Fiscal Policy

FISCAL
POLICY
 Introduction
 Fiscal Policy is a part of macro economics.
 This policy is also known as budgetary policy.
 One major function of the government is to stabilize
the economy.
 Current indian govt wants to achieve fiscal deficit
target by not reducing expenditure but increasing tax
collection.
 Keynesian economics, when the government
changes the levels of taxation and governments
spending, it influences aggregate demand and the
level of economic activity.
 Meaning
• The word fisc means ‘state treasury’ and fiscal policy
refers to policy concerning the use of ‘state treasury’ or
the government finances to achieve the macroeconomic
goals.
• Fiscal policy involves the decisions that a government

makes regarding collection of revenue, through taxation
and about spending that revenue.
• It is sister strategy to monetary policy through which a

central bank influences a nation’s money supply.
Objectives of Fiscal Policy
1. To remove poverty and unemployment
2. To promote capital formation
3. To reduce economic inequality
4. Optimum utilization of resources
5. Achieve economic stability
6. To increase rate of saving
 BUDGET
TAXATION
PUBLIC EXPENDITURE
PUBLIC DEBT
DEFICIT FINANCING
•Budget
• “A Budget is a detailed plan of operations for
some specific future period”.
• Budget is presented by the finance minister of India.
• Budget is also known as Annual Financial
Statement of the year.
• Total Expenditure has accordingly been
estimated at Rs.6,24,276 crore in 2018-2019.
• The requirements for expenditure on Defence,
Internal Security and other necessary
expenditures are adequately provided.
2. Taxation
Taxation is the major source of revenue to the government.

Taxes can be classified into 2 groups – Direct taxes and
Indirect taxes. Direct taxes are those which are imposed
directly on the people and indirect taxes are those the
burden of which can be shifted from one person to another.
During the period of excess demand i.e inflation, taxes
should be increased which reduce the disposable income
that the people may spend and cut down the demand and
during the period of deficient demand i.e deflation, tax
burden on the commodities should be reduced to the min-
imum so as to stimulate aggregate demand.
3.Public expenditure
Public expenditure refers to the expenses which the govern
ment incurs for its own maintenance, for the development
of society and the economy as a whole.
If private demand is excessive or inflationary, the govt.
should reduce its own expenditure to the minimum so as to
counteract or wipe off the inflationary gap.
When there is deficient demand at that time public expen-
diture is most important measure to stimulate the level of
demand and to uplift the economy from the crises of
depression.
•Public Debts
“ Public debt is defined as any money owned by a
government agency”
• Internal borrowings
Borrowings from the public means of treasury bills and
govt. bonds.
 Borrowings from the central bank
• External borrowings
 Foreign investment
 International organizations like World Bank &IMF
 Market borrowings
• Concept of Deficit Financing
• Revenue Deficit = Revenue Expenditure – Revenue
Receipts
• Fiscal Deficit = Total Expenditure (that is Revenue

