BCom Fiscal Policy of India Notes Study Material
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BCom Fiscal Policy of India Notes Study Material
Meaning
Fiscal policy play an important role in the economic and social set up of a country. Fiscal policy refers to the policy of Government regarding taxation, public expenditures and public debt. It is defined as a set of principles and decisions of a Government in setting the level of public expenditure and the ways of financing it. An effecting fiscal policy consists of policy decisions relating to the entire financial structure of the Government including tax revenue, public expenditures, loans, transfers, debt management, budgetary deficit and so on. According to Harvey and Johnson M., “Fiscal policy is defined as changes in Government expenditure and taxation designed to influence the pattern and level of activity.” G. K. Shaw defined fiscal policy as “to include any design to change the price level, composition or timing of Government expenditure or to very the burden, structure of frequency of the tax payment.”
Modern society acknowledges the positive and supportive role played by the Government. The Government not only imposes taxes but also incurs expenditure on public welfare. Government participation, is not confined to just traditional activities of maintaining law and order, but has expanded its reach to include the provision of social infrastructure, such as education, health, entertainment, social security and physical infrastructure, such as airport, roads, parks, water and sewage system. Thus finally we can say that, fiscal policy is the policy concerning the revenue expenditure and debt of the Government for achieving certain objectives like control of inflation, public expenditure etc. which aims to short run goals of full-employment, and stability in price level.
Fiscal policy affects an economy both at micro and macro levels. At the micro economic level, it is used for making the distribution of wealth and income more equitable, providing equitable access to social services, meeting the basic needs of poor, influencing relative prices and cost conditions in order to discourage some activities and encourage others, and enhancing the efficiency of production and competitiveness of domestically produced output. At macro-economic level, the balance of tax revenue and expenditure influences the aggregate demand, which, in turn, influences output, employment, overall price level, inflation rate of interest and many other variables.
OBJECTIVES OF FISCAL POLICY
Fiscal policy has both macro and micro economic objectives. In developed countries, the focus of fiscal policy is on maintaining full employment and establishing growth, whereas in developing countries it is used to create an environment for rapid economic growth. The various objective of fiscal policy are as follows:
- Mobilisation and Efficient Allocation of Resources: Developing countries like India, are characterised by a low per capita income and investment and followed by vicious circle of poverty. Fiscal policy aims at breaking this circle by mobilizing and generating resources through taxes and borrowings, and investing these resources in efficient ways.
- Minimizing of Inequalities of Income and Wealth: Fiscal tools are used with the objective of bringing about redistribution of income in favour of the poor by taxing the rich spending it in various social welfare activities including education, health, water and sanitation.
- Increasing Employment Opportunities: The level of employment influences the aggregate output and income, and thus, general standard of living will improve. Fiscal policy also enables the policy makers to attain the objectives of full employment and control of business cycles. It is possible by making the desired public expenditure to boost the effective demand in the economy at the time of depression.(BCom Fiscal Policy of India Notes Study Material)
- Increasing Output and Accelerating Economic Growth: Fiscal policy aims at increasing growth and development in the economy. Rapid economic growth is the fundamental objective of fiscal policy in a developing economy. In this regard, the fiscal policy should be so designed as to raise the production potential of the economy and generate resources to finance infrastructural activities in the economy which will give or big push to the process of growth and development in the country.
- Economic Stability: It is another prime objective of sound fiscal policy. This objective implies maintenance of full employment with relative price stabilisation. During an upswing, taxes are hiked to curb the rising demand for goods and services, whereas these are lowered in a recessionary phase to boost up the level of demand.
- Price Stability: Economic stability is largely dependent on overall price stability. A stable price level creates conducive environment for production, output and employment. Fiscal policy aims at reducing price fluctuations and maintaining stable price level. In an inflationary situation, government expenditure is curtailed and taxes are increased to reduce disposable income and expenditure of the private sector. Conversely, in a deflationary situation, the Government enhances its own expenditure and induces the expenditures of the private sector by reducing taxes.
