College of Management Studies ( CMS) IILM Academy of Higher Learning Economic Environment and Policy

A PROJECT REPORT ON FISCAL POLICIES...

FISCAL POLICY...
Fiscal policy is defined as that part of Government economic policy which deals with • • • • TAXATION GOVERNMENT EXPENDITURE BORROWINGS DEFICIT FINANCING & MANAGEMAENT OF PUBLIC DEBTS of a Economy.

It is the means by which a government adjusts its levels of spending in order to monitor and influence a nation's economy. It is the sister strategy to monetary policy with which a central bank influences a nation's money supply. These two policies are used in various combinations in an effort to direct a country's economic goals. Fiscal policy is related to Income and Expenditure of Government. It refers to Budgetary policy of Government. It is important for both developing and developed countries.It is the policy which is concerned with the management of Government's Taxation system, Public expenditure and public debt to achieve definite objectives.

OBJECTIVES OF FISCAL POLICY...

1) Mobilization of resources for rapid economic development of the country. 2) To increase the rate of savingin the country so that sufficient financial resources can be obtained from with in the economy. 3) To increase the investment in the economy, so as to promote capital formation. 4) Removal of poverty and unemploment. 5) Reduction in economic inequalities. 6) Reduction in regional disparities. 7) To achieve economic stability. 8) Optimum utilisation of resources. 9) To support private sector. 10)To achieve favourable balance in payments.

ADVANTAGES OF FISCAL POLICY...
1)CAPITAL FORMATION- it played a significant

role in capital formation of public and private sectors. It leads to further economic development of the nation. 2) INDUCEMENT OF RESOURCES- It has provided incentives to private sector for investment and production by several measures. To set up industries in backward ares, several taxoncessions has been given. 3)MOBILISATION OF RESOURCES- Helped in mobilisation of resources . By making use of measures like taxes, savings, public debt etc. Government has mobilised sufficient resourses for the projects necessary for economic development. 4)INCENTIVES OF SAVINGS- Provides several incentives for savings households and corporate sectors. To encourage savings in household sector several concessions and tax exemptions has been given on life insurances, NSCs, Provident fund, Bonds etc.. Tax concessions have also ben given to corporate sector to enable them to save more and to replough their profits.

5)DEVELOPMENT OF PUBLIC ENTERPRISESThe policy has been providing finance for development of public enterprises. Establishment of basic and heavy industries involved huge capital and risk. But these industries play important role in development of nation.

6)SOCIAL WELFARE- Goverment spend huge amount on public health, eduction, safe drinking water, welfare of weaker sections of society, child welfare, women welfare. All this has promoted social welfare in the economy. 7)ALLEVIATION OF POVERTY & GENERATION OF EMPLOYMENT OPPORTUNITIES- Fiscal policy has been endeavour to alleviate poverty. With a view to provide employment to the poor people of the country and to enhancing their income level. Programs such as INTEGRATED RURAL DEVELOPMENT PROGRAMME, JAWAHAR ROZGAR YOJNA, NATIONAL RURAL EMPLOYMENT ACT.. is initiated by Govt. Subsidy given by the goverment food, kerosene oil, LPG etc has also benefitted the poor people.

8)REDUCTION IN INEQUALITY OF   INCOME AND WEALTH­ It reduce inequality of
wealth and income. By the way of progressive income tax, hiah rates of taxes on luxuries, wealth tax, etc.. govt mobilized resources from the rich class and has utilized the same on the welfare schemes for poor people. 9)EXPORT PROMOTION- Goverment has made use of fiscal policy to promote exports.

DRAWBACKS OF FISCAL POLICY...
1) INFLATION-Deficit financing results in increase in money supply which results in fall of money and leads to rises in prices. 2) DEFECTIVE TAX STRUCTURE- In India share of direct taxes is less than the share of indirect taxes. Such taxes are burden for poor. Indirect taxes such as excise duty, VAT etc..are chareged on all sections of society. So it effects poor section of society. 3) POOR TAX ADMINISTRATION- Poor tax administration leads to tax evasion. It failed to check black money. 4) INEQUALITY OF INCOME- It failed to check

inequality of income. 5) FAILURE OF PUBLIC SECTOR- Various sectors are running at losses. They failed to generate adequate return on investment. 6) INCREASE IN NON-DEVELOPMENT INCOMEGovt spend huge amount on non development expenses such as defence, election, subsidies.The policy failed to control these expenses.

