Economics and Business and economic environment 2012-13

Government in the Business Policy Economics Fiscal Policy

Introduction
• Public finance is one of the important branches of economics. • It deals with the finances of the public which in the context of India could be identified as public bodies such as Local self govts. Municipal corporations, State Govts /UTs and Central Govt.

• Policy led development dominated by public sector till 1991, mgmt of public finance occupied very important role. • Keynesian economics states how during depression, govt can play very important role by increasing expenditure and by increasing tax during inflation.

• National government announced an economic stimulus package of $4 billion to shield its economy from recession substantial increase in government expenditure coupled with a cut in interest rates by Reserve Bank of India aim towards raising aggregate demand during 2008-09 ...Contd.

• It affects private spending what we popularly say crowding out effect.contd.. Demand. • When G is financed through borrowings it adds to govt. Demand and agg. Supply that fiscal policy can stimulate agg. debt. . • We have also learnt when we discussed agg.

• How to analyse budget and implications of fiscal deficit on growth. • What is Budget. concepts of deficit and other components.Fiscal Policy • Objectives: • Meaning and scope of fiscal policy • How fiscal policy helps in achieving the overall objective of growth and economic development through fiscal instruments. .

Macro Economic Stability .Definition It refers to govt. Objectives .Economic Justice or Equity Fiscal Policy .Economic Growth .’s programs of taxation. expenditure and public borrowings with a view to achieve certain national goals/objectives.Promotion of employment .

.High productivity .High overall investment . ..High investment in infrastructure and education Key culprits to Growth .High fiscal deficit of central and state govts. Key to Growth .Contd..High non plan expenditure .

govt spending. • Budget has two sides: Inflows and outflows. • By its statutory powers. . govt can influence inflows and outflows and thereby the macroeconomic variables such as agg. pvt savings and investment by altering taxation. Consumption. and borrowings.How It Works • Fiscal policy is also known as Budgetary Policy and is reflected by Union Budget.

ports etc. payments of interest. transfer payments such as pensions. Taxation. • Budget could be: Balanced Budget. Deficit Budget. new buildings. Budgetary balance are known as fiscal instruments. capital expenditure on new roads. and amortisation of loans. Surplus Budget.Fiscal Instruments • Government Expenditure. Revenue Expenditure takes place due to public spending on purchases of goods and services. • Devt exp/Non-devt exp both in revenue and capital. Public Borrowings. • Govt. . • Govt. grants and aid. subsidies. by plan and non plan expenditure and by revenue and capital exp. unemployment allowance.

customs and various state/local bodies taxes • Recovery of loans and Public sector disinvestment are capital receipts . corporate tax. sales tax.Taxation • Taxation: Direct and Indirect • Direct Taxes: income tax. wealth and property tax • Indirect Taxes: Excise.

loans to public enterprises. subsidies. Loans to state and UT govts • Plan expenditure:Revenue expenditure and capital expenditure: Central Plan and central assistance to State and union territory Plans . social services. • Non plan capital expenditure: Defence services. grants to foreign govts.Govt Expenditure • Non Plan Expenditure.Revenue Expenditure such as interest payment. defence services.

Asian Development Bank. (2) Borrowings from the central bank.e. international organisations such as IMF. The former is transfer of purchasing power from public to govt and the latter monetisation of deficit with inflationary implications. provident fund etc. deficit financing. . World bank.Public Borrowings • Internal Borrowings:(1) Borrowings from the public by means of government bonds. • Both have different implications. • External Borrowings from foreign govts. and treasury bills and other liabilities such as small savings and. i.

The Indian Budget Intentions Vis-à-vis Realities .

What is it ? • Fiscal stance of the government • Annual Balance Sheet • Mandated under Article 112 of the constitution .

medium and long term loans .Govt.Tax:direct(income). special deposits .state provident funds. fees etc.Receipts from recovery of loans .Public sector disinvestments .) Capital receipts: . Receipts Include • Revenue receipts .Other short.External assistance . indirect(tax on commodities and Services) and non-tax revenue(interest and dividend.

expenditures • It is divided into:Revenue exp & capital expenditure • Revenue exp: Consumption exp. • Capital Exp:Expenditure on New roads. • Plan exp. • Govt. • It is also divided into plan exp. And non plan exp again is divided into revenue exp. dams etc.. . And capital exp. interest payments and transfer payments. And non plan exp.Govt Expenditure.

parliament approves subsequently .Contingency Fund • Any unforeseen expenditure • Any urgent expenditure pending parliament approval • Placed at the disposal of the president .