ASPECTS OF FISCAL POLICY
The followings are the four important aspects of India’s fiscal policy:
- Taxation Policy,
- Public Expenditure Policy,
- Public Debt Policy,
- Deficit Financing Policy.
Taxation Policy
Tax revenue is one of the important sources of revenue of the Government India. The Government levies both direct and indirect taxes. Direct taxes are progressive in nature while indirect taxes are regressive in nature. Direct taxes, include taxes on income and property whereas indirect taxes covers taxes on commodities and services. Important direct taxes are income tax, corporate tax and wealth tax. Important examples of indirect taxes are sales tax, excise duty, import or custom duties etc.(Fiscal Policy of India Notes Study Material)
Traditionally, the basic objective behind imposing taxes is to raise revenue. However, in modern economies these have become an important instrument of fiscal policy to achieve other objectives, such as equity and growth. The objective of equity is achieved by redistribution of income among individuals or different population groups. For example, taxes are imposed on working population to support the poor, the disabled and unattended social group. Similarly, to attain higher growth, macro economic performance is influenced by diverting resources, such as capital and labour, in certain desired channels, such as investment in infrastructure and production and consumption of essential goods, by imposing lower rates of taxes or by providing various tax concessions.
The main objectives of the taxation policy in India include the followings:
(i) Mobilisation of resources for financing economic development.
(ii) Formulation of capital by promoting savings and investment through time deposits, investment in Government bonds, units, insurance and so on.
(iii) Attainment of quality in the distribution of income and wealth through the imposition of progressive direct taxes.
(iv) Attainment of price stability by adopting an anti-inflationary taxation policy.
Public Expenditure Policy
Public expenditure plays an important role in the economic development of country like India. With increase in the responsibilities of the government and with increasing participation of the Government in the economic activities of the country, the volume of public expenditure in a highly populated country like India is increasing at a galloping rate. “The budget estimate (BE) 2014-15 estimated plan and non-plan expenditure at 5.75 lakh crore and 12.20 lakh crore respectively, which amounted 4.5% and 9.5% of budget GDP, reflecting a growth 20.9% and 9.4% respectively over RE 2013-14.”
Public expenditure is of two different types i.e. developmental expenditure and non-developmental expenditure. Developmental expenditure of the Government is mostly related to development activities viz. development of infrastructure, industry, health facilities, and educational institutions and so on. The non-developmental expenditure is mostly a maintenance type of expenditure, related to maintenance of law and order, defence administrative services, and so on.
The following are the important features of the policy of public expenditure formulated by the Government of India.
(i) Development of Infrastructure: Development of infrastructural facilities which include development of power projects, railways, road, transportation system, bridges, dams, irrigation projects, hospitals, educational institutions and so on involves huge expenditure by the Government because private investors are avoid to invest in these areas considering their low rate of profitability and high risk.(BCom Fiscal Policy of India Notes Study Material)
(ii) Development of Public Enterprises: The development of heavy and basic industries is very important for the development of a developing country. But the establishment of these industries involves huge investment and a considerable proportion of risk. So that, the private sector cannot take the responsibility to develop these industries. Naturally, the development of these industries has becomes a responsibility of the Government.
(iii) Support to Private Sector: The another objective of the public expenditure policy of Government of India is to providing the necessary support to the private sector for the establishment of industry and other projects.
(iv) Social Welfare and Employment Programmes: It is the another important feature of the public expenditure policy persuade by the Government of India to its growing involvement in attaining various social welfare programmes and stress on employment generation programmes.
Public Debt Policy
Under public debt policy, the Government takes resource to public debt for financing its development expenditure. In the post independence period, the Central Government has been raising a good amount of public debt regularly in order to mobilise resources to meet its developmental expenditure. The total public debt consists two types of debt i.e. internal debt and external debt.
