Fiscal Deficit Finallast (1)

8/8/2019 Fiscal Deficit Finallast (1)

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Group Members

Sai Kumar K - 132

Anand Kumar S - 136Divya Shree R C - 148

Ashutosh Tiwari - 158

Vikalp Agrawal - 161

Satish K Reddy - 162Abhilasha Jha - 174

Group-6

Submitted to

Dr.C.S.Adhikari

Dean Academics

FISCAL DEFICIT AND ITS

IMPLICATIONS


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FISCAL DEFICIT

It is a phenomenon where governments total

expenditure surpasses the total revenue

generated.

In simple terms it is the difference between

governments total receipts and total expenditure.

Total receipts doesnt include governments

borrowing from external sources. Normally fiscal deficit termed as a percentage of

GDP.


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It is a clear indication of the level which

government should borrow.

Fiscal deficit takes place due to either revenuedeficit or a major hike in capital expenditure.


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COMPONENTS OF FISCAL DEFICIT

Revenue expenses: Revenue expenses are the day-to-day

expenses

salaries payable to the government employees

the expenses incurred in running various governmentdepartments, and so on

Capital expenses: Capital expenses include what is incurred

for creating new factories and improving infrastructure.


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Revenue Receipts

Revenue receipts consist of tax collected by the governmentand other receipts consisting of interest and dividend on

investments made by Govt., fees and other receipts forservices rendered by Govt.

Capital Receipts:

Capital Receipts include Recoveries of Loans anddisinvestment of Govt.s equity holdings in Publicenterprises, etc.


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Revenue Deficit

It is an economic phenomenon, where the net amount received fails tomeet the predicted net amount to be received.

Plan expenditure

These are the expenses that form a part of the governments five yearplan.

Non plan expenditure

It is an outcome of planned expenditure like maintenance of nationalhighways, subsidies to states.


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Revenue expenses: Revenue expenses are the day-to-day

expenses:

salaries payable to the government employees

the expenses incurred in running various governmentdepartments, and so on

Capital expenses: Capital expenses include what is incurred

for creating new factories and improving infrastructure.


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3%6%

9%

9%

10%

11%23%

29%

Where Does the Money Come From??

Non debt capital receipts

Service tax and other

taxesCustoms

Income tax

Union excise duties

Non tax revenues

Corporation tax

Borrowings and other

liabiliies


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4%7%

9%

11%

13%

16%

19%

21%

Where is Our Money Going??

Non plan assistance to state

and UT Govts

Plan assistance to state andUT

Subsidies

Defence

Other non plan expenditure

States' share of taxes and

duties

Interest paymaent

Central plan


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TRENDS AND PATTERNS IN FISCAL

VARIABLES IN INDIA


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0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2003-04 2004-05 2005-06 2006-07 2007-08

Subsidies

Food

Fertilizer

Petroleum

SUBSIDIES AS % OF


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PROJECTIONS(AS % OF GDP)

0

1020

30

40

50

6070

80

90

Gross Fiscal

Deficit

Public Debt


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FISCAL DEFICIT IN TERMS OF % OF

GDP

5.6

5.1

5.86 6

6.7

7.3

5.5

4.4

3.8

4.6

5.35.2

4.34.1

4.6

5.4

4.9

5.7

6.5

8.1

6.7

7.3

8.1

9.79.3

10.9

10

9.4

10.4

6.6

4.74.8

6.4

4.7

4.24.1

4.85.1

5.45.7

6.25.9

4.54.1

4.3

3.5

2.7

6.1

0

2

4

6

8

10

12


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REDUCING FISCAL DEFICIT BY

EFFECTIVE FISCAL POLICY

Fiscal policy is a policy in which government

uses its expenditure and revenue programs to

produce desirable effect on national income

and employment.


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TYPES OF FISCAL POLICY

REFLATIONARY FISCAL POLICY

Policy aims to boost the economy by decreasingthe taxes which will lower the prices of taxed

goods and encourage more demand. This will make people to spend the disposable

income which will trigger the growth.

Government will increase its expenditure.

These policy will be adopted during economicslow down and recession.

These policy will increase the fiscal deficit.


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DEFLATIONARY FISCAL POLICY

Policy adopted during boom period to stopthe growth.

Economy growing above its capacity will causeinflation and balance of payment problem.

Aims to increase indirect tax and reduce thegovernment expenditure.

Aims to increase the direct tax which will leavepeople to spend less.

These policy will reduce the fiscal deficit.


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SUPPLY SIDE POLICY

Aims to increase the capacity of the country to

produce more.

Reduction in the tax rate to motivate theenterprises to start new business ventures.

These policy will increase the fiscal deficit.


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THE KEYNESIAN VIEW OF FISCAL POLICY

Keynesians argued that the country budget shouldbe used to promote a level of aggregate demandconsistent with the full-employment rate of output.

EXPANSIONARY FISCAL POLICY

An increase in government expenditures and/or areduction in tax rates such that the expected size ofthe budget deficit expands.

