...THE EFFECT OF FISCAL DEFICIT ON WHOLE SALE PRICE INDEX IN INDIA Submitted by, Group 7 – Sec A Ankit Rout (U111007) Chinmaya Swain (U111017) Kavindra Sharma (U111027) Nikhil Lukose (U111037) Samik Bhattacharjee (U111047) Swarup Kumar Mishra (U111057) ------------------------------------------------- ACKNOWLEDGEMENT We would like to express our whole-hearted gratitude to all those who have helped with the report or have been associated with the report in any way and made it a worth-while experience. We are greatly indebted to our batch mates and our seniors for having shared their invaluable thoughts and opinions that went a long way in helping us gather information and analyse issues for the report. And, a special mention of Professor Latha Ravindran, whom we cannot thank enough for having given us the opportunity and her total support for working on this project and completing our report. Thank you. INtroduction For the last several years the GDP of India has been growing rapidly. The real GDP growth of India averaged 8.5% in the five years ending March 2010. But at the same time food price inflation and consumer price inflation too have been on the increasing curve. The relationship between fiscal deficit and inflation which is measured by WPI in India is an important issue in macroeconomics study. The main purpose of the study is to analyze the relationship between budget deficit and Whole Sale Price Index. The fiscal deficit influences demand...
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...The Fiscal Deficit | | | | | | | | |What exactly is the Fiscal Deficit? | |The fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowing). | |The elements of the fiscal deficit are (a) the revenue deficit, which is the difference between the government’s current (or | |revenue) expenditure and total current receipts (that is, excluding borrowing) and (b) capital expenditure. The fiscal deficit | |can be financed by borrowing from the Reserve Bank of India (which is also called deficit financing or money creation) and | |market borrowing (from the money market, that is mainly from banks). | | | |Does a Fiscal Deficit Necessarily Lead to Inflation? | |No. Two arguments are generally...
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...Problem Statement Rising rate of inflation in Pakistan in last decade, factors that impact this rise in inflation. The factors are monetary i.e. money supply, exchange rate and real GDP and other factors are banking and non-banking borrowings. Research attempts to give solutions for problem that how, why, and when these factors affect the rate of inflation. Research is aimed to identify reasons due to which inflation is rising in Pakistan and give solution for this problem. Review of Literature Inflation & Importance The general movement of a country's overall price level is of primary concern to all and more so if the movement is upward. The problem of inflation has virtually become a major concern for all economies - over the last few decades, Inflation has been accelerating at an alarming rate in most of developing countries. (Mohammed Sabihuddin Butt and Haroon Jamal: A MONETARIST APPROACH TO INFLATION FOR PAKISTAN: Pakistan Economic and Social Review Vol.X XVI No.2 (Winter1988) pp 69-87) Inflation adversely affects the overall growth, the financial sector development and the vulnerable poor segment of the population. There is clear consensus that even moderate levels of inflation damage real growth. Inflation decreases the real income and also induces uncertainty. Considering such adverse impacts of inflation on the economy, there is a consensus among the worlds' leading central banks that the price stability is the prime objective of monetary policy and...
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...difficult to be found. Chart 1: How country debts and budget deficits compare [pic] Source: Eurostat Newsrelease Euroindicators 2010 According to the Chart 1 above, the debt of Italy is 115.8% of GDP and Greece (115.1% of GDP) is closely followed, while Ireland has the highest budget deficit of 14.3% of GDP and next is Greece (13.6% of GDP). However, the European Union member states were required to have 3% for the ratio of the actual government deficit to GDP as market prices and 60% for the ratio of government debt to GDP at market prices (Treaty on European Union, 1992). It is clear that all member states shown above broke the standard of Treaty on European Union and have excessive deficit and debt relate to the GDP. Government debt is defined as the government borrowing in order to satisfy the short-term liquidity needs or the longer-term budget capital expenditures (Edirisuriya, 2010). The government debt usually can be caused as an accumulated governmental deficit over several years or several decades. A large scale of debt, especially the sovereign debt, can cause rapid inflation which implied that a high price level of goods and a high level of unemployment, when an economy is running near or at its potential level of output. Therefore, the fiscal policy and monetary policy can be applied to counteract inflation. Monetary policy In order to maintain inflation...
