Meaning of Fiscal Policy The fiscal policy is concerned with the raising of government revenue and incurring of government

t expenditure. To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned with government expenditure and government revenue. Fiscal policy has to decide on the size and pattern of flow of expenditure from the government to the economy and from the economy back to the government. So, in broad term fiscal policy refers to "that segment of national economic policy which is primarily concerned with the receipts and expenditure of central government." In other words, fiscal policy refers to the policy of the government with regard to taxation, public expenditure and public borrowings. The importance of fiscal policy is high in underdeveloped countries. The state has to play active and important role. In a democratic society direct methods are not approved. So, the government has to depend on indirect methods of regulations. In this way, fiscal policy is a powerful weapon in the hands of government by means of which it can achieve the objectives of development. Fiscus (in Latin) refers to a purse and fisc (in English) is a royal or state treasury. Thus, fiscal policy is that under which the government uses its revenue and expenditure programs to produce desirable effects on national income, production and economy. It is thus used as a balancing device in the economy. Two major elements of fiscal policy are taxation and public expenditure Main Objectives of Fiscal Policy In India The fiscal policy is designed to achive certain objectives as follows :1. Development by effective Mobilisation of Resources The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of Financial Resources. The central and the state governments in India have used fiscal policy to mobilise resources. The financial resources can be mobilised by :Taxation : Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation. Public Savings : The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises.

Private Savings : Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing. 2. Efficient allocation of Financial Resources The central and state governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc. But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable. 3. Reduction in inequalities of Income and Wealth Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society. 4. Price Stability and Control of Inflation One of the main objective of fiscal policy is to control inflation and stabilize price. Therefore, the government always aims to control the inflation by Reducing fiscal deficits, introducing tax savings schemes, Productive use of financial resources, etc. 5. Employment Generation The government is making every possible effort to increase employment in the country through effective fiscal measure. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generates more employment. Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas. Similarly, self employment scheme is taken to provide employment to technically qualified persons in the urban areas. 6. Balanced Regional Development Another main objective of the fiscal policy is to bring about a balanced regional development. There are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc. 7. Reducing the Deficit in the Balance of Payment Fiscal policy attempts to encourage more exports by way of fiscal measures like Exemption

of income tax on export earnings, Exemption of central excise duties and customs, Exemption of sales tax and octroi, etc. The foreign exchange is also conserved by Providing fiscal benefits to import substitute industries, Imposing customs duties on imports, etc. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or by giving subsidies to export. 8. Capital Formation The objective of fiscal policy in India is also to increase the rate of capital formation so as to accelerate the rate of economic growth. An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of capital deficiency. In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to encourage savings and discourage and reduce spending 9. Increasing National Income The fiscal policy aims to increase the national income of a country. This is because fiscal policy facilitates the capital formation. This results in economic growth, which in turn increases the GDP, per capita income and national income of the country. 10. Development of Infrastructure Government has placed emphasis on the infrastructure development for the purpose of achieving economic growth. The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is invested in the infrastructure development. Due to this, all sectors of the economy get a boost. 11. Foreign Exchange Earnings Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax and octroi, etc. Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. Conclusion On Fiscal Policy The objectives of fiscal policy such as economic development, price stability, social justice, etc. can be achieved only if the tools of policy like Public Expenditure, Taxation, Borrowing and deficit financing 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.

Seigniorage is part of public finance and government's meagre earning source like income tax and VAT. If we have to define seigniorage, we can say,"Seigniorage is earning of government for issuing new notes."

Explanation # Case One Suppose Govt. of India issued Rs. 100000 new notes and it was given for purchasing Gold of any other company. After one year, govt. of India sells this Gold and receives Rs. 200000 due to inflation and increasing the price of gold. Then Rs. 100000 is seigniorage. In seigniorage, govt. receives profit due to decreasing the value of currency. Formula of Calculating Seigniorage = Net profit on producing of new notes and coins. # Case Second Suppose Govt. of India produced Rs. 500 one note and its cost for printing was just Rs. 100. If govt. of India pays Rs. 500 for repayment of his loan, then Rs. 400 net profit on producting of new note will be the seigniorage of govt. of India.

MONETARY POLICY Definition of 'Monetary Policy' The actions of a central bank, currency board or other regulatory committee that determine the size and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is maintained through actions such as increasing the interest rate, or changing the amount of money banks need to keep in the vault (bank reserves The Supply of Money: Definitions of Money Supply used by the Central bank: 1)M1 or Monetary Base Supply Notes and coins in circulation plus current (non- interest bearing) account balances at credit institutions. Also called Narrow Money Supply 2)M3 or Broad Bearing Supply M1 + deposit account balances 3)High Powered Money (H) currency reserves held by the Central Bank Money Creation: Banks can create money by taking in deposits, keeping a certain amount in reserve and lending out the remainder. This is known as a system of financial reserve. When they lend out the deposits money is created. The Keynesian Theory of the demand for money:

