FISCAL POLICY OF INDIA

PREPARED BY:-

MEGHA OZA (1006) ALPA PATEL(1007) HELI MODI (1008) ROMA MEHTA (1009) JUHI AGRAWAL(1010)

OVERVIEW
Fiscal

policy play an important role in the economic and social set up of the country. effective fiscal policy consists of policy decisions relating to the entire financial structure of the government including tax revenue, public expenditure, loans, transfers, debt management, budgetary deficit, and so on.

An

It tries to attain a proper balance among these units to achieve the best possible results in terms of economic goals.
Harvey and Johnson defined it as Changes in government expenditure and taxation designed to influence the patter and level of activity. According to G.K. Shaw, We define fiscal policy to include any design to change the price level, composition or timing of government expenditure or to vary the burden, structure of frequency of the tax payment.

OBJECTIVES

To mobilize adequate resources for financing various prog and projects adopted for economic development. To raise the rate of savings and investment for increasing the rate of capital formation. To promote necessary development in the private sector through fiscal incentive. To arrange an optimum utilization of resources.

To control the inflationary pressures in economy in order to attain economic stability To remove poverty and unemployment
To attain the growth of public sector To reduce regional disparities To reduce the degree of inequality in the distribution of income and wealth

ASPECTS OF FISCAL POLICY

Taxation

policy

Public

expenditure policy debt policy financing policy

Public

Deficit

TAXATION POLICY
Important

sources of revenue of the government of India. The government levies both direct and indirect taxes.
taxes are progressive in nature while most indirect taxes are regressive in nature.

Direct

Objectives :

Mobilization of resources for financing economic development Formation of capital by promoting saving and investment through time deposits, investment in government bonds, units, insurance, and so on. Attainment of quality in the distribution of income and wealth through the imposition of progressive direct taxes. Attainment of price stability by adopting an antiinflationary taxation policy.

PUBLIC EXPENDITURE POLICY

It has been creating a serious impact on the production and distribution patterns of the economy.

Features of the policy:

Development of infrastructure. Development of power projects, railways, road, transportation system, bridges, irrigation projects, hospitals, educational institutions.

Development of public enterprises. The

development of heavy and basic industries involves huge investment and risk.

Support to private sector. Providing necessary

support to the private sector for the establishment of industry and other projects

Social welfare and employment programs.

Attaining various social welfare programs and stress on employment generation programs.

DEFICIT FINANCING POLICY

Deficit

financing indicates the government taking a loan from the reserve bank of India in the form of issuing fresh currency.

Considering

the low level of income, low savings rate and capital formation, the government is increasingly taking recourse to deficit financing.

 It

is a kind of forced savings.

Deficit financing helps the country by providing necessary funds.

Must

be kept within the manageable limit.

PUBLIC DEBT POLICY

In the post independence period, the central government has been raising a good amount of public debt in order to mobilize resources to meet its developmental expenditure.

Internal debt:

Amount of loan raised, from within the country by the government. It is raised from the open market by issuing bonds and cash certificates. Borrowing from commercial banks and RBI.

External debt:
Loan

from external sources, from abroad, in the form of foreign capital, technical know-how, and capital goods.

Borrowing from international funding agencies.

Inter-governmental loans from various developed countries.

RECENT FISCAL POLICY REFORMS

Reduction

of rates of direct taxes

Reform

in indirect taxes

Reduction

in volume of subsidies
in fiscal deficit. in public sector

Reduction

Disinvestment

SUGGESTIONS FOR NECESSARY REFORMS IN FISCAL POLICY:

o

Progressive taxes :- The tax structure of the

country should try to infuse more progressive elements so that it can put a heavier burden on the rich and lighter burden on the poor. Necessary amendments must be made in respect of irrigation tax, sales tax,excise duty ,land revenue, property taxes, and so on.

Agricultural taxation :- the tax net of country

should be extended to the agricultural sector for tapping the huge amount of revenue from rich agriculturists.

 Broad

based taxation:- A broad based tax net

would cover increasing numbers of the population with taxable capacity.

Checking

tax evasion: Adequate measures must be

taken to check the problem of tax evasion in the country. Tax laws should be made stricter for prosecuting tax evaders. The tax machinery should be made more efficient and honest to gear up its operations. Tax rate should be reduced to encourage the growing trend of tax compliance.

 Increasing

reliance on direct taxes:- The tax

machinery should rely more on direct taxes than indirect taxes. Accordingly the tax machinery should try to introduce wealth tax, estate duty, gift tax, expenditure tax, and so on.

