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Fiscal Policy

Budget 2018: Fiscal deficit number to be close to target of 3.2% of GDP

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	Fiscal policy, in simple terms, is an estimate of taxation and government spending that impacts the economy.</div>
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	<strong>Types of fiscal policy</strong></div>
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	There are two types of fiscal policy:</div>
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	<strong>Expansionary fiscal policy:</strong> This policy is designed to boost the economy. It is mostly used in times of high unemployment and recession. It leads to the government lowering taxes and spending more, or one of the two. The aim is to stimulate the economy and ensure consumers&#39; purchasing power does not weaken.</div>
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	<strong>Contractionary fiscal policy: </strong>As the term suggests, this policy is designed to slow economic growth in case of high inflation. The contractionary fiscal policy raises taxes and cuts spending.</div>
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	<strong>What are the tools of fiscal policy?</strong></div>
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	There are two key tools of the fiscal policy:</div>
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	<strong>Taxation:</strong> Funds in the form of direct and indirect taxes, capital gains from investment, etc, help the government function. Taxes affect the consumer&#39;s income and changes in consumption lead to changes in real gross domestic product (GDP).</div>
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	<strong>Government spending: </strong>It includes welfare programmes, government salaries, subsidies, infrastructure, etc. Government spending has the power to raise or lower real GDP, hence it is included as a fiscal policy tool.</div>
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	<strong>Fiscal policy objectives</strong></div>
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	Some of the key objectives of fiscal policy are economic stability, price stability, full employment, optimum allocation of resources, accelerating the rate of economic development, encouraging investment, and capital formation and growth.</div>
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	<strong>Who sets fiscal policy?</strong></div>
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	In India, the Union finance minister formulates the fiscal policy.</div>
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	<strong>What is the importance of fiscal policy?</strong></div>
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	Fiscal policy is a crucial part of the economic framework. In India, it plays a key role in elevating the rate of capital formation, both in the public and private sectors.</div>
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	The fiscal policy helps mobilise resources for financing projects. The central theme of fiscal policy includes development activities like expenditure on railways, infrastructure, etc. Non-development activities include spending on subsidies, salaries, pensions, etc. It gives incentives to the private sector to expand its activities.</div>
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	Fiscal policy aims to minimise income and wealth inequalities. Income tax is charged on all salaried persons directly proportioned to their income. Likely indirect taxes are also more in the case of semi-luxury and luxury items than that of necessary consumable items. In this way, the government generates a good amount of revenue and that also leads to a reduction in wealth inequalities.</div>
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	A prudent fiscal policy stabilises price and helps control inflation.</div>
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	Fiscal policy planning gives the larger chunk of funds for regional development so as to achieve a balanced regional development. It aims to reduce the deficit in the balance of payment.</div>
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	<strong>Difference between monetary policy and fiscal policy</strong></div>
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	Monetary policy is concerned with the management of interest rates and the total supply of money in circulation. It is generally carried out by the RBI.</div>
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	Fiscal policy, on the other hand, estimates taxation and government spending. It should ideally be in line with the monetary policy, but since it is created by lawmakers, people&#39;s interest often takes precedence over growth.</div>

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What is Fiscal policy, Fiscal policy Definition, Fiscal policy News

What is Fiscal Policy

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	The Fiscal Policy Strategy Statement, presented to Parliament under Section 3(4) of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, outlines the strategic priorities of the government in the fiscal area for the ensuing financial year relating to taxation, expenditure, lending and investments, administered pricing, borrowings and guarantees. The statement explains how the current policies are in conformity with sound fiscal management principles and gives the rationale for any major deviation in key fiscal measures.</div>
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	The Interim Budget did not outline such a statement. Here&#39;s what the government aimed to achieve in its Fiscal Policy Strategy Statement of Budget 2018:</div>
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	a) To target simultaneously on fiscal deficit and debt</div>
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	b) To target fiscal deficit as an operational target and to ensure that the fiscal deficit of 3 per cent of GDP is reached by the government by FY21.</div>
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	c) The central government shall endeavour to follow a declining debt trajectory and the reach a debt target of 40 per cent of GDP, as also to keep the general government debt at 60 per cent of GDP by FY25.</div>
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	d) Inserting adequately defined escape and buoyancy clauses to determine when the targets defined by the FRBM Act may be relaxed or tightened as the case may be.</div>
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What is Fiscal Policy Strategy Statement, Fiscal Policy Strategy Statement Meaning and Definition

Fiscal Policy Strategy Statement

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	Inflation can be defined as a persistent rise in the general price of goods and services of common or daily use &mdash; such as clothing, food, fuel, transport, etc &mdash; which results in an increase in the cost of living.</div>
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	Inflation is the measure of change in average price of services and commodities, done at regular intervals. It indicates a decrease in the purchasing power of a unit of a nation&rsquo;s currency as the products and services get more expensive. Basically, inflation is the difference between aggregate demand and aggregate supply of goods and services. When aggregate demand exceeds the supply of goods at current prices, there is a rise in the price level.</div>
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	A certain level of inflation is required in the economy to ensure that expenditure is promoted and money hoarding through savings is discouraged.</div>
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	<strong>How is inflation measured?</strong></div>
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	In India, there are two main sets of inflation indices to measure changes in price levels &mdash; Consumer Price Index (CPI) and Wholesale Price Index (WPI). These indices measure changes at the retail and wholesale price levels, respectively. CPI tracks any shift in retail prices of essential and daily goods and services consumed by households across the country. In short, it captures changes in price level at the consumer level.</div>
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	WPI, on the other hand, is the average change in the price of commodities at the wholesale level. It considers the price of goods traded among corporations, not goods purchased by consumers. The aim of WPI is to monitor price drifts that reflect demand and supply in manufacturing, industry and construction.&nbsp;</div>
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What is Inflation, Inflation News, Budget 2020 News, Types of Inflation

