Fiscal Policy 2020

Introduction to Fiscal Policy:

Fiscal policy is the means by which a government adjusts its spending levels and tax rates to
monitor and influence a nation's economy. Fiscal policy is the guiding force that helps the
government decide how much money it should spend to support the economic activity, and
how much revenue it must earn from the system, to keep the wheels of the economy running
smoothly. It deals with the taxation and expenditure decisions of the government.

Some of the major instruments of fiscal policy are as follows: Budget, Taxation, Public
Expenditure, public revenue, Public Debt, and Fiscal Deficit in the economy. Fiscal policy
also feeds into economic trends and influences monetary policy. When the government
receives more than it spends, it has a surplus. If the government spends more than it
receives it runs a deficit. To meet additional expenditures, the government needs to borrow
domestically or from overseas. Alternatively, the government may also choose to draw upon
its foreign exchange reserves or print additional money.

Main objectives of Fiscal Policy in India:

 Economic growth: Fiscal policy helps maintain the economy’s growth rate so that
certain economic goals can be achieved.
 Price stability: It controls the price level of the country so that when the inflation is
too high, prices can be regulated.
 Full employment: It aims to achieve full employment, or near full employment, as a
tool to recover from low economic activity.

Importance of Fiscal Policy in India:

 In a country like India, fiscal policy plays a key role in elevating the rate of capital
formation both in the public and private sectors.
 Through taxation, the fiscal policy helps mobilise considerable amount of resources
for financing its numerous projects.
 Fiscal policy also helps in providing stimulus to elevate the savings rate.
 The fiscal policy gives adequate incentives to the private sector to expand its
activities.
 Fiscal policy aims to minimise the imbalance in the dispersal of income and wealth.

Fiscal Deficit:
Fiscal Deficit Target: 3.3 %
Actual Fiscal Deficit: 3.8%
In eight months of the current financial year, the government has spent roughly Rs 18.20 lakh
crore, while earning tax and non-tax revenues to the tune of Rs 10.12 lakh crore- a deficit of
Rs 8.20 lakh crore.

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Pros of Fiscal Policy 2020:

Budget 2020 was widely expected to be a display of the Narendra Modi government’s resolve
to foster economic growth, despite being constrained by fiscal deficit targets. In the end, it
seems to have balanced the two.
Presenting her second union budget today (Feb. 1), Nirmala Sitharaman offered income tax
doles to tax-payers in an attempt to boost their purchasing power and lift consumption.
There was also a substantial infrastructure spending push. “Rs100 lakh crore ($1.4 trillion)
would be invested on infrastructure over the next five years,” Sitharaman said.
A jumbo Rs1.7 lakh crore was allotted to transport infrastructure, with plans for 100 new
airports by 2024 under the regional connectivity scheme UDAN, high-speed trains, 2,500 km
of highways, 9,000 km of economic corridors, and 2,000 km of coastal roads.
For the struggling rural sector, she allotted Rs2.83 lakh crore, besides announcing a 16-point
action plan that includes doubling farmers’ income by 2022, special trains and flights for easy
transportation of perishable farm produce, and strengthening of shadow banks.
The hope is that these measures will boost GDP growth from an 11-year low of 5% in
financial year 2020 to between 6% and 6.5% next year.
Other Pros of the budget:

Budget 2020 is not being framed in a business-as-usual scenario but at a time of sharply
lower growth. It offered a plethora of measures to boost a flagging economy. First, the
biggest focus before and after the Budget was on changes in the personal income taxes.
Government has sought to increase the spending capacity by delivering a personal income tax
cut but only with removal of exemptions. The overall impact on tax liability is unclear, but
the government has estimated the value of the tax cuts at Rs. 40,000 crores. This will give a
moderate boost to consumption demand in the short run but the impact on other sectors will
have to be further looked into.

Second, the big bet of the government to boost growth is push for investments in its industrial
sector and push for India’s participation in the global value chains. This is borne by further
changes announced in the dividend distribution tax (DDT), moving its incidence from the
company to the recipient. This follows the corporate tax cuts announced in September 2019,
and will boost India’s attractiveness to investments especially by foreign companies.

Third, another focus area of the government is to increase investments in infrastructure.

Despite challenges in meeting fiscal math, the government has budgeted in 2020-21 for an
increase in capital spending by about 20% over the last year.

