports due to global slowdown.

The immediate and the short term objective of the policy was to arrest and reverse the

declining trend of exports as well as to provide additional support especially to those sectors


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which were hit badly by recession in the developed world. The Policy envisaged an annual

export growth of 15 per cent with an annual export target of US $ 200 billion by

March 2011 and to come back on the high export growth path of around 25 per cent per

annum in the remaining three years of this Foreign Trade Policy i.e. up to 2014. The long term

policy objective for the Government is to double Indias share in global

trade by 2020.

As an immediate relief, the Government provided a policy environment through a mix of

measures including fiscal incentives, institutional changes, procedural rationalization, and

efforts for enhanced market access across the world and diversification

of export markets. Towards achieving these objectives, several steps were announced in the

Policy. Some of the important steps includedaddition of new markets under the Focus Market

Scheme, coverage of Africa, Latin America and large part of Oceania under Focus Market

Scheme (FMS) and the Market Linked Focus Product Scheme (MLFPS), increase in incentives

available under the Focus Market Scheme from 2.5% to 3% and for Focus Product Scheme (FPS)

and MLFPS from 1.25% to 2%, introduction of EPCG Scheme at zero duty for specified sectors,

and the grant of additional duty credit scrip to status holders.


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Union Minister of Commerce & Industry, Sh. Anand Sharma, Minister of State of Commerce &

Industry, Sh. Jyotiraditya Scindia and Commerce Secretary, Dr. Rahul Khullar at the release of

Foreign Trade Policy (2009-14) on 27th August, 2009

Thereafter, as promised in FTP, to continue regular interaction with stakeholders to maintain a

close watch on the performance of the policy in the field, a number of interactions were held

with members of Board of Trade, Open Houses with exporters and sectoral reviews with EPCs.

Constant dialogues were held with all key stakeholders in industry and the exporting

community for sectoral assessment of exports at regular intervals. The first review was

undertaken in December 2009 and thereafter in February 2010, which demonstrated that some

sectors were still facing difficulties. Need-based additional support measures were announced

in January, 2010, March, 2010 and on 11th February, 2011 for certain product groups /


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products.The recovery has been fragile and economies around the world are still emerging out

of the shadows of a grim recessionary period. The IMF projections indicate that the world

economy is recovering at varying speeds for different regions. Though, there had been marginal

improvement in some of the developed economies like US, UK, Germany, France, Japan etc.,

the nervousness continued in the markets about the fiscal situation and sovereign indebtedness

in several high income countries of Europe. In this setting, it was expected that the developed

countries would aim at economic recovery through consolidation and export led growth, which

would pose a challenge to Indian exporters in accessing overseas markets for their products.

The uncertainty surrounding Indian exporters prospects, therefore, continued to linger.

Though the exports growth moved towards the positive trajectory from October, 2009

onwards, our exports were not yet out of the woods.

Under this global situation of slow recovery, it was necessitated to take stock of the situation so

as to make mid course corrections. Accordingly, sectoral reviews were continued in the current

financial year 2010-11, and the first such review for 2010-11 was undertaken in July 2010. It

was observed that despite the measures announced in the FTP and additional support

extended in January and March, 2010, some sectors continued to face difficulties. It was also

realized that there was a shroud of uncertainty continuing over the fragile nature of global

economic recovery. Even as global economic rebalancing had been proceeding apace, it was

not going to be an easy patch for Indian exporters. In view of resource constraints, it was not

simply possible to sustain support to all sectors and there was need to calibrate the support

measures appropriately. On the other hand, exports of certain products had been placed under

restriction in view of domestic situation i.e. inflationary pressures and unemployment. It was


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also essential to be conscious of the need for and the inevitability of fiscal consolidation.

Keeping all these factors in mind and based on the sectoral review held in July, 2010, need

based additional initiatives were undertaken in the Annual Supplement 2010-11 to FTP 2009-

14, announced on 23rd August, 2010. While emphasis on stability of policy regime was

continued, additional measures were announced to support exports particularly for the labour

intensive sectors. In order to promote technological upgradation, zero duty EPCG and Status

Holder Incentive Schemes were expanded and validity extended. It will add to expansion and

modernization of production base at a time when investment is drying up in export industry

The Commerce Secretary, Dr. Rahul Khullar briefing the press after releasing the Strategy Paper for the growth

of Auto and Auto Component Exports: 2010-2014, in New Delhi on April 28, 2010.