Expenditure + Capital Expenditure) – Total Receipts
(that is all Revenue and Capital Receipts other than
loans taken)
5. Deficit Financing
Deficit financing refers to printing of new currency notes to
fill up gap between revenue and expenditure i.e budgetary
Deficit. Deficit financing in advanced countries is used to
mean an excess of expenditure over revenue – the gap
being covered by borrowing from the public by the sale of
bonds and by creating new money. Deficit financing raises
aggregate expenditure and aggregate demand.
Deficit financing in India is said to occur when the Union
Government’s current budget deficit is covered by the withdrawal
of cash balances of the government and by borrowing money from
the Reserve Bank of India. When the government draws its cash
balances, these become active and come into circulation.
Types of Fiscal Policy
Fiscal policy
Discretionary Non-discretionary
fiscal policy
fiscal policy
To cure To control
recession inflation Personal
Transfer income
Increase in Raising taxes payment
to control taxes
Govt.
expenditure inflation
Disposing of Corporate Corporate
Reduction
budget Income dividend
of taxes
surplus taxes policy
This policy is quite popular among the people of the
country because through this, consumers get more money
in their hands and as a result their purchasing power
increases drastically. The government uses this by two
ways. Either they spend more money on public works,
provide benefits to the unemployed, spend more on
projects that are halted in between or they cut taxes so that
the individuals or businesses don’t need to pay much to the
government.
Expansionary policy isn’t easy to apply for state
government because state government is always on a
pressure to keep a budget that is balanced.
A contractionary fiscal policy is just the opposite of the
expansionary fiscal policy. That means the objective of the
contractionary policy is to slow down the economic growth.
The only reason for which contractionary fiscal policy can
be used is to flush out the inflation. In this case, the
government spending is cut as much as possible and the rate
of taxes is increased so that the purchasing power of the
consumer gets reduced. Taking away money from the hands
of the consumers can be dangerous because that means
businesses will not be able to sell off goods and services and
as a result, the economy will take a sure-shot hit which only
can be reversed by taking the expansionary fiscal policy.
Statistical Data of Fiscal
Deficit
Year Fiscal deficit of Fiscal deficit of Combined Fiscal deficit of
centre states centre and states
governments
(Rs. crore)
2005-06 146435 87608 237187
2006-07 142573 79979 220617
2007-08 126912 75690 199375
2008-09 336992 127320 459908
2009-10 418482 194962 610851
2010-11 373591 158374 529594
2011-12 515990 171798 688434
2012-13 490190 198076 683418
2013-14 524539 284642 806383
2014-15 531177 293973 821903
• Fiscal deficit of centre and
States Governments
900000
800000
700000
600000
Combined
500000 Fiscal deficit
400000 of centre and
states
300000
governments
200000
100000
0
Achievements of Fiscal Policy
in India
• Mobilization of resources
• Increase in savings
• Increase in capital formation
• Incentives to investment
• Reduction in Income and wealth Inequalities
• Reduction in inter regional variations
 Fiscal Responsibility and
Budget Management Act, 2003
• The Fiscal Responsibility and Budget Management Act,
2003 is an Act of the Parliament of India to institutionalise
financial discipline, reduce India's fiscal deficit, improve
macroeconomic management and the overall management
of the public funds by moving towards a balanced budget.
• Objectives
• To introduce transparent fiscal management systems in the
country .
• To introduce a more equitable and manageable distribution of
• the country's debts over the years.
• To aim for fiscal stability for India in the long run.
 Fiscal Reforms in India
• Simplification of taxation system
• Improving tax to GDP ratio
• Reduction in rates of direct taxes
• Reforms in indirect taxes
• Introduction of service tax
Contd…
• Reduction in non-plan government expenditure
• Reduction in subsidies
• Closure of sick public sector companies
• Disinvestment of public sector units
• Efforts to reduce government administrative expenses
 Current Fiscal Policy
• The state of world economy has been the most decisive
factor affecting the fortunes of every developing
countries.
• Roadmap to achieve Fiscal deficit of 3% of GDP in three
years: Target is 3.9% in 2015-16, 3.5% in 2016-17, 3% in
2017-18.
• The current financial year will end on a satisfactory note
with the fiscal deficit at 4.6 percent (below the red line of
4.8 percent) and the revenue deficit at 3.3 percent.
• Fiscal Deficit in 2014-15 estimated to be 4.1 percent
which will be below the target set by new Fiscal
Consolidation Path and Revenue Deficit is estimated at
3.0 percent.
Conclusion
• Thus, the fiscal policy encompasses two separate but related
decisions; public expenditures and the level and structure of
taxes. It occupies the central place for maintaining full
employment without inflationary forces in the economy.
With its various instruments it influences the economic
stability of an economy. The fiscal policy of the Indian
government has been very successful in several fields such
as mobilization of resources for economic development,
increasing rate of savings and capital formation, developing
cottage and small scale industries ,reducing the incidence of
poverty etc.
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FISCAL

• Fiscal policy involves the decisions that a government

• It is sister strategy to monetary policy through which a

Taxation is the major source of revenue to the government.

• Fiscal Deficit = Total Expenditure (that is Revenue

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