Fiscal System in India - An Overview

FISCAL SYSTEM IN INDIA - AN OVERVIEW

Essential for All Upcoming Banking Exams

Introduction: 

Fiscal System refers to the management of revenue and capital expenditure finances by the state. Hence, fiscal system includes budgetary activities of the government that is revenue raising, borrowing and spending activities. 

Indian Fiscal System includes or refers to the management of revenue sources and expenditure of the Centrals and State Governments, Public Debt, Deficit Financing, Budget, Tax Structure etc.

Fiscal Policy: 

Fiscal Policy refers to the use of taxation, public expenditure and the management of public debt in order to achieve certain specified objectives. 

This is part of the government policy, which deals with the increase in income tax and taxation and expenditure of government expenditure. The two principal instruments of monetary policy are government spending and taxes - 

1. Revenue Budget 
2. Expenditure Budget 

In the economy, tax on the following variables and the changes in government spending levels and amounts can be affected. 

Three possible stances of fiscal policy are – 

• A Contradiction stance of fiscal policy (G<T) [Where G= Government Spending and T= Tax Revenue] 
• A neutral stance of fiscal policy implies a balanced budget where (G=T)
• An expansionary stance of fiscal policy involves a net increase in government spending (G>T). 

Objectives: 

• To achieve desirable employment level. 
• To achieve desirable price level. 
• To achieve desirable income distribution. 
• To achieve desirable consumption level. 
• Increase in Capital formation. 

Source of Revenue for Center: 

The revenue of the Central Government consists of the following elements – 

Non-Tax Revenue – 

Non-Tax Revenue consists of Interest receipts and dividends and Currency, coinage and min. 

Tax Revenue – 

Tax Revenue comes broadly from three sources – 

• Taxes on commodities and services. 
• Tax on property and capital transactions. 
• Taxes on income and expenditure. 

Expenditure of the Center: 

The Central Government makes expenditures broadly under two heads – 

Non-Plan Expenditure – The major non-plan expenditures are interest payments, defence, subsidies and general services. 

Plan Expenditure – Under Plan expenditure comes outlay for agriculture, irrigation and flood control, rural development, energy, communications science and technology, industry and minerals, transport, communications science and technology, environment and economic services etc. 

Expenditure of state: 

Like the Union Government, the State Governments too have two broad heads of expenditure – 

• Development Expenditure 
• Non- Development Expenditure. 

Internal Debt: 

It comprises loans raised from the open market, prize bonds, compensation bonds etc. treasury bills issued to the RBI, commercial banks etc. 

External Debt: 

• It consists of loan taken from World Bank, ADB, IMF and Individuals countries like USA, Japan etc. 
• Deficit Financing is a tool in the hands of the Government to bridge the gap between revenue receipt and revenue expenditure.