Small savings .Public Account • Includes transactions where government acts more as a banker .Other deposits • Money does not belong to the government • Parliament approval not required .Provident funds .

Gifts. Grants. Excise. Sales • Non-Tax receipts: interest income and dividends on investments. Fines.Inflows • Tax revenues . .Indirect : Custom duties. Education.Direct Taxes : Income. corporate. Donation. service .• Revenue budget The Broad Category . other fees. Forfeitures.

departments. interest payments. Uts. expenditure on economic and social services. defence etc comprise the revenue expenditure. police.It is divided into revenue expenditure and plan expenditure and non plan expenditure . .Subsidies. .Normal running of govt. loans and grants given to the state govts. pension.• Expenditure .

Borrowings from RBI/Tbills .Market loans/loans from public . small savings.Capital Budget • Capital Receipts . . PSE Disinvt.spl deposits) constitute the capital receipts. .Recoveries of loans.Capital receipts are estimated to account for 37 of the total receipts in 10-11 budget.borrowings and other liabilities(PF.Loans from foreign governments .

subsidies are known as non devt exps. Plan and Non Plan expenditure: 1-Budget support to central plan towards economic activities and social activities. Exp .2-cental assistance to state and UTs plans .• Capital Payments • Development &Non-Dev.It is non recurring . interest payment.Loans and advances Maintenance of Law and Order and Defence.Expenditure on acquisition of assets .

• Revenue Deficit : Difference between revenue receipts & revenue expenditure – increasing trend over the yrs (4% of GDP) • Fiscal Deficit : Difference between govt.Some Basic Fiscal Concepts • Budget Deficit : Difference bet total expen & total receipts of central govt. total expenditure &govt. total own receipts – increasing trend (6. minus govt total receipts. .5 % of GDP) • Primary Deficit : difference bet govt current expenditure(total exp minus interest payment).

000 cr • Expenditure not under control – nondevelopmental cannot be touched . 50.The Govt. Budget Dynamics • Deficit on revenue account made good by surplus on capital account • Huge fiscal deficit • Interest outgo accounts for over 34% of current revenue • Disinvestment target – Rs.

plan exp : 420513 (81%) Total cap plan exp: 100512 (19%) Total expenditure 1490925 Total capital exp.5% .Central Govt. (Plan+non plan) 204816 (13.73%) Plan capital exp growth: 22% • Plan revenue exp growth: 21. Expenditure • • • • • • • • BE (2012-13) Total Non-Plan Expenditure:969900 Revenue non-plan exp: 865596 (89%) Capital non-plan exp : 104304 (11%) Total plan exp: 521025 Total Rev.

e. liabilities not backed by assets • Dismantling of APM – subsidy on kerosene and LPG to be part of budget .• Employee pension scheme has grown to more than one-third of the country’s GDP i.

payment 444061(29.6) Total (a+b+c+d) 846699(56.4) .8) e) Social services 20784(1.4) f) Eco.74) d) Gen. a) Int. and pre. pensions) 98794(6.Contd.6) c) Subsidies 190015(12..8% of TE ) b) Defence 113829(7.6) g) Postal deficit 5727(0. Services 24105(1. Services(police.

Concepts Of Fiscal Deficit * Budget Deficit.Fiscal Deficit less interest payment. *Fiscal Deficit.Excess of total Budgetary expenditure over total budgetary receipts. Revenue Expenditure are those that does not result in capital formation. *Primary Defcit. .Excess of total expenditure over govt own receipts (excluding). *Revenue Deficit. This measure was adopted by IMF as the principal policy target in evaluating the performance of countries seeking assistance.Excess of revenue expenditure over revenue receipts.

but also adversely affect savings and investment and consequently growth.Critical examination between the fiscal deficit and growth * India’s fiscal deficit is one of the highest in the world * It is argued that large structural primary deficits and interest payments relative to GDP have had an adverse effect on growth in recent years * There is a clear need to bring down the combined debtGDP ratio from its current level. * High level of fiscal deficit relative to GDP tend not only to cause sharp increase in debt equity ratio. .

GDP growth rate and Fiscal deficit .

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