A new facility of Annual EPCG authorization was introduced. While exports have shown a rising

trend during the last few months, certain sectors are still not out of woods. Further, fragile


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economic recovery and consequent slower demand growth in the developed markets has

necessitated greater emphasis on improving the competitiveness of our exports. To access the

export performance of various sectors, second sectoral performance review was conducted

during November-December, 2010. Accordingly, to enhance competitiveness for products

which are labour intensive, technology intensive and value added, further export incentives

were undertaken on 11th

February, 2011 for more than 600 products for sectors viz.

Agriculture, Chemicals, Carpets, Engineering, electronics and plastics. In addition, as a

continuing endeavor for procedural simplification and trade facilitation, a few measures were

taken.

Trade Policy Measures taken under Foreign Trade Policy 2009-14 and thereafter:

A. Market and product diversification and expansion of markets:

1. Measures undertaken in FTP 2009-14, January / March, 2010 and in Annual Supplement,

2010-11:

27 new markets added under Focus Market Scheme (FMS) with incentive of duty creditscrip @ 3% of exports.

Market Linked Focus Product Scheme (MLFPS) with incentive of duty credit scrip @ 2%,has been significantly broadened by inclusion of a large number of products linked to

their markets.

Full Africa, Latin America and large part of Oceania covered under FMS & MLFPS (13countries added in MLFPS at the time of release of FTP, 2009-14 in August, 2009 and 2

countries added in January, 2010).


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The incentive available under FMS has been raised from 2.5% to 3%; and for FocusProduct Scheme (FPS) & MLFPS from 1.25% to 2%; and Special Focus Products Scheme

@ 5%.

Additional benefit of 2% bonus, over and above the existing benefits of 5% / 2% underFPS, allowed for about 135 existing products, which had suffered due to recession in

exports. Major sectors include all Handicrafts items, Silk Carpets, Toys and Sports Goods

(all of which were earlier eligible for 5% benefits), Leather Products and Leather

Footwear, Handloom Products and some of the Engineering Items including Bicycle

parts and Grinding Media Balls (all of which were earlier eligible for 2% benefit).

256 new products added under FPS (at 8 digit level), which became entitled for benefits@ 2% of FOB value of exports to all markets. Major Sectors / Product Groups covered

are Engineering, Electronics, Rubber & Rubber Products, Other Oil Meals, Finished

Leather, Packaged Coconut Water and Coconut Shell worked items.

Instant Tea and CSNL Cardinol included for benefits under Vishesh Krishi and GramUdyog Yojana (VKGUY) @ 5% of FOB value of exports.

Nearly 300 products (at 8 digit level) from the readymade garment sector incentivisedunder MLFPS for further 6 months from October, 2010 to March, 2011 for exports to

27 EU countries.


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II. Additional measures announced on 11th February, 2011:

Under Market Linked Focus Product Scheme (MLFPS):-

335 New Products incentivised under MLFPS at 8 digit level, eligible for benefits

@ 2% of FOB value of exports to 15 specified markets like Agricultural Tractors of

more than 1800 cc, all inorganic chemicals and inorganic / organic compounds of

metals, Flexible Intermediate Bulk Containers and Narrow Woven Fabrics;

71 new products of Chapter 63 (Textile Made ups) at 8 digit level for exports toEU (27 Countries).

Under Focus Product Scheme (FPS):- 147 products incentivised for Bonus Benefits (additional 2%) under FPS at 8 digit

level, henceforth eligible for benefits @ 4% or 7% of FOB value of exports to all

markets. These includes Engineering items, Electronic items, Stationery items,

Handmade carpets and other Floor Coverings under Chapter 57 (7%);

57 New products incentivised under FPS at 8 digit level, eligible for benefits @2% of FOB value of exports to all markets. These include products from Sectors

viz. Engineering, Chemical, paper products etc.

