Fiscal Policy

By
Kumar Devrat
Rohita
Mohit Shukla
Nasreen
Prashant Sharma

What is Fiscal Policy?

Fiscal policy involves the Government changing the levels of Taxation and Govt
Spending in order to influence Aggregate Demand (AD) and therefore the level
of economic activity.
AD is the total level of planned expenditure in an economy
C- is consumption ,
I- is Investment,
G- is Government spending,
X- is total exports, and
M- is total imports

AD = C+ I + G + X M

Reasons for Fiscal deficit

Increase in
Subsidies
Unproductive
expenditure by
the government

Payment of
Interest

Defense
Expenditure

Huge Borrowings

Poor
Performance of
Public Sector

Weak Revenue
Mobilization
Tax Evasion

Objectives Of Fiscal
Policies
Increase in
capital
formation

Achieve
desirable
employment
level

Achieve
desirable
price
level

Achieve
desirable
consumption
level

Achieve
desirable
income
distribution

Types Of Fiscal policies

Expansionary Fiscal
Policy

ContractionaryFiscal
Policy
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Expansionary Policy /
Loose

AD

=C

+
I
+

+X

Involves increasing AD

Govt will increase spending (G) & Cut

Taxes
Lower taxes will increase consumers
spending because they have more
disposable income(C)
This will worsen the govt budget deficit

Risk of High Inflation due to huge

demand & increase in money supply

Contractionary Policy /
Tight
AD

I
+
C

+G

+X

M
Involves decreasing AD

Govt will cut spending (G) & Increase

Taxes
High taxes will decrease consumers
spending because they have less
disposable income(C)
This will help in improving the govt
budget deficit

Not Easy to achieve this

Balancing Economy
Automatic Fiscal Stabilizer

DiscretionaryFiscal Policy
8

Tools Of Fiscal Policies

c
Publi itu
nd
Expe
re

Income Of
The
Government
Government
Borrowings
9

 No Borrowing from the RBI

Reducing the Public debt
Reducing revenue deficit
Long-term macroeconomic stability

FRBM

FRBM

FRBM

FRBM

Fiscal Responsibility And

Budget Management
(FRBM)

Criticisms of Fiscal Policy

Disincentives of
Tax Cuts.

Poor Information

Time lags

Crowding out

Implications of Fiscal policy

It will lead to capital infrastructure like higher education,
growth and output.
It help and facilitate trade and promote economic activity in
the private sector.
It will build up the framework for strong economic growth and
working towards full employment.
It will improve and promote in economic development.

IS-LM Curve

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Cont..
An increased deficit by the national government shifts the
IS curve to the right.
This raises the equilibrium interest rate (from i1 to i2)
and national income (from Y1 to Y2), as shown in the
graph.
The equilibrium level of national income in the IS-LM
diagram is referred to as aggregate demand.
The graph indicates one of the major criticisms of deficit
spending as a way to stimulate the economy: rising
interest rates lead to discouragement of private fixed
investment, which in turn may hurt long-term growth of
the supply side

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AS-AD Framework

Price level

AS

P1
P0

AD1
AD0

Y0

Y1

Real GDP

15

Governments Income
Direct and Indirect Tax
Progressive Tax and Regressive Tax
Non Tax Revenue

Administrative receipts
Net contribution of
Public sector undertaking
Railways
Posts and Telegraphs
Currency and mint
Other

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Public Debt
The government can turn to the capital markets to borrow
the necessary money.
Borrowings could be from the Reserve Bank of India
(RBI), from the public by floating bonds, financial
institutions, banks and even foreign institutions.
Borrowing from capital market is done primarily by
issuing securities, either Treasury Bills or Treasury Bonds

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Public Expenditure
Public expenditure is incurred in the form of purchases of goods and
services, transfer payments and lending.
Divided under two heads i.e. Plan Expenditure and Non Plan expenditure.
The plan expenditure is developmental in nature. Plan expenditure refers
to the expenditure incurred by the Central Government on
Programs/Projects, which are recommended by the Planning Commission.
According to the ministry of finance non-Plan expenditure is a generic
term, which is used to cover all expenditure of Government not included
in the Plan expenditure. It includes both developmental and nondevelopmental expenditure. Part of the expenditure is obligatory in nature
e.g. interest payments, pensionary charges and statutory transfers to States.
A part of the expenditure is an essential obligation of a State, e.g. Defense
and internal security. Expenditure on maintaining the assets created in
previous Plans is also treated as Non-plan expenditure.

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Thank You !