The demand for money refers to the desire to hold money; to keep wealth in the form of money rather than spending it on goods and services or saving it by purchasing financial assets such as bonds and shares There are 3 main reasons why people hold their assets in the form of money: 1)Transaction demand 2)Precautionary demand 3)Speculative demand 1) The Transactions Demand for Money: People need to hold money to finance planned expenditure which they intend to undertake in the near future. The transactions motive depends on 4 main factors: A)Disposable Income: At higher disposable incomes, total planned expenditure is higher and so people need larger amounts of money balances to finance their planned expenditure. B)The Price Level: At higher prices, larger amounts of money balances are needed to finance planned expenditure. C)Money Substitutes: The growing use of money substitutes such as credit cards reduce the need to hold money balances to finance planned expenditure. (It also reduces the precautionary need to hold money) D)The Frequency which people are paid: On average the less frequently people are paid (e.g.: monthly as opposed to weekly) the greater the level of money balances they will tend to hold. 2) The Precautionary Demand for Money: The precautionary motive for holding money is similar to the transactions demand, except that it relates to a persons need to hold money in order to finance unplanned rather than planned transactions (e.g. unexpected ill health or a car accident or breakdown) In recent years the greater availability of money substitutes has probably reduced the need to hold cash or funds in a bank current account for precautionary purposes. Note: The transaction and the precautionary motives for holding money are for expenditure purposes and so are independent of the rate of interest. 4)The Speculative Demand for Money: This is a motive for holding money to avoid losses from holding interest bearing assets i.e. the need for cash to take advantage of investment opportunities that may

arise. An individual must chose between holding money or holding bonds. Money has instant spending power but earns little interest. In contrast bonds earn a rate of interest but suffer from being relatively illiquid. If investors had foreseen the Wall Street crash of 1987 they would have sold their interest bearing assets and put the proceeds into the bank. Central Bank -First central bank in Ireland set up by parliament in 1783 Bank Of Ireland -In 1801 The Bank of England took over the central bank and BOI concentrated on commercial banking. -Currency Act of 1927 introduced the Saorstat pound which was later renamed as the Irish Pound -In 1943 The Central Bank of Ireland was formally established -Since single currency unit was introduced in 1999, many of the functions of the Irish Central Bank have been taken over by the European Central Bank. Functions of the Central Bank -Issues and controls legal tender -Acts as a banker to the state -Acts as the bankers bank -Holds reserves required by law for the commercial banking sector -Formulates and implements monetary policy which involves adjusting interest rates -Manages a countries monetary system regulating and supervising all financial institutions Monetary Policy Refers to the use of money supply, credit and interest rates to achieve economic objectives. It is a deliberate attempt by governments to influence the interest rates directly or indirectly by controlling the supply of money in order to influence the level of aggregate demand and hence equilibrium output in the economy. Monetary policy that expands money supply lowers interest and vice versa. The aim of monetary policy is price stability. Controlling the money supply means limiting the banks ability to lend, either by restricting the amount of liquid assets available or by reducing the demand for borrowing. The only tool available to fight inflation if by pushing up interest rates

Monetary policy can be either expandit, iongry, or contractionary. Expantionary monetary policy occurs when the central bank deliberately reduces the interest rate in order to increase aggregate demand, and hence equilibrium output Monetary policy is not available in Ireland anymore because we are in the EU and EU members cannot borrow more than 3% of their GDP. The supply of money can be controlled by the Central Bank through: 1)Reserve Requirements (Minimum Reserve Ration (MRR)) is the percentage of deposits which banks are legally obliged to lodge at the Central Bank the amount of reserves a bank must hold to back up deposits can influence the supply of money. Minimum Reserve Ration in the European Central Bank is 2% 2)Open Market Operations involve buying and selling government securities and bonds. An open market purchase expands the money supply and an open market sae reduces the money supply. If the Central Bank purchases bonds, the money is paid to the commercial bank and its reserves are increased, If the Central Bank sells bonds, it takes money from the commercial bank so money supply decreases. 3)Discount Rate is the rate at which the Central Bank charges financial institutions that borrow from it for purposes of maintaining the reserve requirement Commercial banks must hold a % of their reserves and if they fall below the limit they must either borrow from the inter-bank market or from the Central Bank to make up the shortfall. The interest rate charges by the Central bank is called the discount rate. The discount rate is generally used as a base for all other interest rates. When the discount rate decreases all other interest rates decrease. In UK called Bill Discounting Rate About

