All about Fiscal policy and measures

Formed of two items:

Expenditure: spent by govt through investment and other means
G
receipts: coming to the govt through disinvestment, or department earnings etc
G
Receipts :
capital and revenue
G
recurring and non recurring
G
Expenditure:
plan
G
non-plan
G
Fiscal Policy deals with both quantity as well as quality of public finance
Different targets of govt are often aimed through fiscal policies
Art. 112 of constitution deals with annual financial statement of govt or fiscal policy
Revenue Deficit: Revenue receipts revenue expenditure ( NREGA though as
a plan of planned expenditure)
Fiscal Deficit: (revenue receipts+ non-debt creating capital receipts)- total expenditure
G
Net FD= Gross FD (grants or loans that the states are given)
G
Budget deficit= total receipts- expenditure ; abolished in 1997 since it considers only that
G
part of deficit for which govt has to print money
Monetised deficit: when borrowings made from the RBI through printing money because of
inability to have money to borrow from the market because of high interest rates is called
monetised deficit
Deficit financing: Financing done by printing new currency, money printed by RBI is called
high powered money or reserve money. However since 1997 this has been dropped and
FRBM also disallows it
Benefits of DF:
G
since FDI discouraged of deficits
G
debt sourced from inside than outside;
G
fixed non inflationary sources of financing;
G
social spending
G
Faults:
G
inflation:
G
middle path is best option
G
Adhoc treasury bill and WMAs(Google it if feeling too good today)
FDs boon or bane debate: moderation required why:
FD
G
corporate sector crowded out since FD inviteshigh interest rates
G
interest rates will be high and forms a vicious circle
G
inflation and instability
G
less saving less investment and eventually less growth
G
similar happened to PIIGS economy
G
FRBM target of 3% FD for 2010 however revised targets for FRBM now
G
India in global recession:
G
6.8% FD;
G
steps taken by India
G
tax relief
G
higher public spending
G
easing liquidity for further lending at lower rates
G
cutting excise duty and service tax to 2% point
G
FRBM act:
fiscal deficit target to 3% with annual decrements of .5%
G
revenue deficit to 0 with annual decrements of .5%
G
cap on liabilities quarterly assessment of expenditure and receipts
G
exceptional circumstances for breaching targets
G
revised in 2009 with new targets and timelines
G
Kelkar Committee report(just get a little idea about its reco from internet for a better day)
G
GST: Number of points given to tackle any question related to GST
Increased compliance Lower average taxation Collective gain for industry, trade,
agriculture and common consumers
10% for goods, 6% for
essential items and 8% for
services
Necessary goods are under
exemptions
State will lose out initially will be
pacified through Grand Bargain
technology infra reqd Increase tax collection Constitutional amendment would be
reqd
States: surrendering there
power to tax sales
Change rates according to
fiscal needs
States cannot have same rates;
centre may not compensate states;
Centre is surrendering
sharing its power
regarding service tax
States are free to tax sin
goods
Replace existing excise duty, service
tax and VAT
Integration Multiplicity of taxes to be
unified
Federal dist of power
Constitution amendment Standardisation Computerisation
Training would be reqd Safeguarding of interest Protecting and balancing present and
future revenues; taxing of sin goods
outside its regime
Centre and federal level Replace multiple taxation Eliminating of existing indirect taxes
2 lakh10-20-30Burden at higher
level comes down
Senior
citizen
MAT-20, dividend distribution
tax, exemption to investment
319 sec, 22
schedules
DTC
G
Fiscal consolidation:
revenue reforms,
G
rationalization of tax exemptions
G
expenditure side
G
Plan and non plan expenditure(expenditure on research projects are even under it)
Public Debt
External : both govt and private(75%)+ Indias forex reserve more than external debt
G
Long term external debt+ NRI deposits and multilateral loans+ commercial borrowings+
G
bilateral loans+ trade credit
Internal debt: liabilities through treasury bills and govt securities, special securities to
G
RBI, oil bonds fertilizer bonds etc

Few terminologies of importance
Market Stabilisation scheme
Perquisites and fringe benefit tax
Fiscal drag
Fiscal neutrality: Zero on fiscal balance sheet
Crowding out and Pump priming(google it)
Public goods: Goods for consumption of all
Merit goods: Merit goods are those goods and services that the government feels that people
will under-consume, and which ought to be subsidised
Demerit goods: Goods whose consumption should be discouraged and govt uses different
schemes to reach its ends like sin tax