A

PROJECT ON

FISCAL POLICY IN INDIA

SUBMITTED TO-

MISS. ERITRIYA ROY

ROLL NO.-88

SEMESTER – 1 (BA.L.L.B HONS.)

SUBMITTED BY-NEELAM THAKUR

DATE OF SUBMISSION-26-8-2013

HIDAYATULLAH NATIONAL LAW UNIVERSITY

NEW RAIPUR- 493661, (C.G.)

 Acknowledgement

I would like to sincerely thank my teacher Ms. Eritriya Roy for giving me this topic which has
enabled me to be aware and more knowledgeable about the subject of Price determination under
different forms of market. It is her encouragement and support that has made me complete the
project within the stipulated guidelines and rules. Thank you ma’am for your ever so helpful
guidance.
 Table of Contents

1. Introduction

2. Research Methodology

3. Objective

4. Introduction

5. Advantages of fiscal policy

6. Drawbacks of fiscal policy

7. Conclusion
 RESEARCH METHODOLOGY

The objective of this project is to understand the basis of different forms of market. The project’s
primary aim is to analyse different conditions of markets.

This doctrinal research is descriptive and analytical in nature. Secondary and electronic resources
have been largely used to gather information and data about the topic.

Books and other references as guided by the faculty of Economics have been primarily helpful in
giving this project a firm structure. Websites, dictionaries and articles have also been referred.

Objective of fiscal policy

1)Mobilization of resources for rapid economic development of the country

.2)To increase the rate of saving in 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 unemployment.

5)Reduction in economic inequalities.

 INTRODUCTION

FISCAL POLICY...

Fiscal policy is defined as that part of Government economic policy which deals with

•TAXATIiON
•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

In  Economics , fiscal policy is the use of government revenue  collection (mainly taxes)

and expenditure (spending) to influence the economy.[1] According to Keynesian economics,
when the government changes the levels of taxation and governments spending, it
influences aggregate demand and the level of economic activity

The two main instruments of fiscal policy are changes in the level, composition of taxation, and
government spending in various sectors. These changes can affect the
following macroeconomic variables, amongst others, in an economy:

 Aggregate demand and the level of economic activity;

 Savings and Investment in the economy
 The distribution of income

Main Objectives of Fiscal Policy In India

 The Indian Constitution gives the balanced fiscal policy framework for the country. India
constitutes federal form of government which is having divided responsibility of
imposing taxes and spending between the central and the state governments.
 The Indian constitution provides for the formation of a Finance Commission (FC) every
five years which provides medium term guidance on all the fiscal matters.
 It is with help of report of the FC that the central taxes are delegated to the state
governments. The Constitution also says that for every financial year, the government
shall prepare its proposal of taxation and spending execution and place them before the
legislature for legislative debate and approval.
 This is known as the Budget. Both the central and the state governments have their own
budgets.

The various objectives of Indian fiscal policy are as follows-

 Development by effective allocation of Resources

The primary objective of fiscal policy is to produce rapid and sustainable economic growth and
development. By Mobilization of Financial Resources this objective of economic growth and
development can be attained. Both the central and the state governments in India have been
empowered to mobilize financial resources in order to bring effective financial planning and its
uses. In India financial resources are mobilized by following three means :-

Taxation : Through fiscal policies, the government generated revenue. It aims to allocate
resources by means of direct taxes as well as indirect taxes. Direct taxes involves income tax
which each working citizen of India pays form his salary.
Public Savings : By reducing government expenditure and increasing surpluses of public sector
enterprises is one of the emerging tool of fiscal policy. Hence financial resources can be
mobilized well through public savings. 

Private Savings : With the help of effective fiscal policy such as tax benefits, the government
can bring resources from households and private sector. Resources can be allocated and managed
through government borrowings by means of loans from domestic and foreign parties, treasury
bills, issue of government bonds, deficit financing etc.