About finance commission

The Finance Commission of India came into existence in 1951. It was established under Article 280 of the Indian Constitution by the President of India. It was formed to define the financial relations between the centre and the state. The Finance Commission Act of 1951 states the terms of qualification, appointment and disqualification, the term, eligibility and powers of the Finance Commission. As per the Constitution, the commission is appointed every five years and consists of a chairman and four other members. Since the institution of the first finance commission, stark changes have occurred in the Indian economy causing changes in the macroeconomic scenario. This has led to major changes in the Finance Commissions recommendations over the years. Till date, Thirteen Finance Commissions have submitted their reports. Functions Functions of the Finance Commission can be explicitly stated as: 1. Distribution of net proceeds of taxes between Centre and the States, to be divided as per their respective contributions to the taxes. 2. Determine factors governing Grants-in Aid to the states and the magnitude of the same. 3. Work with the State Finance Commissions and suggest measures to augment the Consolidated Fund of the States so as to provide additional resources to Panchayats and Municipalities in the state. financecommision It lays down rules regarding qualification and disqualification of members of the Commission, their appointment, term, eligibility and powers. Qualifications of the members The Chairman of the Finance Commission is selected among people who have had the experience of public affairs. The other four other members are selected from people who: 1. Are, or have been, or are qualified, as judges of High Court, or 2. Have knowledge of Government finances or accounts, or 3. Have had experience in administration and financial expertise; or 4. Have special knowledge of economics Procedure and Powers of the Commission The Commission has the power determine their own procedure and: 1. Has all powers of the civil court as per the Court of Civil Procedure, 1908. 2. Can summon and enforce the attendance of any witness or ask any person to deliver information or produce a document, which it deems relevant. 3. Can ask for the production of any public record or document from any court or office.

4. Shall be deemed to be a civil court for purposes of Sections 480 and 482 of the Code of Criminal Procedure, 1898 Disqualification from being a member of the Commission A member may be disqualified if: 1. He is mentally unsound; 2. He is an undischarged insolvent; 3. He has been convicted of an immoral offence; 4. His financial and other interests are such that it hinders smooth functioning of the Commission Terms of Office of Members and eligibility for Reappointment Every member will be in office for the time period as specified in the order of the President, but is eligible for reappointment provided he has, by means of a letter addressed to the President, resigned his office. Salaries and Allowances of the members The members of the Commission shall provide full- time or part- time service to the Commission, as the President specifies in his order. The members shall be paid Salaries and Allowances as per the provisions made by the Central Government. So far, 13 Finance commissions have submitted their recommendations. More or less, all of them have been accepted by the Union Government. irst Finance Commission

The First Finance Commission was appointed by the President on November 20, 1951, which was chaired by Mr. K.C. Neogy. Other members of the commission included Mr. V.P. Menon, Mr. R. Kaushalendra Rao, Dr. BK Madan and Mr. M.U. Rangachari. After Mr. V.P. Menons resignation on February 18, 1952, Mr. V.L. Mehta was appointed as a member. The commission was asked to make recommendations regarding: 1. Allocations of income tax and Union Excise Duties and tax sharing. 2. Amounts payable as Grants- in-Aid to the States in need of Assistance under the substantive portion of Clause 1 of Article275. 3. Grants-in-Aid to certain States in lieu of their share of export duty on jute and jute products according to Article 273. 4. Continuation or adjustment of the terms of agreement with Part B States under Article 278 (1) or under Article 306. Recommendations income tax was to be 55 per cent. The First Commission recommended that shares of States in the Union excise duties be 40 per cent of the proceeds of the tax on three commodities, 25 per cent of the proceeds of the tax on eight commodities and 20 per cent of the proceeds of the tax on 35 commodities, respectively. The share of States in the proceeds of

As far as Horizontal Distribution is concerned, overwhelming weightage is given to Population (80%). Only residual weightage of 20% given to contribution. No recommendations regarding grants for meeting capital requirements of the state were made by the commission. The Commission provided Grants in- Aid (under Article 273) to only four states, namely, Assam Bihar, Orissa and West Bengal. However, Grants were provided to many states under Substantive Portion of Article 275 (1) and under the head of Primary education grants.

All recommendations made by the commission were accepted by the Union Government. Major Recommendations of 13th Finance Commission 1. The share of states in the net proceeds of the shareable Central taxes should be 32%.This is 1.5% higher then the recommendation of 12th Finance Commission. 2. Revenue deficit to be progressively reduced and eliminated,followed by revenue surplus by 201314. 3. Fiscal deficit to be reduced to 3% of the GDP by 2014-15. 4. A target of 68% of GDP for the combined debt of centre and states. 5. The Medium Term Fiscal Plan(MTFP)should be reformed and made the statement of commitment rather then a statement of intent. 6. FRBM Act need to be amended to mention the nature of shocks which shall require targets relaxation. 7. Both centre and states should conclude 'Grand Bargain' to implement the model Goods and Services Act(GST).To incentivise the states,the commission recommended a sanction of the grant of Rs 50000 crore. 8. Initiatives to reduce the number of Central Sponsored Schemes(CSS)and to restore the predominance of formula based plan grants. 9. States need to address the problem of losses in the power sector in time bound manner.