Impact of fiscal policy on indian economy

An attempt to keep output above its natural rate by means of aggregate demand policies will lead only to ever-accelerating inflation. But economists do not forecast well.

impact of fiscal policy on indian economy pdf

Foreign Exchange Earnings : when the central government of the country gives incentives like, exemption in custom duty, concession in excise duty while producing things in the domestic markets, it motivates the foreign investors to increase the investment in the domestic country.

That is because, over the long run, the level of output is determined not by demand but by the supply of factors of production capital, labor, and technology.

Impact of fiscal policy on indian economy

In the case of a fiscal expansion, the rise in interest rates due to government borrowing attracts foreign capital. Higher aggregate demand due to a fiscal stimulus, for example, eventually shows up only in higher prices and does not increase output at all. Similarly, self employment scheme is taken to provide employment to technically qualified persons in the urban areas. To maintain equilibrium in the Balance of Payments. Some of the major instruments of fiscal policy are as follows: Budget, Taxation, Public Expenditure, public revenue, Public Debt, and Fiscal Deficit in the economy. Investment in infrastructure has resulted in direct and indirect employment. This greater demand leads to increases in both output and prices. The same is true for a tax cut for some favored constituency. Hemant Singh Feb 26, IST image source:Investopedia Fiscal policy means the use of taxation and public expenditure by the government for stabilization or growth of the economy. Recognizing that a tax cut today means higher taxes in the future, the argument goes, people will simply save the value of the tax cut they receive now in order to pay those future taxes. Therefore, the government always aims to control the inflation by reducing fiscal deficits, introducing tax savings schemes, productive use of financial resources, etc. In their attempt to get more dollars to invest, foreigners bid up the price of the dollar, causing an exchange-rate appreciation in the short run. Similarly, because taxes are roughly proportional to wages and profits , the amount of taxes collected is higher during a boom than during a recession. If these economists were right, then my earlier statement that budget deficits crowd out private investment would be wrong.

But if consumers decide to spend some of the extra disposable income they receive from a tax cut because they are myopic about future tax payments, for examplethen Ricardian equivalence will not hold; a tax cut will lower national saving and raise aggregate demand.

Unemployment insuranceon which the government spends more during recessions when the unemployment rate is highis an example of an automatic stabilizer. The problem of making good fiscal policy in the face of such obstacles is, in the final analysis, not economic but political.

project on fiscal policy

This tends to influence other economic variables. The case for using discretionary fiscal policy to stabilize business cycles is further weakened by the fact that another tool, monetary policyis far more agile than fiscal policy.

role of fiscal policy in india

The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society.

A textbook presentation aimed at undergraduates.

Impact of fiscal policy on indian economy ppt

The extreme of this argument, known as Ricardian equivalence, holds that tax cuts will have no effect on national saving because changes in private saving will exactly offset changes in government saving. Such a countercyclical policy would lead to a budget that was balanced on average. In doing so, it competes with private borrowers for money loaned by savers. Price Stability and Control of Inflation : One of the main objectives of fiscal policy is to control inflation and stabilize price. Advanced Barro, Robert. Employment Generation: The government is making every possible effort to increase employment in the country through effective fiscal measures. Taxation: Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation.
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Impact of fiscal policy shocks on the Indian economy