THE FISCAL

POLICY

ABBAS ANSARI

FARAZ ALAM

SHEIKH TALHA

MOHIUDDIN

ADITYA GUPTA

TOUSEEF SHAGOO
AGENDA
 INTRODUCTION
WHAT IS FISCAL POLICY ?
Fiscal policy refers to the taxation,
expenditure and borrowing by the government
and is an effective tool of stabilizing the
economy.
GOALS OF FISCAL POLICY.
• Achieving economic stability
• Controlling inflation and recession
• Achieving price stability.
• DISCRETIONARY FISCAL POLICY:
Deliberate change in government expenditure and taxes to
influence national output and prices.

• NON-DISCRETIONARY FISCAL POLICY:

Built-in tax and expenditure mechanism so designed that
taxes and government spending vary automatically with
changes in national income.
• Tool to cure recession.
Recession is a phase when there is a
lot of idle or unutilized productive
capacity. There are two fiscal methods
to get the economy out of recession.
- Increase in government
expenditure
- Reduction of taxes.
• Tool to control inflation:
Inflation is a period when
there is an increase in demand leading
to increase in prices in the economy.
Fiscal policy measures to control
inflation are:
- Reducing government
expenditure.
- Increasing taxes.
 Non-discretionary fiscal policies automatically
raise aggregate demand in times of recession
and reduce aggregate demand in times of
inflation. It includes a built-in tax and
expenditure pattern that vary with the changes
in the National Income.

Such taxes are:-

Personal Income Tax

Corporate Income Tax

Transfer Payments
Corporate Dividend Policy
To mobilize resources for economic
growth
Capital formation is of strategic importance in
the matter of rapid economic development and
hence the importance of public finance in
underdeveloped countries.
- Tools for mobilizing resources

Taxation
Government
borrowings
 Taxation is an important instrument of resource
mobilization to raise savings to national income
ratio and also cuts down consumption and
thereby controls inflation.

Taxes can be imposed :

• Directly through highly progressive taxes on
income and profits.
• Indirectly through excise duties and sales tax on
luxury goods.
 ROLE OF TAXATION IN SAVINGS
AND INVESTMENT
The following measures can be taken to promote
investments and savings:
• Interest on private savings such as bank deposits, National
Savings Certificates be exempted from tax.
• Provide tax holidays to promote private investments.
• Reduction in excise duties on domestically produced
goods.
• In developing economies government borrow
in order to finance schemes of economic
development.
• Government borrowings takes two forms:
- Market loan: Government sells to the
public negotiable government securities of
varying terms and duration.
- Small savings: Public borrowing which are
not negotiable and are not bought and sold in
capital market.
• High degree of fiscal deficit leads to
excess market borrowing by the
government which leads to
inflationary situation.
• To check the rate of inflation fiscal
deficit has to be reduced through
raising revenue of government and
by reducing government expenditure.
FISCAL POLICY AND
BUDGET DEFICIT
 In Indian context the following measures
can be adopted to reduce government
expenditure:
 Reduction in expenditure on major subsidies.
 Reduction in expenditure on Leave Travelling
Concessions
 Reduction of interest payments on past debts.
 Increase revenue from taxation:
• Adopting policy of moderate taxes as high
rates of direct taxes leads to tax evasion.
• Preventing hoarding of black money
through strict enforcement of tax laws.
• Only 2% of population pay income tax
therefore to increase revenue from
taxation tax base should be increased
 INDIAN SCENARIO-FRBM
ACT
• The FRBMA was notified on July 2, 2004 and
came into force on July 5, 2004. This Act
requires the reduction of fiscal deficit and
elimination of revenue deficit by March 31,
2009.
• The FRBMA requires the Government of India
to reduce fiscal deficit by a minimum of 0.3
per cent of the GDP every year and revenue
deficit by 0.5 per cent each year, so that the
fiscal deficit is not more than 3 per cent of the
GDP by March 31, 2009.
 The reduction in fiscal deficit by
adopting measures of reducing
public expenditure and increasing
public revenue will prevent excess
demand in the economy thus helping
in controlling inflation and achieving
price stability.