Part-I

Fiscal Policy
 CONTENTS
1. Why Fiscal policy?
2. What is Fiscal policy?
3. Objectives of Fiscal policy
4. Instruments of Fiscal policy
- Public Revenue
- Public Exp
- Public Debt (Fiscal deficit)

5. Fiscal Policy in the Open Economy

6. Using Economic policy to Stabilise the
Economy
7. Conclusion

Part-II Taxes
 What is Fiscal policy ?
The policy of the government regarding:
(1) Taxing & Spending,
(2) Lending & Borrowing and,
(3) Investing & selling.
It is nothing but the budgetary policy of the
government.
 Refers to the government’s choices regarding
the overall level of government purchases or
taxes.
 In the short-run, fiscal policy affects the
aggregate demand.
 In the long-run fiscal policy influences saving,
investment, and growth. V J Sebastian, IMT Ghaziabad
Objectives of Fiscal policy are same as
the general economic objectives of the
govt.

Objectives of fiscal policy in India are:

 Mobilise Resources

 Raise rate of savings and capital formation

 Control Inflation

 Reduce disparities in income and wealth

 Exchange rate stability V J Sebastian, IMT Ghaziabad

Instruments of Fiscal policy

Fiscal policy tries to achieve its

objectives by a coordinated use of:
1. Pub. Revenue

2. Pub. Exp.

3. Pub Debt.

V J Sebastian, IMT Ghaziabad

 Public Revenue:
TAX (7.28%)
Revenue
NON-TAX (1.71%) Receipts
[Interest, Dividend, Ext. (9.0 %) Govt.'s
Grants etc]
Total
Receipts
Recovery of Loan, Capital ( 9.0% )
Market Receipts
Borrowings, net
(3.67 %)
Disinvestment
Tax rev (net) of Centre: 7.28%; Non-tax rev. 1.71%; Total rev. 9.0%,
Capital Receipts:3.67% (As % of GDP during 2017-18)
 Public Expenditure(Centre):

Consumption
Revenue
Interest Exp.
(11.59%)
Transfer Pay. Total
Exp.
Exp. on new (13.22)
Roads, Dams, Capital
Loans given, Exp.
etc. (1.63)

Total exp. of Centre & States: 27.3% of GDP in 20017-18

 0.00
1000.00
2000.00
3000.00
4000.00
5000.00
6000.00
1988‐89
1989‐90
1990‐91
1991‐92
1992‐93
1993‐94
1994‐95
1995‐96
1996‐97
1997‐98
1998‐99
1999‐00
2000‐01
2001‐02
2002‐03
2003‐04
Gross Fiscal Deficit 2004‐05
2005‐06
2006‐07
2007‐08
2008‐09
Source: RBI, Handbook of Statistics on Indian Economy 2009‐10
2010‐11
2011‐12
GDPMP =Rs.151837.09 Billion in 2016-17

2012‐13
2013‐14
2014‐15
2015‐16
2016‐17
Gross Fiscal Deficit of Central Govt. ( Rs. Billion)

2017‐18
 Fiscal Policy considerations in the
Open Economy
 In an open economy, an expansionary
fiscal policy causes the domestic
currency to appreciate. (???)

Since this causes net exports to fall,

there is an additional crowding-out
effect that reduces the demand for
domestic goods and services.
V J Sebastian, IMT Ghaziabad
 Using Eco. Policy to Stabilize the
Economy
 Many policy-makers believe it necessary to
use monetary and fiscal policy to achieve
any level of aggregate demand and GDP
that they wish.
o Active monetary and fiscal intervention is
necessary to tame an inherently unstable private
sector.
o The use of policy instruments stabilize aggregate
demand & production and thereby, employment.
V J Sebastian, IMT Ghaziabad
 Conclusion
 Government’s macroeconomic policy has
short and long-run effects.
 In short run, fiscal policy affects the
aggregate demand.
 In the long-run it affects saving,
investment, the trade balance and growth.
 Monetary policy can ultimately determine
the level of prices and affect the inflation
rate.
Part-II
Taxes
 Tax Revenue
 A Tax is a compulsory levy imposed by the
government on individuals and organisations.
 The tax system in India is mainly a three tier system
involving the Central, State Governments and the
local government organizations.
 According to the Constitution of India, the government has the right to levy
taxes on individuals and organizations. However, the constitution states
that no one has the right to levy or charge taxes except the authority of
law. Whatever tax is being charged has to be backed by the law passed by
the legislature or the parliament. Article 246 (SEVENTH SCHEDULE) of
the Indian Constitution, distributes legislative powers including taxation,
between the Parliament and the State Legislature. Schedule VII
enumerates these subject matters with the use of three lists:
 Revenue of Central Govt (Rs. Crores)

