LEGAL ENVIRONMENT OF BUSINESS

RECENT CHANGES IN FISCAL POLICY

INSTRUMENTS AND ITS IMPACT ON

ECONOMY

Presented by :Amit Kumar Verma

(GM16009)

TOPICS TO BE COVERED..

WHAT IS FISCAL POLICY ?

FISCAL POLICY : OBJECTIVES

TYPES OF FISCAL POLICY

INSTRUMENTS OF FISCAL POLICY

CHANGE IN INSTRUMENTS OF FISCAL

POLICY

IMPACT ON INDIAN ECONOMY

WHAT IS FISCAL POLICY ?

• FISCAL POLICY INVOLVES THE DECISIONS THAT A GOVERNMENT MAKES

REGARDING COLLECTION OF REVENUE, THROUGH TAXATION AND

ABOUT SPENDING THAT REVENUE. IT IS OFTEN CONTRASTED

WITH MONETARY POLICY , IN WHICH A CENTRAL BANK OF ANY

COUNTRY SETS INTEREST RATES AND DETERMINES THE LEVEL OF MONEY

SUPPLY.

OBJECTIVES OF FISCAL POLICY

THE OBJECTIVE OF FISCAL POLICY IS TO MAINTAIN THE CONDITION OF FULL EMPLOYMENT, ECONOMIC STABILITY AND TO STABILIZE THE RATE OF

GROWTH.

FOR AN UNDER-DEVELOPED ECONOMY, THE MAIN PURPOSE OF FISCAL POLICY IS TO ACCELERATE THE RATE OF CAPITAL FORMATION AND

INVESTMENT.

GENERALLY FOLLOWING ARE THE OBJECTIVES OF A FISCAL POLICY IN A DEVELOPING ECONOMY:

• 1. FULL EMPLOYMENT

• 2. PRICE STABILITY

• 3. ACCELERATING THE RATE OF ECONOMIC DEVELOPMENT

• 4. OPTIMUM ALLOCATION OF RESOURCES

CONTINUED….

• 5. EQUITABLE DISTRIBUTION OF INCOME AND WEALTH

• 6. ECONOMIC STABILITY

• 7. CAPITAL FORMATION AND GROWTH

• 8. ENCOURAGING INVESTMENT

TYPES OF FISCAL POLICY

1. AUTOMATIC STABILIZER FISCAL POLICY

2. COMPENSATORY FISCAL POLICY

3. DISCRETIONARY FISCAL POLICY

AUTOMATIC STABILIZER FISCAL POLICY

POLICIES OR INSTITUTIONS (BUILT INTO AN

ECONOMIC SYSTEM) THAT AUTOMATICALLY

TEND TO DAMPEN ECONOMIC CYCLE

FLUCTUATIONS IN INCOME, EMPLOYMENT, ETC.,

WITHOUT DIRECT GOVERNMENT INTERVENTION.

COMPENSATORY FISCAL POLICY

• THE COMPENSATORY FISCAL POLICY AIMS AT

CONTINUOUSLY COMPENSATING THE ECONOMY AGAINST

CHRONIC TENDENCIES TOWARDS INFLATION AND

DEFLATION BY MANIPULATING PUBLIC EXPENDITURES

AND TAXES.

DISCRETIONARY FISCAL POLICY

• IT REFERS TO ACTIONS MADE BY THE

GOVERNMENT. THESE ACTIONS CAN INCLUDE

THINGS LIKE TAX CHANGES AND SPENDING.

INSTRUMENTS OF FISCAL POLICY

Tools of

Fiscal Policy

Revenue

Budget

Direct Tax Indirect Tax

Expenditure

Budget

REVENUE BUDGET

• REVENUE BUDGETS ARE FORECASTS OF A COMPANY'S SALES REVENUES AND

EXPENDITURES, INCLUDING CAPITAL-RELATED EXPENDITURES. IT IS ESSENTIAL

THAT YOU ESTABLISH WHETHER YOU POSSESS ENOUGH FINANCIAL MEANS TO

CONDUCT OPERATIONS, GROW YOUR BUSINESS AND ULTIMATELY MAKE A

PROFIT.

TYPES OF REVENUE BUDGET

1. DIRECT TAX

2. INDIRECT TAX

3. NON-TAX REVENUE

DIRECT TAX

• INDIVIDUAL INCOME TAX & CORPORATE TAX.

• WEALTH TAX.

• TAX DEDUCTED AT SOURCE.

INDIRECT TAX

• CENTRAL EXCISE (A TAX ON MANUFACTURED GOODS)

• VAT.

• SERVICE TAX.

• CUSTOMS DUTY.

• EDUCATIONAL CESS.

NON-TAX REVENUE

NON-TAX REVENUE IS THE RECURRING INCOME EARNED

BY THE GOVERNMENT FROM SOURCES OTHER THAN

TAXES.

EXPENDITURE BUDGET

• THE CENTRAL GOVERNMENT IS RESPONSIBLE

FOR ISSUES THAT USUALLY CONCERN THE

COUNTRY AS A WHOLE LIKE NATIONAL

DEFENSE, FOREIGN POLICY, RAILWAYS,

NATIONAL HIGHWAYS, SHIPPING, AIRWAYS,

POST AND TELEGRAPHS, FOREIGN TRADE AND

BANKING.

IMPACT OF THE CHANGES IN INSTRUMENTS OF FISCAL POLICY

• BUDGET

• TAXATION

• PUBLIC EXPENDITURE

• PUBLIC WORKS

• PUBLIC DEBT

IMPACT OF FISCAL POLICY ON INDIAN ECONOMY

• THE IMPLIED CHANGE IN EXPECTATIONS OF THE US FISCAL AND MONETARYPOLICY WILL HAVE IMPACT ON INDIA'S CAPITAL FLOWS AND EXCHANGE

RATES .

• THE EFFECTS OF FISCAL POLICY ON ECONOMIC ACTIVITY IN INDIA OVER THE LAST DECADE AND HALF AND FINDS THAT FISCAL POLICY CAN PLAY AN

EFFECTIVE COUNTERCYCLICAL ROLE. THE RESULTS ALSO HAVE IMPLICATIONS FOR THE DESIGN OF FISCAL CONSOLIDATION PLANS GOING FORWARD.

IN PARTICULAR, OUR FINDING SUGGEST THAT EXPENDITURE REFORM AIMEDAT CURTAILING THE GROWTH OF SPENDING MAY BE PREFERABLE TO TAX

INCREASES BECAUSE THE LATTER MAY HAVE LARGER (NEGATIVE) EFFECT ON GROWTH OVER THE LONGER TERM.

THANK YOU