There are two types of expenditures – money spent on the delivery of goods and services and the transfer of funds to other levels of government. Government expenditure can be both, planned, as well as non-planned. Planned capital expenditure is like government expenditure on social sectors and planned non-capital expenditure means normal government expenses. The latter means sudden expenses on, say, durable disaster management and mounts to government expenses on government officials, including VIPs.
Taxation takes many forms (direct and indirect), including taxation of personal and corporate income, so-called value added taxation and the collection of royalties or taxes on specific sets of goods. Government revenue is categorised into revenue receipts – like tax revenue and non-tax revenue – and capital receipts (say, through borrowing). Through borrowing, a government means to provide a great deal of goods and services to its people, while not having the immediate tax revenue to fund that expenditure. This is done primarily by issuing securities, such as Treasury Bills or Treasury Bonds. All levels of government borrow money at some point or the other. Fiscal Policy has two main tools – the changing of tax rates, and changing of government expenditure. The government has been focusing on both of these to provide a boost to the economy.
Existing Measures – As we know, the on-going global recession has also hit India. According to the International Monetary Fund (IMF) and World
Bank, apart from many Central and Eastern European economies, a large number of developing countries across the five continents are facing a financial meltdown. This would seriously affect the rate of economic growth and the related equity issues, especially poverty levels. It is estimated that an additional 90 million people’s income may fall below the poverty line in most of these countries.
Another problem is that capitalism rules the world but is surviving only because of huge stimulus packages. India
is fortunate in the sense that both the public and private sectors are active, and both are equally aware of the crisis. They are, in fact, going hand in hand to get the country out of this crisis. Let us briefly see what the public sector is doing in terms of Fiscal and Monetary Policies in this context:
Looking at the global financial and economic conditions, the RBI
has taken many measures since mid-September 2008, to augment domestic liquidity and to ensure that credit continues to flow to productive sectors of the economy. Since then, the RBI has reduced the Cash Reserve Ratio (CRR) from 9.0 per cent to 5.0 per cent and the Statutory Liquidity Ratio (SLR) from 25.0 per cent to 24.0 per cent.
The various fiscal stimulus packages as announced by the government during the last few months or so, have raised the market borrowing programme of the government for the year 2008-09. In terms of the amendment to the memorandum of understanding on ‘Market Stabilisation Scheme’ (MSS) on February 26, 2009, an amount of Rs 45,000 crore was transferred from the MSS cash account to the normal cash account of the Government of India by March 31, 2009. An equivalent amount of government securities issued under the MSS would also form part of the normal market borrowing of the government. This arrangement has surely given a boost to the market.
Furthermore, the RBI has conducted purchase of government securities under its open market operations. The Government has given liquidity support to the housing sector and particularly to Housing Finance Companies (HFC), which have been adversely affected by the recent financial market developments. The government is also helping the overseas financial companies in many ways for financing imports to India. Attempts are being made to ensure adequate liquidity in order to maintain the flow of credit for all productive purposes in the housing, export and small and medium industry sectors.