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Key Points:

 India's economic growth is expected to "strongly rebound" to 6-6.5 per cent in 2020-
21 from 5 per cent estimated in the current fiscal. The Survey said there are tentative
signs of bottoming out of slowdown in manufacturing activity and global trade, which
will have a positive impact on growth in the next fiscal.
 Considering the urgent priority of the government to revive growth in the economy,
the fiscal deficit target may have to be relaxed for the current year, the survey said.
 The Economic Survey 2019-20 has proposed India can create well-paid four crore
jobs by 2025 and eight crore by 2030 by integrating “assemble in India for the world”
into government’s Make in India initiative and exporting network products that can
give substantial push to India’s target of becoming a $5 trillion economy.
 India's GDP growth is neither overestimated nor underestimated and the concerns on
data are unfounded. It said that cross-country comparisons are fraught with risks of
incorrect inference due to various confounding factors that stem from such inherent
differences.
 India's balance of payments position improved to USD 433.7 billion by September
2019 from USD 412.9 billion of forex reserves in March 2019, says Economic survey
2019-20. India's foreign reserves are comfortably placed at USD 461.2 billion as on
10th January 2020. Further, the external debt levels remained low at 20.1 per cent of
GDP by the end of September 2019.
 The Survey suggested providing ESOPs to public sector bank employees to enable
them to become owners in the banks. Employee stock ownership plans (ESOPs) will
incentivise the bank employees to embrace risk-taking and innovation continually, it
said.
 Funding of the Rs 102 lakh crore National infrastructure pipeline recently unveiled by
the Indian government “would be a challenge”, the Economic Survey for 2019-20
said.
 The survey cited a new selloff mode. In the model, the government can transfer its
stake in the listed CPSEs to a separate corporate entity which would be managed by
an independent board and would be mandated to divest the government stake in these
CPSEs over a period of time.
 Indian companies garnered nearly Rs 74,000 crore through public issuance of equity
and debt during April-December this fiscal, a 66 per cent jump from the preceding
financial year, with rights issue emerging as the most preferred route for financing
business needs. Companies had raised Rs 44,355 crore in the April-December period
of 2018-19.
 According to the Survey, foreign tourist arrivals to India on e-visas, which are
available for 169 countries, have increased from 4.45 lakh in 2015 to 23.69 lakh in
2018 and stood at 21.75 lakh in January-October 2019, recording nearly 21 per cent
year-on-year growth in the tourism sector.
Overall, the Budget provides a set of measures to help progress across various areas of the
economy. Government is hoping that this will improve the trust within the industry to get
their animal spirits going.

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Cons of Fiscal Policy 2020:

The higher deficit this year is mainly on account of lower revenues owing to the slowdown
and receipts forgone (Rs1.45 lakh crore) following the corporate tax cut announced last
September.
The budget announced a new, optional income tax regime, amounting to a further revenue
dent. “The new personal income tax rates will entail estimated revenue forgone of Rs40,000
crore per year,” said Sitharaman.
There was also a removal of the dividend distribution tax (DDT) levied on companies when
they pay dividends to shareholders. This will lead to an additional loss of Rs20,000 crore.

Negative impact of Fiscal deficit:

 Higher Inflation
Higher government expenditure will push up demand and generate more money in the
economy. This may lead to higher inflation.

 Increase in Taxes
High fiscal deficit means government is not able to earn as much as it is spending. So
often it raises taxes in some form or the other. The government, in order to repay its
debt, is likely to levy more taxes in the future. It could be either higher inflation or
higher taxes. Or, worse, it could be both.

 Higher Interest Rates

In an emerging economy like India, a higher fiscal deficit leaves little room for
interest rate cuts. A higher interest rate may affect private investments from taking off
in a growing economy like India. Banks have already witnessed a slowdown in credit
take-off.

1. Borrowing costs may remain high for consumers (vehicle and house purchases
or
2. personal loans) and industry/companies.

 Slowdown in Private sector

More than average borrowing by the government from the market leaves that much
less pool for private sector to borrow, stalling its growth plans.

 Fiscal constraints during crisis

It reduces the options for a country to recover from an unforeseen economic volatility
like the financial crisis that hit the world in 2007-08. After the fiscal stimulus package
post 2008 market crash, India's fiscal deficit jumped to about 6 per cent of the GDP.

General Information:

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Fiscal Deficit rise whenever a government spends more money than it brings in during
the fiscal year. This imbalance, sometimes called the current accounts deficit or the budget
deficit, is common among contemporary governments all over the world.

