Session 10

Macro Economics
Prof Chandrika Raghavendra
 Topics to be covered

• You will learn about:

– Fiscal Policy, types and its objectives
– Fiscal Multiplier
– Role of Government Spending
– Fiscal policy and Crowding out
 Policies to Regulate Economy

Monetary Policy Fiscal Policy

RBI Govt. – Ministry of Finance

Money Supply Govt. Revenue and Expenditure

Inflation Public Debt

 Govt.
Budget

ECONOMIC GROWTH AND

STABILITY
 Types of Fiscal Policy
It is a macro economic policy that involves changes to government spending and taxation in order to
influence aggregate demand

Expansionary FP Contractionary FP

• Boost Growth • Reduce Inflation

• Reduce Unemployment • Reduce Budget Deficit /
• Increase Inflation Public Debt
• Redistribute Income • Redistribute Income
• Reduce Current a/c Deficit
 Objectives of Fiscal Policy

Economic Growth

Reduction in Inequality

Price Stability
 More Production

More Demand
More Employment

Increase in GDP and Growth

More Income
 FISCAL How does Fiscal Policy
POLICY influence Money supply and
Aggregate Demand??

MONETARY
POLICY
How does Fiscal Policy influence Money supply, Aggregate Demand and GDP ??

Disposable Income = Y - T
Scenario 1
= 100 – 30
Tax rate = 30%
= 70

Income = 100
Disposable Income = Y - T
Scenario 2
= 100 – 60
Tax rate = 60%
= 40

Increase in Tax  Lesser money

circulation  Lesser demand
More Disposable Income
Decrease in Tax  More money  More Demand
circulation  More demand
How does Fiscal Policy influence Money supply, Aggregate Demand and GDP ??
Pradhan Mantri
Ujjwala Yojana (PMUY)
Actual expense = Price - Subsidy
Scenario 1
= 1000 – 410
(2013)
= 590
Subsidy = 410
Saving = 410  more disposable income

Actual expense = Price - Subsidy

Scenario 2
= 1100 – 200
(2023)
= 900
Subsidy = 200
Saving = 200  less disposable income

More Demand
 How does Fiscal Policy influence Inflation or Price Stability??

During
Scenario 2
Inflation,
(2023)
which subsidy
Subsidy = 200
is Ideal ?

Favorable situation Increased

which leads to GDP Production
Growth
 How does Fiscal Policy reduce the inequality??
Should Govt. aim at Equality or Equity??
Government of India to eliminate inequality and to
empower the marginalized sections of the society -
- Food, Oil, Agricultural, and other subsidies
- Atal Pension Yojana (Unorganized Sector)
- Pradhan Mantri Suraksha Bima Yojana (Accident
Insurance)
- Pradhan Mantri Jeevan Jyoti Yojana (Life Insurance)
- Institutional support for entrepreneurship with the help
of MUDRA Bank, to provide microfinance to
entrepreneurs in rural hinterland of India and
- A National Hub for SC/ST entrepreneurs has been
created to support the entrepreneurs belonging to the
marginalized communities
- The Prime Mantri Jan Dhan Yojana is operational that
strives to achieve financial inclusion by ensuring that
the economically weaker sections have access to bank
accounts
 Components of Fiscal Policy

Government Receipts Government Expenditure Public Debt

(When Receipts < Expenditure)

Receipts and Expenditures are credited and debited from three funds
 Three Funds

1. Consolidated Fund of India 2. Contingency Fund of India 3 Public Account of India

Article 266* Article 267* Article 267 (1)*

*Article of Constitution of India

 1. Consolidated Fund of India
Consolidated
Fund
- To spend money from this
fund, Parliament should permit
Revenue a/c Capital a/c

- Audited by Controller and

Auditor General of India
Receipts Expenditures Receipts Expenditure

Tax Non-Tax
Interest, Planned
Salaries, expn-
Pensions, Borrowings, Unplanned
central Expn-
Indirect Interest, Dividends, Fees, Defense, Law Recovery of
Direct Tax Govt Defense,
Tax Fines, Penalties, Grant in and Order, loans,
Minister, Loans and
Aids
Social Disinvestment
Assistance Advance, etc
Securities, s
to State,
Grants to states etc
Income Tax, Corporate Tax, GST, Service Tax, Customs Duty,
Wealth Tax, Gift Tax, Capital Gain Exercise Duty
Tax
 30,000 Crores*
Transferred To spend money from this fund,
President should permit; The
Secretary of Finance Minister
manages

* Maintained all the time; Previously (pre-covid) it was Rs 5,000 crores; Suppose Govt spends Rs 2,000 crores on Kerala (Floor
Relief), then immediately parliament will approve to transfer that money to contingency fund to make it Rs 30,000 crores again
 It deals with the money received by the Indian Government

These funds do not belong to the government, they have to be paid back at some time to their rightful
owners. The government is merely acting as a banker in the transactions of public account.

The Public Account of India deals with the money received by the Indian Government through –
- The state provident funds
- National savings scheme deposits
- Depreciation and reserve funds of departmental undertakings, etc
 Economic Growth
Mr. Ram
Public Sector Private Sector
Full Employment of capital Full Employment of labour
Plans road construction

Public Sector Private Sector

Plans road construction

Public Sector Private Sector

Public Sector Private Sector

So, government spending would

simply be crowding out private
spending and investment
The increased government
spending would not, in the short
run, stimulate the economy

GDP wouldn't increase, because there's already full employment

Public Sector Private Sector
 Plans road construction

Public Sector Private Sector

Government spending on a
new road probably would
increase GDP
 Plans road construction

More demand

Public Sector

Increased AD and GDP

 Increased Production

Increased Production
 The subsequent increases in
spending caused by the initial
increase in government spending
is known as the "FISCAL
MULTIPLIER"
 Learning Outcomes

• We understood -
– Fiscal Policy- expansionary and contractionary FP, Objectives of FP which includes price stability,
economic growth and reducing inequality
– The role of Government Spending in economic growth and influencing aggregate demand
– Govt. spending can result in Crowding out of private investments
– Concept of fiscal multiplier