Fiscal Policy

Tools of Fiscal Policy

Government Expenditure
Taxes

Components of Budget

Revenue Receipts = Tax Revenue + Non Tax

Revenue (Including profit +interest earnings)
Capital Receipts = Loans Recovered +
Proceeds through disinvestment+ Borrowings
and other liabilities
Revenue Expenditure including interest
payments
Capital Expenditure = Loans repayment +
Investment on Capital goods (like buying new
buildings, construction of roads, any other
infrastructural projects)

Capital Expenditure from Budgetary Sources

Total revenue minus Current Expenditure
Current Revenue
Tax
Direct

Indirect

External Loans

Non-Tax

Internal Loans

Household Sector

Financial Sector
RBI

Non RBI

I financed through personal

income taxes
As I , Demand
But as taxes , Demand
Hence Demand may not and
hence Price may not

Direct taxes

An investment project financed through income taxes

on the household sector is non-inflationary
Other things remaining the same, higher investment
spending results in larger demand, but higher income
taxes lead to a fall in demand
If the proportions of the investment spending and the
taxes are proper, investment may increase without
any inflationary pressures

But in India, Income taxes have not

been used as a way of increasing
resources for investment

Tax Revenue = Tax Rate x Taxable Income

In India, what used to be high was the income

tax rate, not taxable income
Tax base has been low, among others, because
of black income, which by definition is not
taxed and agricultural income is not taxed in
India

Tax revenue = (Tax rate) x (Taxable

income)
Taxable Y

Non-taxable Y

Total Y

Macro financing of I
By RBI credit

I , P

By Personal Y
taxes

I , P does not

By Indirect taxes

I , P

By World Bank
Credit/FDI

I , P does not

Nothing done

I does not , P does not

Measures of government budget deficit

Fiscal deficit
Revenue deficit
Primary deficit
Monetised deficit

Revenue Deficit = Revenue

Expenditure Revenue Receipts
Budgetary Deficit = Total
Expenditure (Revenue + Capital)
Total Receipts (Revenue+Capital)

Fiscal Deficit = Fiscal Deficit = Total

expenditure-revenue receipts loans
recovered- disinvestment
Primary Deficit = Fiscal Deficit
Interest Payments
Monetised Deficit = Fiscal Deficit
financed through RBI credit

Revenue
expenditure

Revenue
receipts

Capital expenditure
-Loans recovered
-disinvestment

Revenue
deficit

Fiscal
deficit

Fiscal Deficit = Total expenditure-revenue

receipts loans recovered- disinvestment

Government Debt
Total liabilities of the government at
the end of fiscal year including the
liabilities of the past years which
were not repaid backtill the current
year
Fiscal deficit is a flow concept
Government debt is a stock concept