Thursday, 5 March 2020

Fiscal Policy


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
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
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.
Notes In India, each State Government prepares its own budget of income and expenditure every
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
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
Notes Revenue Deficit: Revenue Expenditure – Revenue Receipts
Revenue Expenditure: Does not result in the creation of assets

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