Important Details you need to know about the Indian Fiscal System
Fiscal system is the anatomy of a country’s government revenue and expenditures. It also includes budgetary activities of the government like revenue raising, borrowing etc. To govern this system or to conduct this system fiscal policies are designed and implemented by the government. Let’s understand the details about Indian Fiscal System.
These Fiscal policies deal with the use of taxation and public expenditure by the government and management of Public debt for achieving stabilization or growth of the economy.
Objectives of the fiscal policy
It ascertains the full employment in the economy.
It preserves price stability.
It strengthens income inequality.
It magnifies economic growth.
It instigates savings and investment in the economy.
So, in this way by maintaining viable fiscal stability in the economy the fiscal policy is managed by the government.
Fiscal Policy is further divided into three-
- Public Revenue
- Public expenditure
- Public debt
Public Revenue– Are the different sources of government income such as taxes etc. It includes-
Revenue Receipts– Consists of revenue from regular sources like Taxation revenues e.g. receipts from corporate tax, income tax, and several other taxes, and Nontax revenue: that includes interest on loans, dividends from Public sector units, Fees and stamp duties etc.
Capital Receipts- Consists of those inflows to the government that does not fall under the nature of regular income, instead belongs to the repayments/recoveries, or proceeds from the sale of assets etc. Disinvestment (selling some shares of a PSU) also comes under this head. Borrowings are the deficit that is covered by taking loans from the market.
- Public Expenditure-Are the different expenses that are made and bear by the Government.
Nonplan Expenditure– Are those expenditures which remain uncovered under the five-year plan. It accounts from interest payments, subsidies, and wage and salary payments to government employees, grants to States and Union Territories governments, pensions, police, and economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments. It basically focuses on defense, loans to public enterprises, loans to States & UT’s and foreign governments etc.
- Plan expenditure- Are those that are covered under the five-year plans formulated by the government for the enhancement of the country’s economy. It mostly includes outlays for agriculture, science, and technology rural development, irrigation, and flood control, energy, industry and minerals, transport, communications, environment, and economic services. These expenditures are incurred by the central government.
Plan expenditure is further subdivided into Revenue Expenditure and Capital Expenditure.
Revenue Expenditure- Are those payments that are incurred for a day – to – day running of government schemes and projects launched to benefit the citizens of the country. This also accounts for the amount spent on subsidies, interest payments etc.
Capital expenditure- Are those payments or expenditure done towards increasing capital. It includes the acquisition of assets that may include investments in shares, infrastructure as well as loans and advances given out by the government.
Public Debt: Amount for the money borrowed by the government and is, therefore, called public debt. Public debt is divided into two parts- internal debt and external debt.
Internal Debt: Includes money borrowed from within the country. It consists of loans for a fixed tenure of time at a fixed rate. The dated securities and treasury bills account for the contents of internal debt.
External Debt : Amounts for funds borrowed from non-Indian sources. It accounts for loans received from foreign governments and multilateral institutions. Government’s foreign currency borrowing does not take place directly for international capital markets; rather it takes place through multilateral agencies and different bilateral sources. It includes Funds borrowed from World Bank, IMF, ADB and individual countries like the USA, Japan etc.
Generally, it happens that the government ends up spending more than what it had earned through various sources. This loss which is met with borrowed funds is called a fiscal deficit. Technically, Fiscal Deficit is equaled to the difference of revenue receipts (net tax revenue + nontax revenue) plus Capital receipts (only recoveries of loans and other receipts) and Total Expenditure.
So, here we came across the fiscal system of our country and the fiscal policy of India. Also, we learned about the revenue and capital receipts and revenue and capital expenditure. In the upcoming posts, we will be discussing more the other economic aspects.