Page 244 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 14: Macro Economic Policies: Fiscal Policy

Public investment expenditure usually have a long gestation period and it yields low and slow Notes
rate of return; but such expenditures are unavoidable because such expenditures are necessary
for growth and development of the economy.
Non-plan expenditure of central government in a country like ours has the following
components: defence, interest payments on loans, administrative expenditure and subsidies
(on items like food, fertiliser, export and education). Government's administrative expenditures
on wages, salaries, pensions and other consumption items like stationeries, maintenance, etc.,
are sometimes beyond control.
Public expenditure shows a tendency to grow over time. It is very difficult to cut any expenditure,
which has once been committed by the government.

14.2.3 Public Debt

If public expenditure exceeds public revenue flow, then we have 'deficits' in the budget. 'Budgetary
deficits' have two components - Revenue Deficits (= Current Revenue - Current Expenditure)
and Capital Deficits (Income - Expenditure on capital account transactions). Such deficits may be
partly met by:

Borrowing, internally or externally or both.
Money creation (e.g., printing of notes) which is known as 'deficit financing'. The extent of
deficit financing indicates the size of 'monetised deficits'. Similarly, the budgetary deficits
when adjusted to borrowing (loans on interest), we get the idea of 'fiscal deficits'.
There are various instruments of raising public loans.

Example: The government may issue securities or bonds. The government securities or
bonds can raise huge funds, provided people have faith in government. In India, development
bonds, defence bonds, bearer bonds etc., have been successful. These days, even companies have
their own co-deposits systems to raise funds. The public enterprises like the Railways, ONGC,
NTPC, have floated bonds to raise resources to finance their modernisation schemes or
developmental expenditures, particularly at a time when the government refuses to provide
any budgeting support to the public enterprises.
In the same way, the government may issue securities, which have a captive market because the
government may statutorily require the public enterprises to have a certain portion of their
portfolio investment in the form of government securities. Sometimes, the government freely
drew its resources from the contribution of the public towards PF, NSCs and NSSs, etc. These are
regarded as instruments of internal borrowing. Finally, the government may float loans from
abroad. The IMF, World Bank, Asian Development Bank, etc., are sources of development finance
in a number of developing counties. Additionally, the government or a governmental company
may take loans from the market say, euro-dollar market.
The basic problem in floating loans is growing indebtedness of the country, which borrows.
Sometimes, the country may get in debt trap or currency crisis, as has been experienced by
nations in recent time.

Self Assessment

Fill in the blanks:
4. Sales tax is a type of ........................ tax.
5. ........................ taxes like income tax and wealth tax are geared to ensure distributive justice.

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