Vishal Balanai(A05) Nooruddin H.

(A26) Vipul Jain(A27) Anuj Kant(A29) Bhagyashree Sathe(A48) Satvinder Singh(A54) Varun Verma(A63)

What is Fiscal Policy?

Concerned with the raising of government revenue

and incurring of government expenditure Three possible stances of fiscal policy are:
A neutral stance of fiscal policy implies a balanced budget

where G = T (Government spending = Tax revenue) An expansionary stance of fiscal policy involves a net increase in government spending (G > T) A contractionary stance of fiscal policy (G < T)

Objectives of Fiscal Policy

Development by effective Mobilisation of Resources
Efficient allocation of Financial Resources Reduction in inequalities of Income and Wealth Price Stability and Control of Inflation Employment Generation Balanced Regional Development Reducing the Deficit in the Balance of Payment

Capital Formation
Increasing National Income Development of Infrastructure

Foreign Exchange Earnings

Fiscal Deficit
government's total expenditures exceed the revenue

that it generates (E>R) economist John Maynard Keynes believed that deficits help countries climb out of economic recession fiscal conservatives feel that governments should avoid deficits in favor of a balanced budget policy

Fiscal deficit 2011-2012

Global research firm Macquarie
Fiscal deficit-of both the Centre and states-during

2011-12 could be as high as 8.6 percent of the GDP Slippage could risk a credit downgrade Loss of business confidence High inflation, > 5.5% last 22 months 9% this year

Fiscal Activities
Disinvestment policy
Deregulation of petroleum prices Taxation policy National Small Saving Funds Other policies like crossholding, dividends, FDI, etc

Disinvestment of PSUs
Department of Disinvestments, Ministry of Finance

controls Disinvestment policy Disinvestment:

sale of equity and bond capital invested by the government in

PSUs sale of governments loan capital in PSUs through securitization Sell shares in PSUs

It is the Government receive money not PSU Raise capital for the government Decrease the cash with PSUs and economy

Approach to Disinvestment
the Government would retain at least 51% equity and

the management control of the CPSE

Already listed profitable CPSEs (not made compliant by Offer for Sale by Government or by the CPSEs through issue meeting mandatory of fresh shares or a combination of both shareholding of 10%)

Unlisted CPSEs

If no accumulated losses and having earned net profit in three preceding consecutive years are to be listed

Approach to Disinvestment
Follow-on public offers would be considered taking into

consideration the needs for capital investment of CPSE, on a case by case basis, and Government could simultaneously or independently offer a portion of its equity shareholding All cases of disinvestment are to be decided on a case to case basis

2010-2011 Proceeds from Disinvestment

Amount of Rs. 22144.21 crores realized from following

six Public offers

Satluj Jal Vidyut Ltd. Engineers India Ltd. Coal India Ltd Power Grid Corporation of India Manganese Ore India Ltd.

Shipping Corporation of India

Use of Disinvestment proceedings

Disinvestment of PSU
Deposit in National investment Fund (NFM)

Capital investments (25%) requirements of profitable and revivable CPSEs that yield adequate returns, in order to enlarge their capital base to finance expansion/diversification

Social Sector Projects (75%) promote education, health and employment

Advantage of Disinvestment
Cash inflow to government
Private shareholders on board Better governance and performance

Reduce government deficit financing

Higher disclosure level, transparency and

accountability

Challenges in Disinvestment
Higher capital expenditure
Not much capital generation Administrative costs have been high

Insider trading has been prominent

Sale of equity to foreign players

Oil Prices and Subsidy

Budget subsidy 0.26% GDP
Actual 0.74-0.87% of GDP Under-realisation of prices due to Rise in international prices Depreciation of Rupee As per PPAC daily under-recovery of Rs. 319 crores

from sale of diesel, kerosene, Domestic LPG Loss Compensation by Conversion into oil bonds

Why Deregulation?
Sharp increase in demand for petrol and petroleum

products Difficulties in periodic adjustment of prices resulting in serious financial problems for the industry participants Need to make available inputs to user industries at competitive prices:

What is deregulation?
Government will not subsidize the petrol price
Price depends on international crude prices Cost of production is greater than retail price

Raw material + Tax +Excise duty + Distribution costs +

dealer commission

Effects of Deregulation
Short term effect: Rate of inflation will rise Real rate of inflation can be obtained
Long term effect: Reduce the long term debt and fiscal deficit Stable economy More marketing companies and higher profit Recover losses immediately Attract bigger players like Reliance and Shell

Benefits to Government
No subsidy
Meet fiscal deficit Better fiscal planning

Implementation of internal (Tax-VAT and Distribution

system) and external solutions (Iran-Pak-India Fuel pipeline)

TAXATION
CBDT: Central Board of Direct Taxes
Income tax department Central Board of Excise and Customs Types of Taxes Direct taxes Indirect taxes

CBDT

State Government taxation

Revenue from tax

Estimated tax revenue for 2011-2012 is Rs. 664457.14

crores Expected to be around 10-12% of GDP the direct tax collection (personal income tax and corporate tax) grew by 23 per cent to Rs 101,600 crore in the first quarter of current financial year corporate tax collections increased by 23 per cent in the first quarter of the fiscal to Rs 67,100 crore from Rs 54,600 crore in the same period a year ago

Introduction of Goods and Service Tax

Why? Complex existing structure Too many intermediate taxing points Different tax rates

Interstate State Central

High Tax evasion/ high loss Adverse affect on business, SCM

Advantages of GST
Evade the cascading effect of indirect tax
Both tax charges on the manufacturing cost Reduce tax burden

Increased transparency
Increase tax collection

National Small Savings Fund

Saving Schemes provided by Govt. of India promising fixed rate of interest to push financial inclusion

NSSF

Postal Deposits

Saving Certificates

Social Security Schemes

NSSF Collections & Share

Net amount collected under NSSF (gross collections minus repayments) is invested in special securities issued by central and state governments in a ratio decided by the governments. These proceeds form a source for financing the fiscal deficit of both Centre and States.

New Policy introduced

Interest rates on postal savings will go up to 4% from

3.5% at present. In addition, the maturity period of monthly investment schemes and national savings certificates will be reduced form six to five years. The ceiling on annual contributions to the public provident funds will also be raised to 1 lakh from 70,000. All these steps are taken to increase inflow of money in savings

Other proposed policies to reduce fiscal deficit

Crossholding the finance ministry will move a cabinet proposal to allow government companies to acquire equity in other public sector units. This means Governments investment would reduce. 30% dividend As per norms, all profit-making state-owned firms are required to declare a minimum 20 per cent dividend on equity or a minimum dividend payout of 20 per cent of post-tax profits, whichever is higher. The Finance Ministry on October 31 wrote to the Oil Ministry saying the minimum dividend payout for PSUs in oil and gas, chemical and other infrastructure sectors would be 30 per cent this year.

Other proposed policies to reduce fiscal deficit

FDI in retail Growth of the Retail sector in India - Improvement in Retail capability building FMCG retail: 12B to 100B by 2025-Nielsen 60-80 lakh jobs Push to Infrastructure - Improvement in management of supply chain Push to productivity - The Farming Community in India

Conclusion