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Fiscal policy

Meaning of fiscal policy

The fiscal policy is concerned with the raising
of government revenue and incurring of
government expenditure. To generate revenue
and to incur expenditure,
To generate revenue and to
incur expenditure, the government frames a
policy called budgetary policy or fiscal policy.
So, the fiscal policy is concerned with
government expenditure and government
revenue.

Fiscal policy has to decide on the size and pattern
of flow of expenditure from the government to
the economy and from the economy back to the
government.
in broad term fiscal policy refers to
"that segment of national economic policy which is
primarily concerned with the receipts and
expenditure of central government.

Main Objectives of
Fiscal Policy In India

Development by effective
Mobilization of Resources
Efficient allocation of Financial
Resources
Reduction in inequalities of Income
and Wealth
Price Stability and Control of
Inflation
Employment Generation

Balanced Regional Development
Reducing the Deficit in the
Balance of Payment

Increasing National Income

Foreign Exchange Earnings

Development by
effective Mobilization
of Resources

The principal objective of fiscal policy is
to ensure rapid economic growth and
development. This objective of economic
growth and development can be achieved
by Mobilization of Financial Resources
The central and the state governments
in India have used fiscal policy to
mobilize resources.

Financial Resources

The financial resources can be mobilized by:
Taxation : Through effective fiscal policies, the
government aims to mobilize resources by
way of direct taxes as well as indirect taxes
because most important source of resource
mobilization in India is taxation.

Public Savings : The resources can be
mobilized through public savings by reducing
government expenditure and increasing
surpluses of public sector enterprises.

Private Savings : Through effective fiscal
measures such as tax benefits, the government
can raise resources from private sector and
households.

 Efficient allocation of
Financial Resources

The central and state governments have tried
to make efficient allocation of financial
resources. These resources are allocated for
Development Activities which includes
expenditure on railways, infrastructure, etc
While Non-development
Activities includes expenditure on defence,
interest payments, subsidies, etc.

But generally the fiscal policy should
ensure that the resources are
allocated for generation of goods and
services which are socially desirable.
therefore, India's fiscal policy is
designed in such a manner so as to
encourage production of desirable
goods and discourage those goods
which are socially undesirable.

Reduction in inequalities of
Income and Wealth

Fiscal policy aims at achieving equity or
social justice by reducing income
inequalities among different sections of
the society. The direct taxes such as
income tax are charged more on the rich
people as compared to lower income
groups.
Indirect taxes are also more in
the case of semi-luxury and luxury items,
which are mostly consumed by the upper
middle class and the upper class.

Price Stability and
Control of Inflation

One of the main objective of fiscal policy is
to control inflation and stabilize price.
Therefore, the government always aims to
control the inflation by Reducing fiscal
deficits, introducing tax savings schemes,
Productive use of financial resources, etc.

Increase capital

The objective of fiscal policy in India is
also to increase the rate of capital
formation so as to accelerate the rate of
economic growth.
In order to increase the
rate of capital formation, the fiscal
policy must be efficiently designed to
encourage savings and discourage and
reduce spending.

Increasing National Income

The fiscal policy aims to increase the
national income of a country. This is
because fiscal policy facilitates the
capital formation. This results in
economic growth, which in turn
increases the GDP, per capita income
and national income of the country.

Foreign Exchange
Earnings

Fiscal policy attempts to encourage more
exports by way of Fiscal Measures like,
exemption of income tax on export earnings,
exemption of sales tax and octroi, etc.
Foreign exchange provides fiscal
benefits to import substitute industries.

Types of fiscal
policy

Expansionary Fiscal Policy

Contractionary Fiscal Policy

Discretionary Fiscal Policy

Expansionary Fiscal Policy

Expansionary fiscal policy uses increased
government spending, reduced taxes or a
combination of the two. The chief objective of a
fiscal expansion is to increase aggregate
demand for goods and services across the
economy, as well as to reduce unemployment.

Contractionary Fiscal Policy

When government policy-makers cut spending or
increase taxes, they engage in contractionary
fiscal policy. Governments may enact
contractionary measures to slow an economic
expansion and prevent inflation..
In addition, governments may enact contractionary
policy for ideological reasons. These include
reducing the overall size and scope of government
activity or lowering budget deficits, in which the
government spends more money than it collects.

