10.4 Techniques of Fiscal Policy

10.4  Techniques of Fiscal Policy:

Following are the four important techniques of fiscal policy of India:

(i) Policy of Taxation of Government of India:

One of the important sources of revenue of the Government of India is the tax revenue. Both the direct and indirect taxes are being levied by the Government of India. Direct taxes are progressive by nature and most of indirect taxes are regressive in nature. Taxation plays an important role in mobilising resources for plan.

During the First, Second and Third Plan, additional taxation alone contributed nearly 12.7 per cent, 22.8 per cent and 34 per cent of public sector plan expenditure respectively. The shares during the Fourth, Fifth, Sixth and Seventh Plan were 27 per cent, 37 per cent 22 per cent and 15 per cent respectively.

Total tax revenue collected by the Government of India stands at 72.13 per cent of the total revenue of the Government. Mobilisation of taxes by the Government stands around 15 to 16 per cent of the national income of the country during recent years.

Main objectives of taxation policy in India includes:

(a) Mobilisation of resources for financing economic development;

(b) Formation of capital by promoting saving and investment through time deposits, investment in government bonds, in units, insurance etc.;

(c) Attainment of equality in the distribution of income and wealth through the imposition of progressive direct taxes; and

(d) Attainment of price stability by adopting anti-inflationary taxation policy.

(ii) Public Expenditure Policy of Government of India:

Public expenditure is playing an important role in the economic development of a country like India. With increase in responsibilities of the government and with the increasing participation of government in economic activities of the country, the volume of public expenditure in a highly populated country like India is increasing at a galloping rate. In 1992-93, the public expenditure as percentage of GDP was around 30 per cent.

Public expenditure is of two different types, i.e., developmental and non-developmental expenditure. Developmental expenditure of the Government is mostly related to the developmental activities viz., development of infrastructure, industry, health facilities, educational institutions etc.

The non-developmental expenditure is mostly a maintenance type of expenditure and which is related to maintenance of law and order, defence, administrative services etc. The public expenditure incurred by the Government of India has been creating a serious impact on the production and distribution pattern of the economy.

Following are some of the important features of the policy of public expenditure formulated by the Government of India:

(a) Development of infrastructure:

Development of infrastructural facilities which include development of power projects, railways, road, transportation system, bridges, dams, irrigation projects, hospitals, educational institutions etc. involves huge expenditure by the Government as private investors are very much reluctant to invest in these areas considering the low rate of profitability and high risk involved in it.

(b) Development of public enterprises:

Development of heavy and basic industries are very important for the development of underdeveloped country. But the establishment of these industries involves huge investment and a considerable proportion of risk. Naturally private sector cannot take the responsibility to develop these industries.

Development of these industries has become a responsibility of the Government of India particularly since the introduction of Industrial Policy, 1956. A significant portion of public expenditure has been utilised for the establishment and improvement of these public enterprises.

(c) Support to Private Sector:

Providing necessary support to the private sector for the establishment of industry and other projects is another important objective of public expenditure policy formulated by the Government of India.

(d) Social Welfare and Employment Programmes:

Another important feature of public expenditure policy pursued by the Government of India is its growing involvement in attaining various social welfare programmes and also on employment generation programmes.

(iii) Policy of Deficit Financing of Government of India:

Following the policy of deficit financing as introduced by J.M. Keynes, the Government of India has been adopting the policy for financing its developmental plans since its inception. The deficit financing in India indicates taking loan by the Government from the Reserve Bank of India in the form of issuing fresh dose of currency.

Considering the low level of income, low rate of savings and capital formation, the Government is taking recourse to deficit financing in increasing proportion. Deficit financing is a kind of forced savings.

Accordingly, Dr. V.K.R.V. Rao observed, “Deficit financing is the name of volume of those forced savings which are the result of increase in prices during the period of the government investment. Thus deficit financing helps the country by providing necessary funds for meeting the requirements of economic growth but at the same time it also create the problem of inflationary rise in prices. Thus the deficit financing must be kept within the manageable limit.”

During the First, Second, Third and Fourth Plan deficit financing as percentage of total plan resources was to the extent of 17 per cent, 20 per cent, 13 per cent and 13.5 per cent respectively. But due to adverse consequence of deficit financing through inflationary rise in price level, the extent of deficit financing was reduced to only 3 per cent during the Fifth Plan.

But due to resource constraint, the extent of deficit financing again rose to 14 per cent and 16 per cent of total plan resources respectively.

Thus knowing fully the evils of deficit financing, planners are still maintaining a high rate of deficit financing in the absence of increased tax revenue due to large scale tax evasion and negative contribution of public enterprises. But considering the present inflationary trend in prices, the Government should give lesser stress on deficit financing.

(iv) Public Debt Policy of the Government of India:

As the taxation has got its limit in a poor country like India due to poor taxable capacity of the people, thus the Government is taking recourse to public debt for financing its developmental expenditure. In the post-independence period, the Central Government has been raising a good amount of public debt regularly in order to mobilise a huge amount of resources for meeting its developmental expenditure. Total public debt of the Central Government includes internal debt and external debt.

Internal Debt:

Internal debt indicates the amount of loan raised, by the Government from within the country. The Government raises internal public debt from the open market by issuing bonds and cash certificates and 15 years annuity certificates. The Government also borrows for a temporary period from RBI (treasury bills issued by RBI) and also from commercial banks.

External Debt:

As the internal debt is insufficient thus the Government is also collecting loan from external sources, i.e., from abroad, in the form of foreign capital, technical knowhow and capital goods. Accordingly, the Central Government is also borrowing from international financing agencies for financing various developmental projects.

These agencies include World Bank, IMF, IDA, IFC etc. Moreover, the Government is also collecting inter-governmental loans from various developed countries of the world for financing its various infrastructural projects.

The volume of public debt in India increased at a considerable rate i.e. from Rs 204 crore during the First Plan to Rs 2,135 crore during the Fourth Plan and then to Rs 1,03,226 crore during the Seventh Plan. During the Eighth Plan, the volume of internal debt of the Central Government was amounted to Rs 1,59,972 crore and that of external debt was to the extent of Rs 2,454 crore.

At the end of the second year of the Twelfth Plan, i.e., in 2013-14, total outstanding loan (liabilities) of the Central Government stood at Rs 55,87,000 crore.