Fiscal Deficit Impact on Economy:

Economists and policy analysts disagree about the impact of fiscal deficits on the economy.
Some, such as Nobel laureate Paul Krugman, suggest that the government does not spend
enough money and that the sluggish recovery from the Great Recession of 2007-09 was
attributable to the reluctance of Congress to run larger deficits to boost aggregate demand.
Others argue that budget deficits crowd out private borrowing, manipulate capital
structures and interest rates, decrease net exports, and lead to either higher taxes, higher
inflation or both.

Fiscal Deficit Impact on the Shorter-Term Economy:

Even though the long-term macroeconomic impact of fiscal deficits is subject to debate, there
is far less debate about certain immediate, short-term consequences. However, these
consequences depend on the nature of the deficit.

If the deficit arises because the government has engaged in extra spending projects—for
example, infrastructure spending or grants to businesses—then those sectors chose to receive
the money receive a short-term boost in operations and profitability. If the deficit arises
because receipts to the government have fallen, either through tax cuts or a decline in
business activity, then no such stimulus takes place. Whether stimulus spending is desirable
is also a subject of debate, but there can be no doubt that certain sectors benefit from it in
the short run.

Other Cons of budget

Budget 2020-21 banks heavily on higher realisations from disinvestment and telecom
services which are not regular or sustainable source of finance while that is precisely what the
central government needs to revive and sustain growth momentum.
Higher dependence on capital and non-tax revenue receipts shows less confidence.
Strategic disinvestment, a questionable source of off-budget financing.
The budget 2020-21 has generated a mixed reaction from economists. While some have
pointed at the fiscal constraints due to inadequate revenue receipts for not providing enough
space for an expansionary fiscal policy, others have praised it for setting more realistic
projections for growth and tax buoyancy.
As financial accruals are important to boost investment and growth, these need a closer look.
Heavy dependence on non-tax receipts.
A reading of the budget documents shows that the central government is heavily banking
on disinvestment and communication services for higher receipts (revenue and capital) in
FY21 - total receipts up from Rs 26.99 lakh crore in FY20 (RE) to Rs 30.95 lakh crore in
FY20 (BE). This is an increase of 15%.
Of this, "miscellaneous capital receipts" go up dramatically from (minus) 38% in FY20 (RE)
to (plus) 223% in FY21 (BE) - from Rs 65,000 crore to Rs 2,10,000 crore. This head shows

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two capital receipt sources: (a) "disinvestment receipts" of Rs 1,20,000 crore and (b)
"disinvestment of government stakes in public sector banks and financial institutions (LIC
and IDBI) of Rs 90,000 crore.
Another component going up substantially is "other communication services" (non-tax
revenue) from which the budget estimates to receive Rs 1,33,027 crore in FY21(BE) - up
from Rs 58,989.64 crore in FY20 (RE). This is an increase of 125%. There is as yet no clarity
whether this would be generated from spectrum auction or adjusted gross revenue (AGR)
from telecom companies which is still pending before the apex court.
Higher dependence on capital and non-tax revenue receipts shows less confidence about tax
revenue.
Indeed, as the graph above shows, between FY20 (RE) and FY21 (BE), the shortfall in tax
revenue is across the board - GST, excise duties, customs and income tax.
When it comes to "gross tax revenue", the budget documents show a massive shortfall of Rs
2.97 lakh crore in FY20 (RE) from the FY20 budget target - (minus) 12.1%. More than half
of this (Rs 1.55 lakh crore) is accounted for by a shortfall in corporate tax. The government
had cut the corporate tax by Rs 1.45 lakh crore in September 2019.
What the above graph also shows is that the receipt targets for FY21 (BE) may be unrealistic.
What happens to the government's investment plans if the receipts from disinvestment and
communication services receipts fail to match the budget estimates?
Surely, that would be a major setback to all its investment plans.
Capex up, revenue expenditure down.
When it comes to expenditure, comparison between FY20 (BE) and FY20 (RE) shows a
decline in total expenditure - fall in revenue expenditure while capital expenditure is up.
A higher capital expenditure (creating more assets) is better for economic growth. Budget
documents show the capital expenditure as percentage of total expenditure has shown an
upturn and is budgeted to go up to 13.5% in FY21 (BE) - as shown in the graph below.
Capex has higher fiscal multiplier effect
Capital expenditure is important because of its higher fiscal multiplier effect. According to
the RBI's Monetary Policy Report of April 2019, while the revenue expenditure multipliers
for the central and state governments are less than unity, that for the capital expenditure is far
higher for both the central and state governments - at 3.25 for the central government and 2.0
for the state governments.
This RBI report also provides another significant pointer: empirical estimates suggest a
negative relationship between revenue and capital expenditures. That is, an increase in
revenue expenditure reduces capital expenditure. Higher capital expenditure by governments
also crowds in private investment and induces more than a proportionate increase investment.
Therefore, output goes up significantly. On the contrary, higher revenue expenditure impacts
private investment negatively and hence the multiplier effect is less.