(i) Internal Debt: This is the amount of loan raised, from within the country by the Government. The internal public debt raised from the open market by issuing bonds and cash certificates and 15 years annuity certificates. The Government also borrows for a temporary period from the RBI (treasury bill issued by RBI) and from commercial banks.(BCom Fiscal Policy of India Notes Study Material)
(ii) External Debt: Since the internal debt is insufficient for its need, the Government also takes a loan from external sources like, World Bank, IMF, IDA and IFC. The Government also uses inter-governmental loans from various developed countries of the world for financing its various infrastructure projects.
The total outstanding liabilities of the Central Government were 55.87 lakh crore, accounting for 49.2 percent of GDP, comprising 39 percent public debt and 10.2 percent other liabilities at the end March 2014. Of total public debt, internal debt constituted 95.9 percent and the remaining was external debt (at book value). Total outstanding liabilities were estimated at 62.22 lakh crore in BE 2014-15.1
Deficit Financing Policy
Deficit financing in India indicates the Government taking a loan from the Reserve Bank of India in the form of issuing fresh currency. Considering the low level of income, low rate of savings and capital formation, the Government is increasingly taking resource to deficit financing. Accordingly, Dr. V. K. R. V. Rao,”Deficit financing is the name of volume of those forced savings which are result of increase in prices during the period of the Government investment. Thus, deficit financing helps the country by providing necessary funds for meeting the requirements of economic growth but at the same time it also creates the problem of inflationary rise in prices. Thus the deficit financing must be kept within the manageable limit.” Due to adverse consequences of deficit financing through an inflationary rise in price level, the Government should lay less stress on deficit financing.(BCom Fiscal Policy of India Notes Study Material)
MERITS OF FISCAL POLICY OF INDIA
The following are the some important merits of the fiscal policy of India:
(i) Capital Formation: The fiscal policy of the country has played an important role in raising the rate of capital formation in the public and private sectors. The gross domestic capital formation as a percent of GDP in India has increased from 10.2 percent in 1950-51 to 22.9 percent in 1980-81 and then 36.5% in 2009-10. Therefore, it has created a favourable impact of public and private sectors investment of the country.(BCom Fiscal Policy of India Notes Study Material)
(ii) Mobilisation of Resources: The fiscal policy of the country has been helping to mobilise a considerable amount of resources through taxation, public debt, and other sources for financing its various developmental projects. The extent of internal resource mobilisation for financing the various five year plans has increased considerably from * 406 crore in 1950-51 to 77,89,892 crore in 2011-12
(iii) Incentives to Saving: The fiscal policy of the country has been providing various incentives to raise the savings and encouraging investment through various budgetry policy changes, viz. tax exemption, tax concession and so on. Accordingly, the saving rate increased from a more 10.4 percent in 1950-51 and 23.1 percent in 1997-98 to 33.7 percent in 2009-10.
(iv) Inducement to Private Sector: The private sector of the country has been getting necessary inducements from the fiscal policy of the country to expand its activities. Tax concession, tax exemptions, subsidies, and so on incorporated in budget have been providing adequate incentives to the private sector units engaged in industry, infrastructure, and export of the country.
(v) Reduction of Inequality: The basic objective of fiscal policy is to maintain equitable distribution of wealth in society. Progressive taxes on income and wealth tax exemption, subsidies, grant and so on are making a concerted effort to reduce such inequalities. Moreover, the fiscal policy is also trying to reduce regional disparities through its various budgetary policies.
(vi) Export Promotion: Through Fiscal Policy Government of India has been trying to promote export activities by its various promotive policies like, export subsidies, reduction in custom duties, concessions etc.
(vii) Alleviation of Poverty and Unemployment: Another important merit of the Indian fiscal policy is to making constant effort to alleviate poverty and unemployment through its various poverty eradication and employment generation programmes, such as IRDP, JRY, PMRY, SGSY, SGRY etc.
