Critical Evaluation of Fiscal Policy of India

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Business Environment
Critical Evaluation of the Fiscal Policy of India

Subitted by:
Tanvir Singh
MBA 2nd Semester - B

Subitted by:
Tanvir Singh
MBA 2nd Semester - B

Subitted to:
Dr. Manoj Kumar Sharma
UBS, PU

Subitted to:
Dr. Manoj Kumar Sharma
UBS, PU

ACKNOWLEDGEMENT

I have put in my best efforts in the completion of this report. However, it would not have been possible without the kind support and help of many informative sources and individuals. I would like to extend my sincere thanks to all of them.

First of all, I am highly indebted to Dr. Manoj Kumar Sharma for his constant guidance and supervision as well as for providing necessary information regarding the project and also giving us the opportunity to increase our technical and managerial skills through this exhaustive and meaningful assignment.

I would also like to express our gratitude towards the individuals who helped navigate through the process of completing this project including the staff of our University Library.

14th April 2012 Tanvir Singh
Chandigarh. MBA 2nd Semester

Abstract

This report examines the trajectory of India’s fiscal policy with a focus on historical trends, fiscal discipline frameworks, fiscal responses to the global financial crisis and subsequent return to a fiscal consolidation path. The initial years of India’s planned development strategy were characterised by a conservative fiscal policy whereby deficits were kept under control. The tax system was geared to transfer resources from the private sector to fund the large public sector driven industrialization process and also cover social welfare schemes. However, growth was anaemic and the system was prone to inefficiencies. In the 1980s some attempts were made to reform particular sectors. But the public debt increased, as did the fiscal deficit. India’s balance of payments crisis of 1991 led to economic liberalisation. The reform of the tax system commenced. The fiscal deficit was brought under control. When the deficit and debt situation again threatened to go out of control in the early 2000s, fiscal discipline legalisations were instituted. The deficit was brought under control and by 2007-08 a benign macro-fiscal situation with high growth and moderate inflation prevailed. During the global financial crisis fiscal policy responded with counter-cyclical measures including tax cuts and increases in expenditures. The post-crisis recovery of the Indian economy is witnessing a correction of the fiscal policy path towards a regime of prudence. In the future, the focus would probably be on bringing in new tax reforms and better targeting of social expenditures.

Table of Contents
Acknowledgement1
Abstract2
1. Introduction4
2. Basic Concepts7
3. India’s Fiscal Policy Architecture8
4. Evolution of India’s Fiscal Policy till 19919
5. Liberalization, growth, inclusion and fiscal consolidation (Post 1991)16 6. Crisis and return to fiscal consolidation: The maturing of Indian fiscal policy23 7. Conclusion29

8. References30

1. Introduction
Fiscal policy deals with the taxation and expenditure decisions of the government. Monetary policy, deals with the supply of money in the economy and the rate of interest. These are the main policy approaches used by economic managers to steer the broad aspects of the economy. In most modern economies, the government deals with fiscal policy while the central bank is responsible for monetary policy. Fiscal policy is composed of several parts. These include, tax policy, expenditure policy, investment or disinvestment strategies and debt or surplus management. Fiscal policy is an important constituent of the overall economic framework of a country and is therefore intimately linked with its general economic policy strategy.

Fiscal policy also feeds into...
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