RESTRICTIVE FISCAL POLICY:

A reduction In government expenditures and/or anincrease in tax rates such that the expected size ofthe budget deficit declines (or the budget surplusincreases).


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Expansionary & Restrictive Fiscal Policy


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Initially, the economy is operating at c. Output isbelow potential capacity and unemployment exceeds

its natural rate.

If there is no change in policy, abnormally high

unemployment and excess supply in the resourcemarket will reduce real wages and other resource

prices, which will direct the economy toward b.

In addition, interest rates would decline as the result

of the weak demand for investment, and increaseaggregate demand.

SELF-CORRECTIVE PROCESS


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However, Keynesians believe this self-corrective process will work slowly, if at all.

(1) Wages and prices are inflexible, particularly

in a downward direction.

(2) Lower interest rates may not stimulatemuch additional spending in a recessionary

economy dominated by consumer pessimismand excess production capacity.


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Keynesians recommend government action.

When an economy is operating below itspotential capacity, the Keynesian prescription

calls for expansionary fiscal policy---adeliberate change(Increase) in expendituresand/or (Decrease) In taxes that will increasethe size of the governments budget deficit.


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The Keynesian revolution challenged the view

that a responsible government should

constrain spending within the bounds of its

revenues. Rather than balancing the budget

annually, Keynesians stressed the importance

of countercyclical policy.


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FISCAL POLICY & CROWDING-OUT EFFECT

CROWDING-OUT EFFECT

A reduction in private spending as a result of

higher interest rates generated by budgetdeficits that are financed by borrowing in the

private loanable funds market.


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The crowding-out effect suggests that budget deficits

will have less effect on aggregate demand than thebasic Keynesian model implies. Because financing the

deficit pushes up interest rates, budget deficits will

tend to retard private spending, particularly spending

on investment and consumer durables.

Thus, the expansionary fiscal policy will have little, if

any, effect on demand, output, and employment.


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Keynesians argue that an increase in government

purchases financed by a deficit will exert a strong

multiplier effect on output, employment, and real

income.

Moreover, when applied during a recession, the

demand stimulus may improve business profit

expectations and thereby stimulate additional

private investment.


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Restrictive fiscal policy will crowd in private

spending. If the government increases taxes and/orreduces its spending , the budget will shift toward asurplus. As a result, the governments demand forloan funds will decrease, placing downward pressure

on the real interest rate. The lower real interest ratewill stimulate additional private investment andconsumption.

So the fiscal policy restraint will be at least partiallyoffset by an expansion in private spending.


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THE NEW CLASSICAL VIEW OF FISCAL POLICY

New classical economists

Economists who believe that there are strong

forces pushing a market economy toward full-employment equilibrium and that

macroeconomic policy is an ineffective tool

with which to reduce economic instability.


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The new classical economists stress that debt

financing simply substitutes higher future taxes for

lower current taxes. Thus, budget deficits affect the

timing of the taxes, but not their magnitude.

RICARDIAN EQUIVALENCEThe view that a tax reduction financed with

government debt will exert no effect on current

consumption and aggregate demand because people

will fully recognize the higher future taxes implied bythe additional debt.


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example

Suppose you knew that your taxes were going

to be cut by $1,000 this year, but that next

year they were going to be increased by

$1,000 plus the interest on that figure.

Would you increase your consumption

spending this year?


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SRAS

AD1

AD2

D2

D1

E1

S2S1

e2

e1

P1

Y1

r1

Q2Q1

Price

level

Real

interest

rate

Goods & services (real GDP) Loanable funds

HIGHER EXPECTED FUTURE TAXES CROWD OUT PRIVATE

SPENDING


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KEY CHANGES IN BUDGET TO

CONTROL FISCAL BALANCES

1954-1955 (The taxation enquiry commission)

Raising tax revenue through higher taxes and

greater progressivity of direct taxes. 1985-1986 (Budget presented by Mr.V.P.Singh)

Reduce the number of income tax slabs from

four to eight.


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1985-1986(Mr.V.P.Singh)

Submitted full fledged long term fiscal policy

in the parliament. Sweeping reforms has been made in custom

duties and central excise duty.

Phased introduction VAT called as

MODVAT(modified VAT).


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1986-1987(Mr.V.P.Singh)

Implementation of MODVAT

It enabled manufacturers to deduct the excisepaid on domestically produced inputs andduties paid on imported inputs from theirexcise duty on output.

By 1990 MODVAT covered all sub-sectors ofmanufacturing except petroleumproducts, textiles, and tobacco.


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1991-1992(Chelliah committee)

Simplification and rationalization of direct taxstructure.

Introduction of three-tier personal income taxstructure with an entry rate of 20% and a top rate of40% .

The rates of corporate income tax for both publiclylisted companies and closely held companies havebeen unified and reduced to 46% from 51.75% 57.5%respectively.

Extension of MODVAT to all inputs including machinery.


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1992-1993(Dr. Manmohan Singh)

Import duties has been reduced.

110% in 1992-1993 85% in 1993-1994

65% in 1994-1995

50% in 1995-1996


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1994 (Chelliah committee)

Widening the tax base by including the service tax andextending its coverage gradually.

