Page 310 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Indian Economic Policy

Notes Government to ensure an improved financial system. The TFC has recommended about 74 per cent
step up in transfer of resources. There has been a sharp rise in the grant portion of 143% from ` 58,5
87 crore awarded by the EFC. At the same time, taxes portion has gone up by 63% from ` 3,76,318
crore. The share of States’ in Centre’s divisible pool of tax and duties has been enhanced to 30.5%. An
estimated ` 6,13,112 crore is to be devolved to the States as their share in Centre’s tax and duties and
` 1,42,639 crore as grants-in-aid, according to the TFC.
Restructuring Public Finances :

(i) The combined tax-GDP ratio to 17.6% to be improved by 2009-10 by Centre and States.
(ii) By 2009-10, 75% reduction in the combined debt-GDP ratio.
(iii) 3% fiscal deficit to GDP.
(iv) Zero revenue deficit by 2009-10.
(v) The interest payments relative to revenue receipts should be 28% for the Centre and 15% for
States.
(vi) The total salary bill, relative to revenue expenditure, net of interest payments, should not exceed
35%.
(vii) A fiscal responsibility legislation should be enacted which provides for elimination of revenue
deficit by 2008-09 and reducing fiscal deficit to 3% of State Domestic Product.
(viii) On-lending to be stopped.
24.2 Meaning and Scope of 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 certain macroeconomic goals. Fiscal policy has however
been variously defined by the economists. Arthur Smithies defined fiscal policy as “a policy under
which government uses its expenditure and revenue programs to produce desirable effects and avoid
undesirable effects on the national income, production, and employment.”G. K. Shaw, a well-known
expert on the subject, defines fiscal policy as “any decision to change the level, composition or timing
of government expenditure or to vary the burden, structure or frequency of the tax payment.” Shaw’s
definition presumes that national economic goals are given. Samuelson and Nordhaus offer a more
complete definition of fiscal policy. By fiscal policy they “mean the process of shaping taxation and
public expenditure to help dampen the swings of the business cycle and contribute to the maintenance
of a growing, high-employment economy, free from high or volatile inflation.” In their opinion, the
role of fiscal policy is confined largely to stabilization of employment and the price level. Its seems,
they have defined fiscal policy keeping in view the problems of the developed countries. Fiscal policy
can be defined in more general terms as follows. Fiscal policy is the government programme of
making discretionary changes in the pattern and level of its expenditure, taxation and borrowings
in order to achieve certain economic goals such as economic growth, employment, income equality,
and stabilization of the economy on a growth path.
A narrow concept of fiscal policy is budgetary policy. While budgetary policy refers to current revenue
and expenditure of the financial year, fiscal policy refers to budgetary operations including both
current and capital receipts and expenditure. The essence of fiscal policy lies, in fact, in the budgetary
operations of the government. The two sides of the government budget are receipts and expenditure.
The total receipts of the government are constituted of tax and non-tax revenue and borrowings
(including deficit financing). These items in the budget represent the budgetary resources of the
government. The government expenditure refers to the total expenditure made by the government
in the fiscal year. The total government expenditure consists of payments for goods and services,
wages and salaries, interest and loan repayments, subsidies, pensions and grants-in-aid, and so on.
From economic analysis point of view, receipt items give the measure of the flow of money from the
private sector to the government sector. The government expenditure, on the other hand, represents
the flow of money from the government to the economy as a whole. The government receipts are
inflows and expenditures are outflows.

304 LOVELY PROFESSIONAL UNIVERSITY