50-51 80-81 01-02 11-12 (BE) 17-18

(BE_Bilion Rs)
Tax 357 9390 133660 664457 12270.14
Revenue (88) (73) (66) (84) (81)

Non tax 49 3440 67790 125435 2887.57

Revenue (12) (27) (34) (16) (19)

Total 406 12830 201450 789892 15157.71

Revenue (100) (100) (100) (100) (100)
Receipts
Figures in brackets show percentages
Source: Indian Economy by Datt and Sundharam, 64th edn., p.921
 Taxes in India

Direct Taxes Indirect Taxes

 Capital gains tax  Countervailing
 Corporate tax Duties
 Inheritance tax  Custom Duty

 Personal income  GST

tax
 Property tax
 Wealth tax
 Share of Direct and Indirect Taxes in Centre’s Tax
Revenue (Rs. Crores)
1950-51 80-81 01-02 10-11 17-18
(BE) ( Rs.
Billion)
Direct 174 11030 69230 430000 6245.64
Tax (43) (16) (37) (57.6) (48.3)

Indirect 227 57470 120270 316651 6448.90

Tax (57) (84) (63) (42.4) (51.7)

Total tax 401 68500 189500 746651 12694.54

Revenue (100) (100) (100) (100) (100)
 NOTES(1)
Contractionary Fiscal Policy - Policy
enacted by the government that
reduces output. Examples include
raising taxes and decreasing
government spending.
Expansionary Fiscal Policy - Policy
enacted by the government that
increases output. Examples include
lowering taxes and increasing
government spending. V J Sebastian, IMT Ghaziabad
 Questions
1. What is fiscal policy? What are the its objectives and tools?

2. Notes on: Multiplier, Automatic stabilisers, crowding out, Laffer curve etc

3. In an open economy, an expansionary fiscal policy may cause the

appreciation of domestic currency. Explain how?

4. Suppose firms become pessimistic about the future. What happens to

aggregate demand and the economy? Explain.

5. If the govt. wants to stabilize aggregate demand, how should it use the
fiscal policy?

6. What are the effects of huge fiscal deficit on the economy?

7. Are all deficits bad? Discuss.

8. Different Taxes in India – Centere and States.

V J Sebastian, IMT Ghaziabad

 DEFICIT CONCEPTS

Major deficit indicators presented in these tables are defined as follows : Revenue deficit
denotes the difference between revenue receipts and revenue expenditure. The conventional
deficit (budgetary deficit) is the difference between all receipts and expenditure, both revenue and
capital. Since March 1997, conventional deficit is represented as draw down of cash balances.
Gross fiscal deficit (GFD) is the excess of total expenditure (including loans net of recovery)
over revenue receipts (including external grants) and non-debt capital receipts. Since 1999-2000,
GFD excludes States’ share in small savings as per the new system of accounting. The net fiscal
deficit is the gross fiscal deficit less net lending of the Central Government. Gross primary
deficit is defined as GFD minus interest payments. The net primary deficit denotes net
fiscal deficit minus net interest payments.

The combined deficit indicators have been worked out after netting out the inter-Governmental
transactions between Centre and States. Combined GFD is the GFD of Central Government plus
GFD of State Governments minus net lending from Central Government to State Governments.
Revenue deficit is the difference between revenue receipts and revenue expenditure of the
Central and State Governments adjusted for inter- Governmental transactions in the revenue
account. Combined gross primary deficit is defined as combined GFD minus combined interest
payments. V J Sebastian, IMT Ghaziabad