Under Special Focus Products Scheme (SFPS), Egg powder included for benefit @ 5% ofFOB value of exports.

Under Vishesh Krishi and Gram Udyog Yojana (VKGUY), 6 New products (Castor Oil Meal Defatted Variety and Instant Coffee)

incentivised under VKGUY at 8 digit level, eligible for benefits @ 5% of FOB value

of exports to all markets.


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B. Support for Technological up-gradation

Zero duty Export Promotion Ca pital Goods (EPCG) scheme and Status Holder IncentiveScrip (SHIS) scheme introduced in 2009 for limited sectors and valid for only 2 years

initially, extended by one more year till 31.3.2012 and the benefit of the scheme

expanded to additional sectors.

3 Additional Towns of Export Exce llence (TEEs) announced, bringing the list upto 24.

C. Availability of concessional Export Credit:

Interest subvention of 2 per cent extended upto March 2011 for certain labour-intensive sectors of exports namely handloom, handicrafts, carpet, SMEs and a few

products from the sectors namely engineering, textiles, leather and jute.

Interest rates on export credit in foreign currency reduced to LIBOR + 200 basis points inFebruary 2010 from the earlier LIBOR+350 basis points.

D. EOUs / STPIs:

Section 10A and 10B (Sunset clauses for STPI and EOU schemes respectively),extended for the financial year 2010-2011. Anomaly removed in Section 10AA relating

to taxation benefit of unit vis-a-vis assessee.

E. Services:


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FTP also provided fillip to services sector (Hotels) by doubling duty free entitlementunder Served From India Scheme (SFIS) from 5% to 10% of foreign exchange earnings.

F. Others:

Duty Entitlement Passbook (DEPB) scheme extended beyond 31.12.2010 till 30.06.2011. Time period of export realization for non-status holder exporters increased to 12

months, at par with the Status holders. This facility has been extended upto 31.3.2011.

Advance Authorization for Annual Requirement now exempted from payment of Anti-dumping & Safeguard duty. The Scheme has been made more flexible for import of

required inputs.

Value limit on duty free import of commercial samples enhanced from Rs. 1 lakh to Rs.3 lakh per annum.

DEPB and Freely Transferable Incentive Schemes provisionally allowed without awaitingreceipt of Bank Realisation Certificate (BRC).

Export Obligation Period under Advance Authorization Scheme enhanced from 24months to 36 months without payment of composition fee.

To facilitate tracing and tracking of pharmaceutical products and hence to provideassurance about the quality of Indian pharma products to prospective importers,

requirement of affixing bar codes has been made mandatory w.e.f. 01.07.11.

A new facility of Input combination for pharma products manufactured trough Non-Infringing process, allowing actual quantum of duty free inputs required for


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manufacturing such export product, has been introduced. This will facilitate pharma

manufacturers to work towards getting a major share of exports of such products to

potential regulated markets such as US or EU.

Facilitation of Trade through various Electronic Data Interchange (EDI) initiatives takenon online message exchange facility.

Additional facility of filing online application for obtaining IEC introduced.


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CHAPTER: 5 ADVANTAGE AND DISADVANTAGE OF FISCAL POLICY AND FOREIGN TRADE:

(a) The Advantage and Disadvantage of fiscal policy:

Following are some important merits or contributions of fiscal policy of Government ofIndia.

Capital formation: Fiscal policy has played a very important role in raising therate of capital in country-in private as well as public sector. A major part of

budgetary resources has been invested in Public Sector enterprises which have

resulted in increase in gross domestic capital formation as percent of GDP from

10.2 percent in 1950-51 to 22.9 in 1997-98 and to 23.7 percent in 2001-02.

Resource Mobilisation: - Fiscal policy has helped to mobilize resources throughtaxes, savings, public debt etc. for economic development of the country.

Resources mobilisation which was 70% in 1965-66 has increased to 90% in 2001-

2002.