7) INCRAESING INTEREST BURDEN- Under this policy Govt has taken huge public debt both from external and internal resources.This results in undue burden on Govt. 8) FAILURE IN ERADICATING POVERTY AND EMPLOYMENT- Fiscal policy fails in eradication of poverty and unemployment problem successfully. 9) FAILED TO CHECK REGIONAL DISPARITIESMeans unequal development of different regions and states. Failed in reducing regional disparities.

REFORMS FOR FISCAL POLICY ...
1) REDUCTION IN NON DEVELOPMENTAL EXPENDITURE. 2) AGRICULTURAL TAXATION. 3) INCREASE IN PROFITABILITY OF SECTOR ENTERPRISES. 4) WIDE SCOPE OF TAXES. 5 ) MORE DIRECT TAXES. 6 ) REDUCTION IN TAX EVASION. 7) PROGRESSIVE TAX STRUCTURE. 8) DISINVESTMENT OF LOSS MAKING PSUs. 9) REDUCING THE PROBLEM OF OVERSTAFFING IN GOVERNMENT DEPARTMENT. 10) REDUCTION IN SUBSIDIES.

11) ENCOURAGEMENT TO SAVINGS AND INVESTMENTS

FISCAL POLICY OVERVIEW
● The Union Budget 2008-09 was presented in the backdrop of impressive growth in the Indian economy which clocked about 9 per cent of average growth in the last four years. ● Riding on the path of fiscal consolidation, the Union Budget 2008-09 was presented with fiscal deficit estimated at 2.5 per cent of GDP and revenue deficit at 1 per cent of GDP. ● The global financial crisis in the second half of the financial year which heralded recessionary trends the world over, also impacted the Indian economy causing the focus of fiscal policy to be shifted to providing growth stimulus. ● The Country is facing difficult economic situation, the cause of which is not emanating from within its boundaries. However, left unattended, the impact of this crisis is going to affect us in medium to long term. ● The Interim Budget 2009-2010 is being presented in the backdrop of uncertainties prevailing in the world economy. The impact of this is seen in the moderation of the recent trend in growth of the Indian economy in 200809 which at 7.1 per cent still however makes India the second fastest growing economy in the World.

During the first half of the fiscal year, the global spurt in commodity prices (crude petroleum, food items and metals) led to increases in domestic prices of essential items and industrial inputs, putting a severe inflationary

pressure on the economy. ● Since there is no change in the tax base and rates, the prospects of growth in direct tax collection in the ensuing financial year will remain unchanged vis-a-vis the revised estimate for the financial year 2008-09. ● The FRBM Act mandates the Central Government to specify the annual target for assuming contingent liabilities in the form of guarantees. Accordingly the FRBM Rules prescribe a cap of 0.5 per cent of GDP in any financial year on the quantum of guarantees that the Central Government can assume in the particular financial year. ● Assumption of contingent liability in the form of guarantee by the sovereign helps to leverage private sector participation in areas of national priorities. In the current situation, wherein a large number of infrastructure projects are being cleared for implementation under the Public Private Partnership (PPP) mode, difficulties are being faced in reaching financial closure due to the current uncertainties in the global financial market. ● In order to have prudent management of debt and greater focus on carrying cost as well as meeting secondary market liquidity, the government has set up a Middle Office which in due course will merge with the proposed Debt Management Office. ● Central Government has stopped playing the role of financial intermediary for State Government for domestic market borrowings and the trends in the current year shows that this transition has been very smooth resulting in reduction in cost for the State Governments ● Delays in receipts of utilization certificate are broadly indicative of poor implementation strategy, diversion of funds or delay in utilization of funds for intended purposes. ● The process of fiscal consolidation during the FRBM Act regime has created necessary fiscal space to undertake

much needed social sector expenditure and provide for higher infrastructure outlays.