FISCAL POLICY

FISCAL POLICY

It is concerned with raising revenue through

taxation and other means and deciding on level
and pattern of expenditure
Instruments of fiscal policy

Taxation
Public borrowing
Deficit financing
Public expenditure

Budget:

FP operates through budget

Budget is a master financial plan of the

government

The union budget constitution provides:

No tax levied or collected except by the

authority of law
No expenditure can be incurred from public
funds except manner provided by
constitution
Authority must spend public money in a
manner sanctioned by parliament for union
and by state legislature in state.

Work of preparing Union budget begin in the

month of August

The annual budget speech is divided into two parts,

part A containing prevailing economic situation
and part B containing specific proposals of tax
pertaining to financial year
The budget is preceded by economic survey which
analysis trends in industry, industrial production,
money supply, prices, exports, imports and other
economic factors.

Instruments of fiscal policy

I Taxation policy
Tax levied are direct and indirect
It plays an important role in mobilizing resources for the
five year plans
Tax revenue collected by the GOI stands at 72.13% in
2002-03
71.0% in 2003-04
75.6% in 2004-05
79.0% in 2005-06
85.0 % in 2006-07
87.0 % in 2007-08

Main objective of taxation policy in India includes:

Mobilization of resources for financing

economic development
Formation of capital by promoting saving
and investment through time deposits,
investment in government bonds, units,
insurance and so on.
Attainment of quality in the distribution of
income and wealth through the imposition
of progressive direct taxes
Attainment of price stability by adopting an
anti- inflationary taxation policy

Fiscal policy resumed the process of fiscal correction in 200607 as stipulated under the fiscal responsibility and budget
management, 2004 (FRBM).
The tax policy 06-07 focused on a rational and stable tax rate
regime, expansion in tax payer base and improvement in the
efficiency of tax administration.
The FBT (fringe benefit tax was rationalized by exempting
expenditures on free sample of medicines and medical
equipment for doctors, expenses on brand ambassadors,
celebrity endorsement, free or subsidized transport, allowances
for employees to their work place.
Tours and travels and hospitality, hotel boarding and lodging
provided by airline and shipping industry was reduced from
20% to 5%.
Custom duty to be brought to mean level of the East Asian
countries.
Introducing the GST (goods and service tax) with effect from
April 1,2010.

II Public expenditure policy

It plays an important role

With the increasing participation of the government in the economic

activities of the country the volume of public expenditure is increasing
rate galloping rate
Public exp. of central government as a % of GDP ,after continuously
from 17.2% in 90-91 to 13.9% in 96-98 to reach 17.2% in 03-04
In 04-05 - 15.4% of GDP
In 05-06 - 15% of GDP
In 06-07 - 14.5% of GDP
Pub. Exp. are of two types, developmental and non developmental
expenditure
Focus was in reduction of non developmental expenditure and
enhancement of exp. On critical social sector like rural employment,
education, health, exp. On infrastructure etc.

PE has been creating a serious impact on the

production and distribution patterns of the
economy

It includes expenditure on development of

infrastructure, public enterprises, support to
private sector, social welfare and employment
programmes etc.

III Deficit Financing policy

DF in India indicates the government taking a loan from RBI

in the form of issuing fresh currency
It helps in providing necessary funds for meeting the
requirements of economic growth but also creates problem of
inflationary rise in prices
DF in Ist FYP 17%
2nd FYP 20%
3rd FYP 13%
4th FYP 13.5%
FRBM act place a limit of 9% of GDP on additional liabilities
that can be assumed by CG

In 5th FYP it fell to 3%

6th FYP 14%
7th FYP 16%
Thus high rate of deficit financing in the absence of
increased tax revenue due to large scale tax evasion
and negative contribution of public enterprises
FRBM

IV Public Debt Policy

Since taxable capacity of the people in India not

good , the government takes recourse to public debt
for financing the developmental expenditure
Public debt are of two types, internal and external
The volume of public debt in India has been
increasing steadily
90-91 314558 crores , 55.3% of GDP
00-01 1168541 crores , 56% of GDP
04-05 1986167 crores , 64% of GDP

Suggestions for necessary

reforms in Fiscal policy

Progressive taxes
Agricultural taxation
Broad based tax net
Checking tax evasion
Increasing reliance on direct taxes
Simplified tax structure
Reduction of non development expenditure
Raising the profitability of PSUS

RECENT FISCAL REFORMS

Fiscal consolidation - pre-payment of high cost

internal debt , introduction of contributory pension
scheme for new entrants to government service
Reduction of rates of direct taxes
Simplification of tax procedure widening of tax
base and phased withdrawal of tax exemptions
Reform in indirect taxes States to introduced
VAT from April1 , 2005

Reduction in the volume of subsidies

Reduction in fiscal deficit
Reduction in public debt
Disinvestment in public sector
FRBM FRBM act , 2003 has been
operationalised with the notification of rules in
July ,2004. Moreover Government is mandated to
eliminated to eliminate revenue deficit by March ,
2009