Incentives to Private Sector: - Private sector has been encouraged under fiscalpolicy for investment and production. Tax concessions, such subsidies

exemptions in taxes have been given as incentives to private sector units set up

in backward areas and expert oriented units. Similarly subsidies and tax

concessions have also been given to encourage imports and as a result it has

affected exports and imports of the country.

Encourage Savings: - Various incentives have been given to raise the rate ofsavings in household and corporate sector. To encourage savings in household


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sector various concessions and tax benefits have been given on fixed deposits,

life insurance schemes, Kisan Vikas Patras (KVPs), National Saving Certificates

(NSCs), provident funds etc. savings have been encourage in corporate sector by

offering them tax concessions and tax exemptions.

Poverty alleviation and Employment Generation: -To fulfill one of its majorobjectives of providing full employment, allocation of huge amount has been

made in fiscal policy to eradicate poverty and generate employment. For this a

huge amount has been spent on different schemes like twenty point

programme, Integrated Rural Development Programme (IRDP), Jawahar Rpzgar

Yojana (JRY) etc.

Reduction in Inequality of Income and Wealth: -Fiscal Policy of the country hasbeen making constant endeavour to reduce inequality of income and wealth.

Resources have been mobilized from rich class to poor by way of progressive

taxes, wealth tax, corporation tax and capital gain tax etc. and this money has

been utlised for the welfare of poor people.

Export Promotion: - Export has been encouraged by way of providing subsidies,concessions, tax exemptions, cash subsidies etc. Exports have shown a rise from

4.5 percent in 1960-61 to 23.4 percent in 2001-2002. Import duty on raw

material and capital goods used for production of goods meant for export has

also reduced with a view to encourage exports.


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Drawbacks/shortcomings/Limitations of fiscal policy:No doubt fiscal policy acts as an important tool for price control, control over

Government expenditure but still the smooth functioning of fiscal policy is not possible

in countries like India because of following limitations.

Lack of Elasticity: - In countries like India tax system is not that elastic as it issupposed to be. Moreover in these economies because of huge tax evasion, it is

difficult to earn revenue from taxes. The spread of tax is very few.

Non Monetised Sector: - Although each and every activity is now awarded interms of money, but still a major part of economy of UDC's like India is not

monetised. In this part fiscal policy remains unaffected.

Inadequate Statistics: - In the countries like India adequate and reliable date isnot available. Because of non-availability of reliable and accurate data, the area

of fiscal policy remains unaffected.

Illiteracy: - Most of the population of India is either illiterate or not in a positionto understand economic policies and is implications, that is why they are not

able to evaluate the importance of fiscal policy and, therefore, they also try to

evade taxes.

Limited Sector: - Fiscal policy only affects a few sectors of the economy. Most ofthe sectors remain untouched e.g. burden of taxes on salaried person whereas

big businessmen hardly pay any taxes in spite of high income levels.


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Delay in decision: - Fiscal policy decision needs approval by the Government. Alot of time required for approvals, that is why decisions are not taken at proper

time.

Limitations regarding full employment: - As a result of fiscal policy in connectionwith full employment wage rate increases. Increases in wage rate results into

increase in prices instead of increase in production. Employment multiplier

decreases and desired increase in employment does not take place. Structural

unemployment cannot be tackled by fiscal policy.

Defective Tax Structure: - The country been relying more on indirect taxesultimately affecting poor persons. Contribution to direct taxes has been declining

and that of indirect taxes rising.

Inflation: - As a result of increase of public expenditure on non-developmentheads and deficit financing pull inflation has taken place. Also high rate of

indirect taxes has resulted in cost push inflation. High rate of direct taxes and

increase of black money in the country has given rise to parallel economy and

increase in inflation.

Huge investment with negative return in public sector: - Huge investments inpublic sector have become sunk money now because of failure of public sector.

Investment of Rs.2,04,054 crore was made in public sector enterprises in 1998

and Rs.3,03,400 crore in 2001. Return on this investment has been very low. Also

takeover of sick textile mills by government has further increased public


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expenditure. Huge amount has to be spent to keep such undertakings going thus

making the resources of country scarce.

