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fiscal policy
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    FISCAL POLICY The word fisc means ‘ state treasury’ and fiscal policy refers to policy concerning ‘the use of state treasury’ or the government finances to achieve the macroeconomic goals.  The fiscal policy is concerned with all those activities which are adopted by the government to collect Revenue & Expenditures, so that economic stability could be attained without Inflation and Deflation. Fiscal policy  refers to a government's spending and taxation policies intended to maintain economic stability, which is indicated by levels of  unemployment, interest rates, prices and economic growth. WHY IT MATTERS:  As the administrative body responsible for public wellbeing, a government implements  fiscal  policy   in an effort to defend the interests of businesses and consumers from economic forces which, if left unchecked, could have adverse consequences. Stances of fiscal policy ã   The three main stances of fiscal policy are: ã   Neutral fiscal policy is usually undertaken when an economy is in equilibrium. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. ã   Expansionary fiscal policy  involves government spending exceeding tax revenue, and is usually undertaken during recessions. ã   Contractionary fiscal policy  occurs when government spending is lower than tax revenue, and is usually undertaken to pay down government debt. Objectives: ã   Economic stabilization ã   Economic growth ã   Employment generation ã   Reduction in inequalities of income and wealth ã   Increase in capital formation ã   Price stability and control of inflation Effective mobilization of resources ã   Balanced regional development ã   Increase in national income  ã   Development of infrastructure ã   Foreign exchange earnings Some of main Objectives : Development by effective Mobilisation of Resources The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of Financial Resources. The central and the state governments in India have used fiscal policy to mobilise resources. The financial resources can be mobilised by :- 1. Taxation : Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation. 2. Public Savings  : The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises. 3 . Private Savings  : Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing. ´ Efficient allocation of Financial Resources  The central and state governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc. ´ But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable. ´ ã   ´ Reduction in inequalities of Income and Wealth ´ ã   Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. ã   Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society ´ ã   Foreign Exchange Earnings ã   Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax etc.  ã   Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem ´ Balanced Regional Development :- Another main objective of the fiscal policy is to bring about a balanced regional development. There are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc. ´ To achieve desirable price level :- The stability of general prices is necessary for economic stability. The maintenance of a desirable price level has good effects on production, employment and national income. Fiscal policy should be used to remove; fluctuations in price level so that ideal level is maintained ´ To Achieve desirable consumption level :- A desirable consumption level is important for political, social and economic consideration. Consumption can be affected by expenditure and tax policies of the government. Fiscal policy should be used to increase welfare of the economy through consumption INSTRUMENT OF FISCAL POLICY BUDGET ã   “Budget refers a financial statement which shows anticipated revenue and  anticipated expenditure in an accounting year.” or ã   “Statement of estimated receipts and expenditures of the government in respect of every financial year which runs from 1 April to 31 March.”   Types of budget: (a) Revenue Budget: The Revenue Budget shows the current receipts of the government and the expenditure that can be met from these receipts. (b) Capital Budget: The Capital Budget is an account of the assets as well as liabilities of the central government, which takes into consideration changes in capital. It consists of capital receipts and capital expenditure of the government.    Capital Budget(Account): ã   Capital Receipts: The main items of capital receipts are loans raised by the government from the public which are called market borrowings, borrowing by the government from the Reserve Bank and commercial banks and other financial institutions through the sale of treasury bills, loans received from foreign governments and international organizations, and recoveries of loans granted by the central government. ã   Capital Expenditure: This includes expenditure on the acquisition of land, building, machinery, equipment, investment in shares, and loans and advances by the central government to state and union territory governments, PSUs and other parties.  CAPITAL EXPENDITURE:  Capital expenditure is also categorized as plan and non  – plan in the budget documents: a)  Plan capital expenditure: Plan capital expenditure, like its revenue counterpart, relates to central plan and central assistance for state and union territory plans. b) Non-plan capital expenditure: Non-plan capital expenditure covers various general, social and economic services provided by the government Revenue Budget(Account):
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