PPT_Sec C_Group 11

8/6/2019 PPT_Sec C_Group 11

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Fiscal PolicyFiscal Policy

&&Current AccountCurrent Account

Submitted by:Group 11Section C

Harsh AgrawalMadhumitha JPankaj AroraPraveen TrivediSneha HingoraniTirtheshwar Banerjee


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IntroductionIntroduction To what extent fiscal adjustment can

contribute to resolving externalimbalances?

Post liberalization trajectory of the country

Relationship between various parameters of

fiscal policy and the current account.


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Fiscal PolicyFiscal Policy


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Current AccountCurrent Account


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Theoretical StudyTheoretical StudyMajor factors through which fiscal policy affects currentaccount:


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Tax and current accountTax and current account

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Government Expenditure andGovernment Expenditure andcurrent accountcurrent account

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AnalysisAnalysisWe took the previous 20 year data of all 5 parameters of fiscalpolicy (described in previous slides) and got the equation tocalculate Net Current Account is as follows:

NCA = -68444.6 -1.066 Td+ 0.90 Ti -0.419 Rex + 0.853 Cex +0.700 S

Finding - Revenue- expenditure (Rex) and subsidy(S) ; and indirect

(Ti) and direct taxes (Td) are highly correlated.

In such case there will be error in distinguishing the independenteffect of each variable.


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AnalysisAnalysis

A lso th e sig n ifica n ce le v e lo f v a ria b le su b sid y S U B S ID Y w a s b e y o n

.a cce p ta b le lim its

,H e n ce W e ig n o re d th e sub sid y v a ria b le a n d u sed to ta lta x v a ria b le

.co m b in in g d ire ct an d in d ire ct va ria b le


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We performed the regression again and derived theequation as:

NCA = -12573.3 -.074 T - 0.212 Rex+ 1.292 Cex

A n a ly sis


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Now we studied the impact of fiscal policy variables on majoringredients (Merchandise and Invisible account) of net currentbalance. (Again performed the regression twice for it.)

The effect of capital expenditure, revenue expenditure and totaltax

on merchandise output can be described as:

MA = 32160-.481 T - 0.264 Rex+ 1.579 Cex

And on the invisibles account as:

IA = -44733.9+.407 T + 0.052 Rex 0.287 Cex

A n a ly sis


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-R e g re ssio n M e rch a n d ise-R e g re ssio n M e rch a n d ise

A c c o u n tA c c o u n t


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-R e g re ssio n In v isib le-R e g re ssio n In v isib le

A c c o u n tA c c o u n t


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ConclusionConclusion Association between fiscal policy and the emergence or

unwinding of large external imbalances is limited. Changesin fiscal policy are indeed associated with changes in thecurrent account, but the relationship is far less than one-for-one.

Tax, which constitutes direct and indirect tax, has very lesssignificance in determining the change in the total currentaccount (as a whole) of India.

but when we decompose the constituents of current accountas merchandise account and invisible account and find thesignificance of tax in determining them, we find it to besubstantial.


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Conclusion - Effect onConclusion - Effect onMerchandise and invisible accountMerchandise and invisible account

Total Tax and capital expenditure are most critical indetermining the Total Merchandise value and individualaccount.

Revenue expenditure is not much accurate predictor for

these accounts. If Total tax increases by 1%, total merchandise value

decreases by 0.481%, whereas invisible account increasesby 0.407%.

if Capital expenditure increases by 1%, total merchandiseincreases by 1.579% whereas invisible account decreasesby 0.287%.


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Thank YouThank You


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Merchandised and invisible Merchandised and invisible

improved regressionimproved regression

M e rch a n d ised

A c c o u n t

In v isib le

A c c o u n t

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PPT_Sec C_Group 11