School of Business Department of Management
Name of the Student: Azhar ShokinRegd. No.: - 11000968
Course Code: MGT511 Course Title: Business Environment Course Instructor: Vishwas ChakranarayanCourse Tutor: Vishwas Chakranarayan Class: MBASemester: 1st
Section: S1001 Batch 2010-12
Topic: - Impact of Fiscal Policy on Indian Economy
* Literature Review
* Data and Methodology
* Main Findings
Impact of Fiscal Policy on Indian Economy
In economics, fiscal policy is the use of government expenditure and revenue collection to influence the economy. Fiscal policy can be contrasted with the other main type of macroeconomic policy, monetary policy, which attempts to stabilize the economy by controlling interest rates and the money supply. The two main instruments of fiscal policy are government expenditure and taxation. Changes in the level and composition of taxation and government spending can impact on the following variables in the economy: * Aggregate demand and the level of economic activity;
* The pattern of resource allocation;
* The distribution of income.
Stances of fiscal policy
The three possible stances of fiscal policy are neutral, expansionary and contractionary. The simplest definitions of these stances are as follows: * A neutral stance of fiscal policy implies a balanced economy. This results in large tax revenue. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. * An expansionary stance of fiscal policy involves government spending exceeding tax revenue. * A contractionary fiscal policy occurs when government spending is lower than tax revenue. However, these definitions can be misleading because, even with no changes in spending or tax laws at all, cyclical fluctuations of the economy cause cyclical fluctuations of tax revenues and of some types of government spending, altering the deficit situation; these are not considered to be policy changes. Therefore, for purposes of the above definitions, "government spending" and "tax revenue" are normally replaced by "cyclically adjusted government spending" and "cyclically adjusted tax revenue". Thus, for example, a government budget that is balanced over the course of the business cycle is considered to represent a neutral fiscal policy stance.
Methods of funding
Governments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits. This expenditure can be funded in a number of different ways: * Taxation
* Seignior age, the benefit from printing money
* Borrowing money from the population or from abroad
* Consumption of fiscal reserves.
* Sale of fixed assets (e.g., land).
All of these except taxation are forms of deficit financing. Borrowing
A fiscal deficit is often funded by issuing bonds, like treasury bills or consols and gilt-edged securities. These pay interest, either for a fixed period or indefinitely. If the interest and capital repayments are too large, a nation may default on its debts, usually to foreign creditors. Consuming prior surpluses
A fiscal surplus is often saved for future use, and may be invested in local (same currency) financial instruments, until needed. When income from taxation or other sources falls, as during an economic slump, reserves allow spending to continue at the same rate, without incurring additional debt.
Economic effects of fiscal policy
Governments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to...