Services brought under the tax net in 19941995 areTelephone, Stockbroker and General Insurance at thetax rate of 5%

1996-1997(finance act)

Advertising agencies, courier agencies and radio pagerservices were added to Service Tax Net.


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2004-2005(Mr.P.Chidambaram)

Introduction of New Securities Transaction Tax

(New STT), Fringe Benefit Tax

(FBT), commodities transaction tax (CTT).

FBT includes Tax on employee stock option.

Taxes on employee travel welfare and

accommodation.


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Securities transaction tax means Taxable

securities transaction, payable by both the

buyer and the seller, refers to any transaction

of securities entered into in a recognized Stock

Exchange in India which is increase from 0.1%

to 0.125%.


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2011-2012(proposals)

Introduction of Direct Tax code

To cut corporate profit tax from 34% (including

surcharge and tax) to 25% (all inclusive). Changes in Mininimum alternate tax.

Companies having large profits and declaringsubstantial dividends to shareholders but who were

not contributing to the Govt by way of corporatetax, by taking advantage of the various incentives andexemptions provided in the Income-tax Act, pay a fixedpercentage of book profit as minimum alternate tax.


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Introduction of GST

Central GST and State GST are the two

components of GST.

Finance Minister Pranab Mukherjee has said

that the successful implementation of the

Goods and Services Tax (GST) can give a

trillion-dollar boost to the economy, taking thetotal output to $2 trillion.


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All the existing taxes like VAT, Service

tax, Excise duty will be removed.

It is a consumer based tax and not origin

based tax.

That tax for product will be collected by states

which consumes.

The rate is expected to be between 14-16%.


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FISCAL STIMULUS

Increase of Rs.20000 crore towards planexpenditure.

4% cut in central value added tax.

Interest reduction for about 2% for exporters. Additional allocation for export incentive

schemes.

Full refund of service tax paid by foreign agents.

No export duty for iron ore.

Export duty for steel reduced.


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DEBT MONETIZATION AND FISCAL

DEFICIT

In simple terms paying off government debt

by printing more money.

This can reduce the value of the money.

Leads to increase in the inflation because of

more money supply in the market.

Downgrade the countries reputation by

international financial observers.


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WHAT IS HAPPENING IN DEBT

MONETIZATION?

Suppose government expense is RS.10,000 andincome is Rs 9,000.

Now government has options such as either goto RBI and take loan of Rs 1000, go to public andissue bonds worth Rs 1000 or print brand new Rs1000 note.

Suppose it goes for third option after printingRs.1000 it goes to the public through treasury

and buy the already issued bond worth of Rs1000 which will increase the money supply inlarge scale which will cause inflation.


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FISCAL RESPONSIBILITY AND BUDGET

MANAGEMENT( FRBM) BILL

An act initiated to keep fiscal deficit in control.

It was introduce in Lok Sabha in the year 2000.

The bill attempted to fix up responsibility toadopt prudent fiscal policy.

To ensure proper fiscal management and long

term macro economic stability by achieving

revenue surplus.


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KEY OBJECTIVES IN THE ACT

Reducing the revenue deficit by an amountequivalent to 0.5% or more of the GDP at the endof each financial year.

To bring down the gross fiscal deficit to less that2% within FY 2006.

Within 10 financial years (ie) from April 2001 toMarch 2011 to bring down the external debt

which do not exceed 50% of GDP. But now targets under FRBM act have been kept

in abeyance.


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MISCONCEPTIONS IN FRBM ACT

These measures might trigger deflation

because of the decrease in the expenditure.

Decrease in the public expenditure will block

the growth in long term aspect.

Money supply will get reduced in the market

because of the decrease in the expenditure.


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REASONS FOR FISCAL DEFICIT

Increase in the defense expenditure which is 2.5%of GDP.

India expects to spend $50 billion in next 10

years. Stimulus package like loan waiver to farmers.

Increase in the expenditure for sick public sectorcompanies.

Increase in the salary of government employeessalary in terms of 6th pay commission.


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IMPACTS OF FISCAL DEFICIT

Forcing the government to cut spending in the

improvement of social and physical

infrastructure.

Increase in the taxes which will reduce the

purchasing power.

Increase in the fuel price which triggers

inflation.


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HOW FISCAL DEFICIT IS MANAGED?

When revenue is not met to the expected

level government borrows money from RBI or

print additional money.

Normally prefers borrowing because printing

money can lead to increase money supply in

the market.

Increase in the money supply will causeinflation.


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Governments will consume the entire money

in capital market.

This will increase the loan amount to be

costlier and affects the growth of private

companies.


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HOW TO REDUCE FISCAL DEFICIT?

Disinvestment of public sector companies.

Increase the revenue generation by selling

spectrum and wi-max licenses.

Rapid growth in the country will increase the

tax collection.

Roll back the stimulus package.

Reduce the subsidy and tax relaxation.

Increase the efficiency of sick PSUs.


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Thank you

Documents

Fiscal Deficit Finallast (1)