Discretionary fiscal policy

Discretionary fiscal policy is the
portion of the Federal government's
actions that can be changed year to
year by Congress and the President.
It is usually executed through each
year's budget or through changes in
the tax code.

INSTRUMENTS OF FISCAL POLICY
Public revenue
Public expenditure
Public borrowing
Deficit financing

Public revenue

Excess of aggregate demand over aggregates supply
is caused due to the excess amount of money income
is the hands of the people in relation to the available
output in the country.
In order to correct such situation
personal disposable incase should be reduced.
Therefore, government should increase the rate of
personal income tax, and corporate income tax so that
people will have less money in their hands and
aggregates demand will fall.

SOURCES OF PUBLIC REVENUE
TAX REVENUE

DIRECT TAX

NON TAX REVENUE

INDIRECT TAX

PUBLIC
ENTERPRISES
INTEREST
RECEIPTS

 INCOME TAX

CENTRAL
EXCISE DUTIES

 CORPORATE TAX
CUSTOMS DUTIES
 WEALTH TAX
 GIFT TAX

TAXES OF UNION
TERRITORIES

 DEATH DUTY

SERVICE TAX

 INTEREST TAX

OTHER TAXES
AND DUTIES

 FRINGE BENEFIT TAX
 BANKING CASH
 TRANSACTION TAX

ADMINISTRATIVE
REVENUE

CAPITAL RECEIPTS

INTERNAL
EXTERNAL
BORROWINGS
SMALL SAVINGS
P.FUND

RAILWAYS

LOAN RECOVERY

POST AND
TELEGRAPHS

PUBLIC DEPOSITS

CURRENCY AND
MINT
 RBI

Public expenditure

Public expenditure is an important component
of aggregate demand. Therefore, excess
demand can be corrected by reducing
government expenditure. Reduction in
government expenditure also leads to a decline
in the volume of national income due to the
backward operation of investment multiplier.
Reduction in national income leads to a decline
in aggregate demand and fall in the price level.

On the other hand, government
should increase expenditure on public
works programmes such as the
construction of roads, expansion of
railways, setting up of power
projects, construction of irrigation
projects, schools and colleges,
hospitals and parks and so on.
Besides, government should also
enhance expenditure on social
security measures, like old age
pensions, unemployment allowances,
sickness benefits etc. 

HEADS OF PUBLIC EXPENDITURE
PLAN EXPENDITURE

NON PLAN EXPENDITURE
 CIVIL EXPENDITURE

CENTRAL PLAN
SCHEMES

ECONOMIC
SERVICES

CENTRAL
ASSISTANCE TO
STATE PLANS

CENTRAL
ASSISTANCE FOR
U.T PLANS

 DEFENCE
EXPENDITURE
 INTEREST PAYMENTS
 SUBSIDIES
 GRANT-IN-AID

SOCIAL
SERVICES

 LOANS AND ADVANCES

 GENERAL
SERVICES

 MISCELLANEOUS
EXPENDITURE

Public Borrowing

Like tax and public expenditure, public borrowing is
also an important anti – inflationary instrument.
Government of a country should resort to borrowing
from the non-bank public to keep less money in their
hands for correcting the state of excess demand and
inflationary situation.
On the other hand, to correct
deficient demand, government should reduce
borrowing from the general public so that purchasing
power in the hands of the people is not reduced

SOURCES OF PUBLIC DEBT
INTERNAL
 INDIVIDUAL

EXTERNAL
 INTERNATIONAL FINANCIAL
ORGANISATIONS

 FINANCIAL INSTITUTION
FOREIGN GOVERNMENT
 COMMERCIAL BANKS
 CENTRAL BANK

DEFICIT FINANCING

Besides the above fiscal measures,
government should resort to deficit
financing to correct deficient demand.
Deficit financing is a technique of
financing a deficit budget by (i) printing
notes, & (ii) borrowing from the central
bank or drawing down the cash balances on
part of the government from the central
bank., deficit financing makes an addition
to the total money supply of the country
and can correct deficient demand.

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