 Expenditure of Financial Resources

The central and state governments have worked to make efficient allocation of financial
resources. These resources are utilized mainly to increase production of necessary and desirable
goods and discourage socially undesirable goods..

 Reduction of Income and Wealth inequalities

Fiscal policy by reducing income inequalities among different sections of the society leads to
strive equity or social justice. The direct taxes play crucial role in this, income tax are charged on
all salaried person which is directly proportion to the income of the person.
 India’s fiscal policy architecture

The Indian Constitution provides the overarching framework for the country‟s fiscal policy.
India has a federal form of government with taxing powers and spending responsibilities being
divided between the central and the state governments according to the Constitution. There is
also a third tier of government at the local level. Since the taxing abilities of the states are not
necessarily commensurate with their spending responsibilities, some of the centre‟s revenues
need to be assigned to the state governments. To provide the basis for this assignment and give
medium term guidance on fiscal matters, the Constitution provides for the formation of a Finance
Commission (FC) every five years. Based on the report of the FC the central taxes are devolved
to the state governments. The Constitution also provides that for every financial year, the
government shall place before the legislature a statement of its proposed taxing and spending
provisions for legislative debate and approval. This is referred to as the Budget. The central and
the state governments each have their own budgets. The central government is responsible for
issues that usually concern the country as a whole like national defence, foreign policy, railways,
national highways, shipping, airways, post and telegraphs, foreign trade and banking. The state
governments are responsible for other items including, law and order, agriculture, fisheries,
water supply and irrigation, and public health. Some items for which responsibility vests in both
the Centre and the states include forests, economic and social planning, education, trade unions
and industrial disputes, price control and electricity.

Evolution of Indian fiscal policy till 1991

India commenced on the path of planned development with the setting up of the Planning
Commission in 1950. That was also the year when the country adopted a federal Constitution
with strong unitary features giving the central government primacy in terms of planning for
economic development (Singh and Srinivasan, 2004). The subsequent planning process laid
emphasis on strengthening public sector enterprises as a means to achieve economic growth and
industrial development. The resulting economic framework imposed administrative controls on
various industries and a system of licensing and quotas for private industries. Consequently, the
main role of fiscal policy was to transfer private savings to cater to the growing consumption and
investment needs of the public sector. Other goals included the reduction of income and wealth
inequalities through taxes and transfers, encouraging balanced regional development, fostering
small scale industries and sometimes influencing the trends in economic activities towards
desired goals (Rao and Rao, 2006). In terms of tax policy, this meant that both direct and indirect
taxes were focussed on extracting revenues from the private sector to fund the public sector and
achieve redistributive goals. The combined centre and state tax revenue to GDP ratio increased
from 6.3 percent in 1950-51 to 16.1 percent in 1987-88.4 For the central government this ratio
was 4.1 percent of GDP in 1950-51 with the larger share coming from indirect taxes at 2.3
percent of GDP and direct taxes at 1.8 percent of GDP. Given their low direct tax levers, the
states had 0.6 percent of GDP as direct taxes and 1.7 percent of GDP as indirect taxes in 1950-51
(Rao and Rao, 2006)
 ADVANTAGES OF FISCAL POLICY...

1)CAPITALFORMATION 
 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 tax on cessionshas 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 givenon life insurances, NSCs,
Provident fund, Bonds etc..Tax concessions have also ben given to corporate sector to enable them
to save more and toreplough their profits. 
5)DEVELOPMENT OF PUBLIC ENTERPRISES- 
The policy has been providing finance for development of public enterprises. Establishment of
basic and heavy industries involved huge capital and risk. But theseindustries play important role
in development of nation.

 6)SOCIAL WELFARE- 
Goverment spend huge amount on public health, education, safe drinking water, welfare of
weaker sections of society, child welfare, women welfare. All this has promoted social welfare
inthe 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
RURALDEVELOPMENT PROGRAMME, JAWAHAR ROZGAR YOJNA, NATIONAL RURAL
EMPLOYMENT ACT.. isinitiated 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 incometax, hiah rates of
taxes on luxuries, wealth tax, etc..govt mobilized resources from the rich class and hasutilized
the same on the welfare schemes for poor  people.
9)EXPORT PROMOTION- 
Goverment has made useof 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 charged 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 sectorsare running at losses. They failed to generate adequate return on investment.