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Revenue expenditure is important too:

Nevertheless, lower revenue expenditure at a time of demand depression is not such a good
idea.
The budget documents show the allocation for the rural employment guarantee scheme
(MGNREGS) has been reduced from Rs 71,001.81 crore in FY20 (RE) to Rs 61,500 crore in
FY21 (BE) - a shortfall of Rs 9,502 crore.
This is likely to deprive a large number of rural poor accesses to income and consumption
because of growing rural distress and unemployment.
Need for regular and sustainable source of finance:
There is no gainsaying that the government needs a regular and sustainable source of finances
to fund its capital and revenue expenditures - rather than banking on one time or occasional
receipts from disinvestments or telecom charges. There is no disputing either that India needs
to raise its tax revenue.
Therefore, the real challenge is how India can raise its tax revenue to fund its long-term
growth. Eminent economist Dr C Rangarajan, for example, believes that this could be done
by raising the income levels, lowering the tax rates and ensuring a higher economic growth.
Conclusion:
Fiscal policy refers to the use of the government budget to affect the economy. This includes
government spending and levied taxes. The policy is said to be expansionary when the
government spends more on budget items such as infrastructure or when taxes are lowered.
A government's total income can be divided into 2 components - revenue receipts and non-
tax revenues. The revenue receipts of the government include Corporation Tax, Custom
Duties, Income Tax, Union Excise Duties, GST and taxes of Union territories. The non-tax
revenues includes such as Interest Receipts, Dividends and Profits, External Grants, Other
non-tax revenues and Receipts of union territories.
Revenue Expenditure, Capital Expenditure, Interest Payments and Grants-in-aid for creation
of capital assets are mainly considered as the govt.'s expenditure.

Growth drivers:

Taxation: The amount of tax that which government taken from each member of our nation is
always depends upon the inflation and deflation of the economy. Apart from the previous
year Indian budget, the current Finance Minister of India Nirmala Sitharaman introduced
some of the new slabs to our Indian taxations and the economy by reducing it. when we have
a first eye upon this, we will feel that its helpful and reduce the amount of tax.
But by introducing these new slabs, the government also introduced some rules and
regulations for having benefit of this slab.

In our nation, there we already had 100 plus taxation schemes until this budget. But by
introducing the new slab of tax, they removed 70 plus schemes and now the status of total

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schemes reduced into 30. Also, if we want to be a part of the new slab, then we will not get
other deductions in the area of house loans, company LTC etc. It may be noted that
investment in housing property is a major tax saver for Indian households and making the full
use of it can earn very high tax deductions. However, with no such exemptions under the new
tax structure, the real estate sector could encounter falling demand. The insurance sector will
also suffer as it will have to put more effort and money on advertisements to attract people to
invest. The new income tax structure, therefore, may lead to reduced business for insurance
companies.

Fiscal deficit: The fiscal deficit is usually mentioned as a percentage of GDP. The
government has estimated the fiscal deficit for the current financial year (2019-20) at Rs 7.03
lakh crore, aiming to restrict the deficit at 3.3% of the (GDP). But the deficit settled at 3.8%.
This was primarily due to the recent corporate tax cuts by the government which had an
impact of Rs 1.45 lakh crore on its revenue mobilisation. The govt has targeted Fiscal deficit
for 2020-21 at 3.5 percent.
In India, the FRBM Act suggests bringing the fiscal deficit down to about 3 percent of the
GDP is the ideal target. Unfortunately, successive governments have not been able to achieve
this target.

Year 2019-2020 2020-2021 2021-2022 2022-2023

Fiscal Deficit 3.8 3.5 3.3 3.1

Government will finally finance their deficit by borrowing money from banks or market and
print currency. It will lead to the situations like, Higher Interest Rates, Higher Inflation,
Fiscal constraints during crisis, Slowdown in Private sector

By analysing the 2019 and 2020 budget of the government, we can say that it will slightly
affect the fiscal policy of our economy. The main reason for the increase in the fiscal
policy is the higher expenditure of the government than the income.