Presented by-Batch 23; PGDBM+Group 5Gunjan Roy chaudhuriSupravat PramanikSaurav dasPratip Paul

Fiscal policy & two investment options when government spending increases

About fiscal policy Tools of fiscal policy Expenditure & revenue after Union Budget 2016-17 Kinds of fiscal policy Limitations & affecting factors Various deficit components Investment options Bond Treasury bill Conclusion References Acknowledgement

Overview

The word fisc means ‘ state treasury ’ & fiscal policy refers to policy concerning the use of ‘state treasury’ or the govt. finances to achieve the macroeconomic goals.

Concerned with the raising of government revenue and incurring of government expenditure.

AD = C+ I + G + X – M Development by effective Mobilisation of Resources. Reduction in inequalities of Income and Wealth Price Stability and Control of Inflation Employment Generation Capital Formation Development of Infrastructure 

About fiscal policy

Tools of fiscal policy

Expenditure & revenue after Union Budget 2016-17

Kinds of fiscal policy Expansionary Fiscal PolicyExpansionary Fiscal Policy Involves increasing AD. Govt will increase spending (G) & cut

Taxes. Lower taxes will increase consumers

spending because they have more disposable income(C).

This will worsen the govt. budget deficit. Risk of High Inflation due to huge demand

& increase in money supply.

Contractionary Fiscal PolicyContractionary Fiscal Policy Involves decreasing AD. Govt will cut spending (G) & increase

Taxes. High taxes will decrease consumers

spending because they have less disposable income(C).

This will help in improving the govt budget deficit.

Not Easy to achieve this.

LimitationsLimitationsLack of adequate data Time lag Budget deficit Small proportion of population in taxable income groups

Factors affecting fiscal policy Factors affecting fiscal policy Tax policies Government subsidies Government borrowings, lending's & investments

Limitations & affecting factors

Revenue deficit = revenue expenditure – revenue income. Budgetary deficit = total expenditure – total income. Fiscal deficit = budgetary deficit + borrowing. Primary deficit = fiscal deficit – interest payment. Current account deficit = balance of trade + net factor income + net cash

transfers.

ReasonsReasons : Increase in Subsidies. Unproductive expenditure by the government. Huge Borrowings. Defense Expenditure. Poor Performance of Public Sector. Payment of Interest. Tax Evasion.

Various deficit components

Investment options(when government spending increases)

When governments increase their spending, crowding out can occur.

Government spending reduces available funds and increases the cost of capital.

Crowding out effect - The government competes with private borrowers for funds, and could drive up interest rates; the government may “crowd out” private borrowing, and this offsets the government expansion.

Involves selling government bonds or bills.

Bonds are long term securities that pay a fixed rate of return over a long period until maturity, and are bought by financial institutions looking for a safe return.

Treasury bills are issued into the money markets to help raise short term cash.

Fixed income securities.

A debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.

Used by companies, municipalities, states and governments to raise money.

Owners of bonds are debtholders, creditor of the issuer.

Not taxed.

Inversely proportionate to interest rates.

Selling price< face value, that is discount bond. Selling price> face value, that is premium bond.

Bond

Represent short-term borrowings of the Government.

A treasury bill is nothing but a promissory note issued by the Government under discount for a specified period stated therein.

Issued only by the RBI on behalf of the Government. Treasury bills are issued for meeting temporary Government deficits.

91 DAYS TB ,184 DAYS TB ,364 DAYS TB (On basis of periodicity). Importance:

Safety. Ideal short term investment. Ideal fund management. Non-inflationary monetary tool.

Treasury bill

The objectives of fiscal policy such as economic development, price stability, social justice, etc. can be achieved only if the tools of policy are effectively used.

Though there are gaps in India's fiscal policy, there is also an urgent need for making India's fiscal policy a rationalised and growth oriented one.

The success of fiscal policy depends upon taking timely measures and their effective administration during implementation.

Fiscal deficit has been pegged at Rs 5.33 lakh crore, or 3.5 per cent of GDP, in 2016-17 (As per data released by the Controller General of Accounts).

Previous RBI Governor Raghuram G. Rajan said after government's 2016/17 budget had been "fiscally prudent", and the establishment of a monetary policy committee to set interest rates would help the central bank fight inflation. 

Conclusion

The Economics Times Finpro. General Awareness book for banking by Mahendra’s publication. Government of India: Ministry of Finance- http://finmin.nic.in/ Employment news -

http://employmentnews.gov.in/writereaddata/11032016356271UNION%20BUDGET%202016-17.png

The Economics Times : http://economictimes.indiatimes.com/news/economy/finance/rbi-governor-raghuram-rajan-says-governments-budget-fiscally-prudent/articleshow/51373176.cms

Mercatus center - https://www.mercatus.org/publication/does-government-spending-affect-economic-growth

India :http://www.india.com/topic/fiscal-deficit/

References

The team is indebted to the Times-pro for providing the infrastructural facilities.

Sincere thanks are due to our sir, Mr. Suvashis Halder , for providing guidance.

Lastly, the co-operation received from the classmates, our loving parents whose moral supports helped us to complete the work & specially all team-members whose equal contribution gave a shape is also acknowledged.

Acknowledgement