Simplified

tax structure:- The tax structure and

rules of the country should be simplified to encourage tax compliance among people and to do away with unnecessary harassment of tax payer.

 Reduction

of non-development expenditures:- The fiscal policy of the country

should try to reduce the non-development expenditures of the country. This would reduce the volume of unproductive expenditure and the inflationary impact of such expenditure.

Checking

black money:- The fiscal policy of

the country should try to check the problem of black money . In this direction, schemes like VDIs should be repeated . Tax rates should be reduced. Corruptions & political interference should be abolished .

 Raising

the profitability PSUs:- The govt.

should try restructure its policy on public sector enterprises so that efficiency and the rate of return on capital invested can be raised efficiently. PSUs should be managed in a rational manner with least government interference and on commercial lines. Accordingly, the policy of budgetary provisions for maintaining PSUs should gradually be eliminated

MERITS
Capital

formation:

Plays

an important role in raising the rate of capital formation in the public and private sectors. Following is the percent of gdp for respective years: 1950 10.2% 1980 22.9% 1997 24.8% 2000-2004 27%

 Mobilization

of resources:

Helps

to mobilize considerable amount of resources for the developmental projects.

Incentives

to savings:

Provides

incentives to raise savings rate both in households and corporate sector. This can be done by various budgetary policies.

 Inducement

to private sector:

Private

sector gets necessary inducements from fiscal policy to expand its activities. By tax concessions, tax exemptions, subsidies and so on.
Reduction
Reduces

of inequality:

inequality in distribution of wealth and

income. Subsidies and grants incorporated in budgets.

 Alleviation

of poverty and unemployment:

It

makes constant effort to alleviate poverty and unemployment. E.g.- IRDP,JRY. Policy

Export

promotion:

Promotes

exports through various budgetary policies in form of concessions, subsidies and so on.

SHORTCOMINGS
Instability:
Fails

to attain stability in various fronts of the economy.

Defective
Fails

tax structure:

to provide suitable tax structure for the country. Failed to raise productivity of direct taxes.
Inflation:
Failed

to contain inflationary rise in price level. Increasing public expenditure and deficit financing has resulted in demand pull inflation.

 Negative

return of the public sector:

Negative

return on capital investment has become serious problem for government. To prevent it government has to keep budgetary provisions.
Growing

inequality:

Growing

inequality in distribution of wealth and

income. Indirect taxes makes the tax structure regressive.

AN ASSESSMENT
1. Economic crisis :o

India faced a severe macroeconomic crisis in 1991.

Reforms in the form of removal of controls & trade barriers along with modernisation of regulatory instituitions took place.

o o

A high fiscal deficit of around 9.5% of GDP.

In 1996-97 fiscal deficit fell to 6.4% of GDP & growth accelarated to 7.5%.

 Indias

current fiscal situation is potentially

grave.
Prime

solution lies in controlling the fiscal deficit.

Complicating

factors are:-

the existence of off-budget items. Fiscal policy cannot be analysed in isolation

2. The Indian Fiscal situation:o

Before independence there was a consensus on planned economic development & state dominance. A National Planning Commission was established in 1950. During 1950-80 Indias economic growth averaged 3.75% per year. In 1980s policy makers began with some piecemeal reforms.

3. Financial Repression:o

India has been a financially repressed economy since 1960s especially since 1969. The links of these repression come about through its implicit tax on the financial system & growth sequences.

Repressionists policies included various interest rate controls, directed credit programmes & required liquidity & reserve ratios.

4. Fiscal adjustment:o

Crises in Argentina & Indonesia had very high economic & social costs. India was still in a stable position for the moment. The major concern in adjustment is its potential cost in slowing down economic development. The adjustment should be such that it benefits rather than hurt the poor.

5. Long-term Fiscal policy changes :o

The most serious medium & long-term issue that must be anticipated is the future of the pension system. Some demographic trends will help. The increase in life expectancy will increase the number of years for which pensions are paid, relative to the number of working years. Sufficiently rapid growth of GDP & employment the difficulty will ease.

 In

general looking at the longer term & at broader public welfare concerns have three benefits.
Better planning of public expenditure.

I.

II.

Improves the pattern of near-term public expenditure towards spending. Emphasises the need for self-insurance to meet unavoidable expenditures.

III.

BIBLIOGRAPHY
Business

environment by Shaikh

Saleem www.wikepadia.com