Inflation

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	A country&rsquo;s fiscal balance is measured by its government&rsquo;s revenue vis-a-vis its expenditure in a given financial year. Fiscal deficit, the condition when the expenditure of the government exceeds its revenue in a year, is the difference between the two. Fiscal deficit is calculated both in absolute terms and as a percentage of the country&rsquo;s gross domestic product (GDP).</div>
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	The fiscal deficit of a country is calculated as a percentage of its GDP or simply as the total money spent by the government in excess of its income. In either case, the income figure includes only taxes and other revenues and excludes money borrowed to make up the shortfall.</div>
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	In her maiden Union Budget, Finance Minister Nirmala Sitharaman had revised the government&rsquo;s fiscal deficit target for 2019-20 to 3.3 per cent of GDP, 10 basis points lower than the target for the previous financial year.</div>
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	<strong>How is fiscal deficit calculated?</strong></div>
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	The fiscal deficit, in mathematical terms, is [total revenue generated &mdash; total expenditure]. The total revenue is the sum of revenue receipts, recovery of loans and other receipts of the government.</div>
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	While most countries continue to project a deficit in their economies, a surplus is a rare phenomenon. A high deficit at times also emerges if the government is spending on developmental works like construction of highways, ports, roads, airports which will later generate revenue for the government.</div>
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	<strong>What are components of the fiscal deficit calculation?</strong></div>
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	The fiscal deficit calculations are based on two components &mdash; income and expenditure.</div>
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	Income component: The income component is made of two variables, revenue generated from taxes levied by the Centre and the income generated from non-tax variables. The taxable income consists of the amount generated from corporation tax, income tax, Customs duties, excise duties, GST, among others. Meanwhile, the non-taxable income comes from external grants, interest receipts, dividends and profits, receipts from Union Territories, among others.</div>
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	Expenditure component: The government in its Budget allocates funds for several works, including payments of salaries, pensions, emoluments, creation of assets, funds for infrastructure, development, health and numerous other sectors that form the expenditure component.</div>
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	<strong>How is fiscal deficit balanced out?</strong></div>
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	While a rising deficit is a challenge for the government in the long term, to balance it out in short-term macroeconomics, the government looks at market borrowings by issuing bonds and selling them in through banks. Banks buy these bonds with currency deposits and then sell them to investors. Government bonds are considered an extremely safe investment instrument, so the interest rate paid on loans to the government represents risk-free investment.</div>
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	The government also sees a deficit situation as an opportunity to expand policies and schemes, including welfare programmes, without having to raise taxes or cut spending in the Budget.</div>

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What is Fiscal Deficit, Fiscal Deficit News, Budget 2020 News, Fiscal Deficit Calculation

Fiscal Deficit

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	Gross Domestic Product (GDP) is the final monetary value of the goods and services produced within the country during a specified period of time, normally a year. In simple terms, GDP is the measure of the country&#39;s economic output in a year. In India, contributions to GDP are mainly divided into three broad sectors &mdash; agriculture, industry, and services. GDP is measured over market prices and there is a base year for the computation. The GDP growth rate measures how fast the economy is growing. It does this by comparing the country&#39;s gross domestic product in one quarter with that in the previous one, and with the same quarter of the previous year.</div>
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	The GDP growth rate is driven by GDP&rsquo;s four components. The main driver is personal consumption, which includes the critical sector of retail sales. The second component is business investment, including construction and inventory levels. The third is government spending whose largest categories are social security benefits, defence spending, and medicare benefits. The government often increases spending to jump-start the economy during a recession. The fourth is net trade.</div>
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	When the economy is expanding, the GDP growth rate is positive. If the economy grows, so do businesses, jobs and personal income. If it contracts, then businesses hold off investing in new purchases. They delay hiring new employees until they are confident that the economy will improve. Those delays further depress the economy. Without jobs, consumers have less money to spend. If the GDP growth rate turns negative, the country&#39;s economy is said to be in a state of recession.</div>
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	The GDP growth rate is the most important indicator of economic health. It changes during the four phases of the business cycle &mdash; peak, contraction, trough, and expansion.</div>
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	Nominal GDP is the value of all final goods and services that an economy produces during a given year; it is not adjusted for inflation. It is calculated by using the prices that are current in the year in which the output is produced. Nominal GDP takes into account all of the changes that occurred for all goods and services produced during the year. If prices change from one period to the next and the output does not change, the nominal GDP would change even though the output remained constant.</div>
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	Real GDP, on the other hand, is the total value of all final goods and services that the economy produces during a given year, accounting for inflation. It is calculated using the prices of a selected base year. To calculate Real GDP, you must determine how much of GDP has been changed by inflation since the base year, and divide out the inflation each year. Real GDP, therefore, accounts for the fact that if prices change but output doesn&rsquo;t, nominal GDP would change.</div>
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	In January 2015, the government moved to the new base year of 2011-12 from the earlier base year of 2004-05 for national accounts. The base year of national accounts had previously been revised in January 2010. In the new series, the Central Statistics Office (CSO) did away with GDP at factor cost and adopted the international practice of valuing industry-wise estimates in gross value added (GVA) at basic prices.</div>
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