Fiscal Policy

August 15, 2019
Economy

Fiscal Policy is prepared by the Government. Fiscal policy is a policy dealing with the taxation and expenditure decision of the government. This includes tax policy, expenditure policy, investment, and disinvestment strategy and debt or surplus management. There are 3 types of fiscal policy:

  1. A Neutral fiscal policy – It applies when the spending of the government is fully funded by the revenue collected from the tax.
  2. Expeditionary fiscal policy – Under this, the government is having more spending than the revenue collected.
  3. Contractionary fiscal policy – Under this the revenue of the government have more than expenditure.

Objectives of Fiscal Policy

  • To accelerate the rate of economic growth by stepping up the rate of investment and capital formation.
  • To increase savings and discourage luxury consumption.
  • To allocate existing resources to desired and priority sectors so that rapid economic growth can be achieved
  • To reduce inequalities in income and wealth.
  • To maintain reasonable price stability

Fiscal Policy is also called a budgetary policy (Annual financial statement – Article 102). The budgetary policy implies policy for the year reflected in the annual budget in the union government. The interim budget can spend only 1/6th of the previous financial year budget.

The union budget of a given year includes or indicates figures for there years. for example, The Union budget of 2018-19 will provide us the figures for three years i.e. 2016-17, 2017-18 and 2018-19. In this budget, we will have actual figures for 2016-17 revised and budget estimates for 2017-18 and budget estimation for 2018-19

Union Budget for any given year gives us two sets of accounts Revenue account and Capital account.

Revenue Account

Revenue Account is subdivided under two heads as revenue receipts and revenue expenditure. Under Revenue receipts, there are 2 sets of receipts

  1. Tax receipts like Income tax, corporate tax, etc.
  2. Non-tax receipts which include income from interest fees &fines, user charges, divided from PSU’s, etc.

The revenue receipts are collected by the government by discharging its day to day functions. Revenue receipts have no repayment liabilities to the government.

Revenue Expenditure is again subdivided into 2 parts:-

  1. Development expenditure like expenditure incurred by the government on day to day basis for the upkeep of maintenance of its assets.
  2. Non-development expenditure which includes expenditure on interest payment, law, and order, civil administration, Defence, Pension, Subsidies, etc.

Capital Account

The capital Account also consists of capital receipts and capital expenditure.

Capital Receipts are predominantly those receipts that have repayment liability.

  1. Loans and Borrowings (both Internal & external)
  2. Recovery of loans
  3. proceeds from disinvestment
  4. proceed from the sale of assets like government buildings, machines, factories, etc.

Capital Expenditure includes huge expenditure which has long term expenditure.

  • Expenditure on infrastructure
  • Repayment of loans
  • Loans to state governments

Central Government’s Total expenditure in the year 2018-19 is ₹ 24,57,349 crore, In this Revenue expenditure, are 21,40,612 crore and Capital expenditure is 3,16,623 crore.

Deficits

  • Revenue Deficits – Revenue expenditure – Revenue receipts
  • Budget Deficits – Total expenditure – Total receipts
  • Fiscal Deficits – Total expenditure – [Revenue receipts + nondebt creating capital receipts]
  • Primary deficits – Fiscal deficit – Internal payment
  • Monetized Deficits – It means the net addition of RBI’s credit to the government in the overall market borrowing of the government. government market program means it borrows from the banks and financial institutions. To the extent it borrows from the RBI, there is a creating of fresh currency from the RBI which leads to monetization of economy and hence it is also called a monetized deficit. It can also be called deficit financing.

Expenditure of The Government of India

Planned expenditure is an expenditure for which a provision is made in the 5-year plan as these expenditures are by and large expenditure on fresh investments on various projects for which the government plans for 5-year plans. Hence these expenditures are productive expenditure.

Non-Planned expenditure is an expenditure for which no provision can be made for a 5-year plan as most of these expenditures are uncertain volatile and contingent and can’t be predicted for a five year plan period. Hence provision for these expenditures is made only in the annual budget. Non-planned expenditures thus arise outside to the plan and are of following three types:-

  1. Expenditure on projects and services that can’t be completed in a five-year plan so that they are shifted to non-plan expenditure.
  2. Expenditure on maintenance buildings etc. both 1 and 2 are development expenditures as a part of the non-planned expenditure.
  3. non-developmental expenditures like expenditures on defense, law, and order, civil administration, interest payments, subsidies, pension, grants, and aids, etc.

In fact expenditure on the item no. 3 may account for more than 2/3rd of the total nonplanned expenditure and therefore it is considered as a major culprit in government finance and calls for an urgent step to reduce and rationalize. However reduction of such expenditure is ridden with political compulsion and national interest and hence it is considered as a major drag in government finance.

The Budget of 2016 has removed the distinction between planned and non-planned expenditures. Finance ministry officials said after the abolition of the Planning Commission, the relevance of plan and non-plan expenditure is lost — and a better indicator of productive and general expenditure will be a distinction under the heads of revenue and capital.