Tuesday, 29 October 2019

Unit 6: Fiscal Policy

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                                               Unit 6: Fiscal Policy    


According to the RBI Act, 1935, every commercial bank has to keep certain minimum cash reserve with the RBI.
Initially, it was 5% against demand deposit and 2% against time deposits.

It is through fiscal policy that the government tries to correct inequalities of income and wealth, which increase with the development of a country.

Fiscal policy is the projected balance sheet of the country, prepared by the Chief Finance Officer of the country i.e. the Finance Minister of the State.

Public finance is the study of generating resources for the development of the country and about the allocation of those resources.

The budget includes revenue and expenditure.

The two are divided into capital and revenue accounts.

Thus, receipts are broken into revenue receipts and capital receipts, and disbursements are broken up into revenue expenditure and capital expenditure.


In India, each State Government prepares its own budget of income and expenditure every Notes year.

State Governments collect revenue from different sources to meet their expenditure.

The Constitution of India divides the functions and financial powers of the government between the Central and the State together with the concurrent areas.

It also provides for sharing of taxes in various forms and the system of grants-in-aids.

Deficit financing is an effective tool in the hands of the government to increase effective demand in recession.

To fill the deficit the government borrows from the RBI, the market and even creates additional currency to increase the disposable income of people.

Indian economy was affected by scarcity.

To safeguard the domestic industry and to restrict the export of essential goods, international trade was regulated.

In the initial phases of development, India had to import capital equipment, machinery, spare parts, industrial raw material etc.

From time to time it had to import food grains too, but because of stagnant exports, government had to decide to import curtail.

The new policy substantially eliminates licensing, quantitative restrictions, and other regulatory and discretionary controls.

Foreign trade policy is built around two major objectives namely, to double India's percentage share of global merchandise trade by 2009, and to act as an effective instrument of economic growth by providing a thrust to employment generation, especially in semi urban and rural areas.

A Direct tax is a kind of charge, which is imposed directly on the taxpayer.

One of the main forms of Direct Tax is the Taxes on Corporate Income, under which the companies residing in this country pays a tax on their global income arising from all sources.

Indirect Tax or the tax that is levied on goods or services rather than on persons or organizations are of different types in India like Excise Duty, Customs Duty, Service Tax, and Securities Transaction Tax.

BOP: Balance of Payments  Budget Deficit: Total Expenditure - Total Receipts  Capital Payments: Loans raised by the government from the public, RBI and other bodies  Capital Receipts: Payments for, acquisition of assets and loans and advances  Deficit Financing: Financing of deliberately created gap between public revenue and public expenditure  Direct Taxes: Kind of charge, which is imposed directly on the taxpayer  External Debt: Debt raised in foreign currency  Fiscal Deficit: Budgetary deficit plus market borrowings and other liabilities of the Government of India  Indirect Taxes: Tax that is levied on goods or services rather than on persons or organizations  Internal Debt: Loans raised within the country  Primary Deficit: Fiscal Deficit – Interest Payments  REPO: Purchase of one loan against the sale of another     Business Environment   Revenue Deficit: Revenue Expenditure – Revenue Receipts  Revenue Expenditure: Does not result in the creation of assets   


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