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The Fiscal Policy Of India

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FISCAL POLICY
Fiscal policy is different from the other macroeconomic policy: monetary policy. Fiscal Policy is considered to be acts of a government to influence the direction of nations economy by using its financial and regulatory powers. The two main important instruments of fiscal policy are: government spending and taxation. By regulatory powers we mean the ability of government to influence or require its people to change their behaviour.

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STANCES OF FISCAL POLICY

1. A neutral stance (G=T) 2. An expansionary stance (G > T) 3. A contractionary stance (G < T)

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GOVERNMENT SPENDING
Government expenditure or spending can be categorized in three ways: 1. Spending on goods and service 2. Transfer payments 3. Net interest

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GOVERNMENT REVENUE
Maximum tax is collected as payroll taxes i.e. income taxes, followed by corporate taxes. The next largest category is sales taxes and import duties. By changing tax rates government can influence demand.

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FISCAL DEFICIT
Fiscal deficit is defined as the difference between government expenditure and its revenue i.e. Fiscal deficit = Government spending Government revenue It is expressed in terms of percentage of GDP. India's fiscal deficit was brought down to 3.17% (Rs 1,43,653 crore) of the gross domestic product in 2007-08 from 3.8% in 2006-07. The government had promised to cut the deficit further to 2.5% of GDP (Rs 1,33,287 crore) by the end of 2008-09, but it didnt happen. Thus, India's fiscal deficit continues to be among the highest in the world.

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EFFECTS OF FISCAL POLICY

Changes in the level and composition of taxation and government spending can impact on the following variables in the economy: Aggregate demand and the level of economic activity The pattern of resource allocation The distribution of income

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CROWDING OUT
Despite the importance of fiscal policy, a paradox exists. When governments fund a deficit with the release of government bonds, an increase in interest rates across the market can occur because government borrowing creates higher demand for credit in the financial markets, causing a lower aggregate demand (AD) due to the lack of disposable income, contrary to the objective of a budget deficit. This concept is called crowding out. Alternatively, governments may increase government spending by funding major construction projects. This can also cause crowding out because of the lost opportunity for a private investor to undertake the same project. Another problem is the time lag between the implementation of the policy and detectable effects in the economy. An expansionary fiscal policy (decreased taxes or increased government spending) is usually intended to produce an increase in aggregate demand; however, an unchecked spiral in aggregate demand will lead to inflation. Hence, checks need to be kept in place.

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CASELET
The fiscal deficit is one of the most serious problems facing the Indian economy. In the year 2008-09, the central fiscal deficit was 6 percent of the GDP. If the fiscal deficit of the state governments is included, it amounts to more than 10 percent. This is large by any standard. Despite the fact that reforms were initiated more than a decade ago, the Indian economy has failed to contain the fiscal deficit...

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Points To Be Discussed
Causes For Increase In Fiscal Deficit What the government can do to improve its fiscal position

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Causes For Increase In Fiscal Deficit

1.Increase in interest payments 2.Increase in subsidies 3.Increase in defense expenditure 4.Poor performance of public sector units 5.Poor tax collections 6.Expenditure on government administrative machinery

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What The Government Can Do To Improve Its Fiscal Position:

Reduction in non-development expenditure Wide scope of taxes More direct taxes Reduction in tax evasion Progressive tax structure Reduction in subsidies Encouragement to saving and investment