SHORTCOMINGS OF FISCAL POLICY OF INDIA
The followings are the main shortcomings of the fiscal policy of the country:
(i) Instability: The fiscal policy of the country has failed to maintain stability in the economy. The increasing trends of deficit financing and adverse balance of payment both have affected the economical stability of the country.
(ii) Defective Tax Structure: Indian fiscal policy has also failed to provide a suitable tax structure for the country. Current tax structure has enabled to raise adequate productivity of direct taxes. As a result the country has been depending much on indirect taxes which has become burden to the common man.
(iii) Inflation: The fiscal policy of the country has failed to control inflationary rise in price level. The increasing volume of public expenditure on non-developmental heads and deficit financing has resulted demand-pull inflation. The higher rate of indirect taxation has also resulted cost-push inflation.
(iv) Negative Return of Public Sector: The negative return on capital invested in PSUs has becomes a serious problem in front of Govt. of India. The return on investment has remained mostly negative in PSUs. In order to maintain the performance of PSUs, the Government has to keep huge budgetary provisions, thereby creating a huge drainage of scarce resources of the country.
(v) Growing Inequality: The Indian fiscal policy has failed to reduce inequality in the distribution of income and wealth among different segments of society. Improper progressive tax structure has also failed to minimize tax invasion in country.(BCom Fiscal Policy of India Notes Study Material)
SUGGESTIONS FOR NECESSARY REFORMS IN FISCAL POLICY
The followings are the some important suggestions to bring necessary reforms in fiscal policy:
(i) More Progressive Taxation.
(ii) Agricultural Taxation.
(iii) Checking Tax Evasion.
(iv) Increasing Reliance on Direct Taxes.
(v) Simplified Tax Structure.
(vi) Checking Black Money.
(vii) Reduction of Non-Development Expenditure.
(viii) Raising the Profitability of PSUs.
(ix) Disinvestment of Loss Making PSUs.
(x) Reduction in Subsidies.
FISCAL POLICY FOR 2014-15
At the time of presentation of the Budget for 2014-15, as per the available information the macro economic outlook was mixed. Growth had been sub-par for two years 2012-13 and 2013-14 and inflation was moderating gradually, reflecting the compression in aggregate demand and a sound external sector outcome. The budget for 2014-15 had indicated that while containing the fiscal deficit at 4.1 percent of GDP was a daunting challenge given the macro-economic conjecture, it outlined the importance of adherence to fiscal consolidation and it accepted the challenge.(BCom Fiscal Policy of India Notes Study Material)
The fiscal consolidation plan as enunciated in BE 2014-15 entailed an increase in the tax to GDP and non-debt receipt to GDP ratio to 10.6 percent and 9.8 percent respectively and a continuance the low level of total expenditure to GDP ratio at 13.9 percent. The envisaged growth in gross tax revenue (GTR) was 17.7 percent over revised estimates (RE) 2013-14 and 19.8 percent over provisional actual (PA) 2013-14. Total expenditure was estimated to increase by 12.9 percent and 14.8 percent in budget estimates (BE) 2014-15 over RE 2013-14 and PA 2013-14 respectively. The expectation of better performance of gross tax revenue vis-a-vis total expenditure, resulted in a projection of decline in fiscal deficit to 4.1 percent of GDP in BE 2014-15.(BCom Fiscal Policy of India Notes Study Material)
About evaluation of fiscal policy it may be clearly said that, fiscal policy has failed to produce enough savings for public investment. Financial deficit has become a standard excuse to avoid or postpone project implementation. With regard to the impact of public revenue and public expenditure on minimizing income inequalities, less said the better, over the years, the difference between the rich and poor has widened. The tax system has, obviously failed to establish equality in society and public expenditure has failed to pay attention on development of common man.(BCom Fiscal Policy of India Notes Study Material)
Fiscal Policy of India Notes Study Material
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Fiscal Policy of India Notes Study Material
BCom Fiscal Policy of India Notes Study Material