(b) The advantages and disadvantages of foreign trade:

The trade between two or more nations is termed as foreign trade or international trade. It

involves exchange of goods and services between the trades of two countries. Foreign trade

consists of import trade, export trade and entrepot trade. In the early stages of human

civilization, production was confined as per consumption. Human wants were limited. Now-a-

days, human wants are increasing and as such no man was considered to be self-dependent.

Like this no country can live in isolation and claimed the status to be self-sufficient. Because of

this reason countries have trade relationships with each other. The primary objective of foreign

trade is to increase foreign trade and increase the standard of living of its people. There is an

increasing demand for foreign trade because of the following reasons:

The natural resources are unevenly distributed. The presence of specialization and division of labour. Different countries have difference in economic growth rate. The presence of the theory of comparative cost.

The following are some of the advantages of foreign trade: Optimum use of Resources: Foreign trade helps in the optimum use of natural

resources and avoid wastages of resources.


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Stable Price: It ensures the presence of stable price by avoiding wide fluctuationsin prices. It tries to equalise the world price.

Availability of all types of goods: It enables a country to import those goodswhich it cannot produce.

Increased Standard of living: It ensures more production to meet the demand ofthe people of different countries. By increased production, it becomes possible

to increase income and the standard of living of its people. It also increase the

standard of living by increasing more employment opportunities.

Large Scale production: It ensures large production because the production iscarried on to meet the demand of its people as well as world market. Large scale

production also ensures a great deal of internal economies which reduces the

cost of production.

Foreign trade is not free from difficulties. The following are some of the importantdifficulties of foreign trade:

It is a long distance trade and as such it becomes difficult to maintain closerelationship between the buyer and the seller.

Each country has its own language. As foreign trade involves trade between twoor more countries, there is diversity of languages. This difference in language

creates problem in foreign trade.

Foreign trade involves preparation of a number of documents which also createsdifficulties in the way of foreign trade.


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Some restrictions are imposed on export and import of commodities. Theserestrictions stands on the progress of foreign trade.

Foreign trade involves a great deal of risks because trade takes place over a longdistance. Though the risks are covered through insurance, it involves extra cost

of production becuase insurance cost is added to cost.


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CHAPTER: 6 CONCLUSION:

This project assesses the effects of fiscal policy on economic activity in India over the last

decade and half and finds that fiscal policy can play an effective countercyclical role. The results

also have implications for the design of fiscal consolidation plans going forward.

In particular, our finding suggest that expenditure reform aimed at curtailing the growth of

spending may be preferable to tax increases because the latter may have larger

(negative)effects on growth over the longer term. The findings also shed light on the nature of

crowding out and the need for careful dynamic scoring of fiscal plans. The inclusion of debt in

the empirical models and further analysis of the effects on fiscal shocks and announced fiscal

measures on aggregate demand components are important issues for future research.


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CHAPTER: 8 Bibliography:

Website:

http://commerce.nic.in http://www.indianexpress.com http://www.publishyourarticles.net/knowledge-hub/business-studies http://business.mapsofindia.com/india-policy/foreign-trade-policy.html http://en.wikipedia.org/wiki/Fiscal_policy http://www.google.com

BOOKS AND NEWSPAPERS:

Newspapers Magazines (4P, Business India) Times of india
http://commerce.nic.in/http://commerce.nic.in/http://www.indianexpress.com/http://www.indianexpress.com/http://www.publishyourarticles.net/knowledge-hub/business-studieshttp://www.publishyourarticles.net/knowledge-hub/business-studieshttp://business.mapsofindia.com/india-policy/foreign-trade-policy.htmlhttp://business.mapsofindia.com/india-policy/foreign-trade-policy.htmlhttp://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Fiscal_policyhttp://www.google.com/http://www.google.com/http://www.google.com/http://en.wikipedia.org/wiki/Fiscal_policyhttp://business.mapsofindia.com/india-policy/foreign-trade-policy.htmlhttp://www.publishyourarticles.net/knowledge-hub/business-studieshttp://www.indianexpress.com/http://commerce.nic.in/


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Documents

Eco Project on Fiscal Policy 2nd Sem