6)INCREASE IN NON-DEVELOPMENT INCOME- 

Government 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 ANDEMPLOYMENT- 

Fiscal policy fails in eradication of  poverty and unemployment problem successfully.
 REFORMS FOR FISCAL POLICY

1) REDUCTION IN NON DEVELOPMENTALEXPENDITURE.

2)AGRICULTURALTAXATION.
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 INGOVERNMENTDEPARTMENT.
10) REDUCTION IN SUBSIDIES.
11) ENCOURAGEMENT TO SAVINGS ANDINVESTMENTS FISCAL POLICY OVERVIEW 

●The Union Budget 2008-09 was presented in thebackdrop of impressive growth in the Indian
economy which clocked about 9 per cent of average growth in thelast four years.
●Riding on the path of fiscal consolidation, the UnionBudget 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 thefinancial year which heralded recessionary
trends theworld over, also impacted the Indian economy causing the focus of fiscal policy to be
shifted to providing growthstimulus.
●The Country is facing difficult economic situation, thecause of which is not emanating from
within itsboundaries. However, left unattended, the impact of thiscrisis is going to affect us in
medium to long term.
●The Interim Budget 2009-2010 is being presented in thebackdrop 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 2008-09 which at 7.1 per cent still however makes India thesecond fastest
growing economy in the World.
●During the first half of the fiscal year, the global spurt incommodity 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 tospecify the annual target for assuming
contingent liabilities in the form of guarantees. Accordingly theFRBM Rules prescribe a cap of
0.5 per cent of GDP inany financial year on the quantum of guarantees that theCentral
Government can assume in the particular financial year.
● Assumption of contingent liability in the form of guaranteeby the sovereign helps to leverage
private sector  participation in areas of national priorities.
●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 aMiddle 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
 Conclusion

This essay traced the major developments in India‟s fiscal policy from the early stages of
planned development in the 1950s, through the country‟s balance of payments crisis of 1991, the
subsequent economic liberalisation and rapid growth phase, the response to the global financial
crisis of 2008 and the recent post-crisis moves to return to a path of fiscal consolidation. India‟s
fiscal policy in the phase of planned development commencing from the 1950s to economic
liberalisation in 1991 was largely characterised by a strategy of using the tax system to transfer
private resources to the massive investments in the public sector industries and also achieve
greater income equality. The result was high maximum marginal income tax rates and the
consequent tendency of tax evasion. The public sector investments and social expenditures were
also not efficient. Given these apparent inadequacies, there were limited attempts to reform the
system in the 1980s. 26 However, the path of debt-induced growth that was pursued partly
contributed to the balance of payments crisis of 1991. Consequently there were major
improvements in the public finances. This probably contributed to the benign macro-fiscal
environment of high growth, low deficits and moderate inflation that prevailed around 2008. The
global financial crisis brought an end to this phase as the government was forced to undertake
sharp counter-cyclical measures to prop up growth in view of the global downturn. Measures
included, excise duty cuts, fiscal support to selected export industries and ramping up public
expenditure. The Indian economy weathered the global crisis rather well with growth going
down to 5.8 percent in the second half of 2008-09 and then bouncing back to 8.5 percent in
2009- 10. In view of the recovery, a slow exit from the fiscal stimulus was attempted in a manner
whereby fiscal consolidation was achieved without hurting the recovery process. Recent policy
documents like the 12th Plan Approach Paper and the government‟s Fiscal Policy Strategy
Statement of 2011-12 appear to indicate that the fiscal consolidation mindset is fairly well
institutionalised in the country‟s policy establishment (Planning Commission, 2011; Ministry of
Finance, 2011).