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...debate of effectiveness of fiscal policy for output and employment under different schools of thought. Fiscal Policy : Fiscal policy is carried out by the governmental and/or the policymaking branches of government. The two main instruments of fiscal policy are government expenditures and taxes. The government collects taxes in order to fund expenses on a number of public goods and services for example, hospitals and national defense. Deficits and Surpluses in the Budget: The budget deficit, which is the difference between government expenditures and tax revenues, is funded by government borrowing; the government issues long‐term, interest‐bearing bonds and uses the proceeds to finance the deficit. The total store of government bonds and interest payments outstanding, from both the present and the past, is known as the national debt. Thus, when the government finances a deficit by borrowing, it is adding to the national debt. When government expenditures are less than tax revenues in a given year, the government is running a budget surplus for that year. The budget surplus is the difference between tax revenues and government expenditures. The revenues from the budget surplus are typically used to reduce any existing national debt. In the case where government expenditures are exactly equal to tax revenues in a given year, the government is running a balanced budget for that year. Expansionary and contractionary fiscal policy: Expansionary fiscal policy is defined as an increase in...
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...Guidelines for Fiscal Adjustment Fiscal Affairs Department International Monetary FundContentsPrefaceIntroductionWhy May Fiscal Adjustment Be Needed? The Impact of Fiscal Policy on Macroeconomic Policy Objectives Inflation External Current Account Growth Fiscal Adjustment to Ensure Sustainability Links to Other Policy InstrumentsHow Should the Fiscal Stance Be Assessed? Fiscal Impact of Alternative Methods of Deficit Financing Other Measures Used to Assess the Fiscal Stance The Sensitivity of a Fiscal Assessment to the Time Frame of Analysis Definition of Government Accounts for Macroeconomic Analysis Coverage of Government Operations Timing of the Impact of Fiscal Transactions Defining the "Overall Fiscal Balance"How Much Fiscal Adjustment Is Required? A Framework for Fiscal Adjustment Determining the Amount of Fiscal Adjustment Reducing the Fiscal Deficit Quality of AdjustmentHow Should Fiscal Adjustment Be Effected? Measures to Improve the Tax System and Increase Revenue Characteristics of a Desirable Tax System Design of Major Taxes Rationalization of Expenditure Policies Expenditure Reduction in the Short Run Structural Public Expenditure ReformReferencesBoxes1. Adverse Consequences of Excessive Fiscal Expansion for Growth2. The Exchange Rate Effects of Fiscal Policy3. Quasi-Fiscal Activities of Public...
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...Growth • Inflation • Surpluses & Deficit KEY MACROECONOMIC INDICATORS : ECONOMIC GROWTH • GDP and GNI (or GNP) – High or Low – total amount of goods and services produced in a year within the domestic territory) or GNI (GDP + net income) – Per capita GNI (total GNI divided by total population) – PPP GNI (unmber of units of a country’s currency required to buy the same goods and services in the domestic market that $1 will buy in USA KEY MACROECONOMIC INDICATORS : INFLATION • Increase in prices • Inflation rate percentage increase in the change in prices from one period to another, usually a year • Demand more than supply • Inflation effects – interest rates – exchange rates – cost of living and – General confidence in a country’s political and economic system KEY MACROECONOMIC INDICATORS : INFLATION • Inflation and Interest rates • High inflation – High interest rates KEY MACROECONOMIC INDICATORS : INFLATION • Inflation and Exchange Rate • Higher inflation – devaluation • Case 1 • UK exporter – US distributor • Cost 100 pounds Exchange rate $1.59 / GBP • Cost to US distributor $159 • Case 2 – High Inflation – exchange rate constant – exports will be costly • Cost 110 pounds Exchange rate $1.59 / GBP • Cost to US distributor $174.90 – High Inflation – currency devaluation – exports will be competitive • Cost 110 pounds Exchange rate $1.47 / GBP • Cost to US distributor $161.70 KEY MACROECONOMIC INDICATORS : INFLATION • Inflation and cost...
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...Monetary and Fiscal Policy? Economic policy-makers are said to have two kinds of tools to influence a country's economy: fiscal and monetary. Fiscal policy relates to government spending and revenue collection. For example, when demand is low in the economy, the government can step in and increase its spending to stimulate demand. Or it can lower taxes to increase disposable income for people as well as corporations. Monetary policy relates to the supply of money, which is controlled via factors such as interest rates and reserve requirements (CRR) for banks. For example, to control high inflation, policy-makers (usually an independent central bank) can raise interest rates thereby reducing money supply * Monetary policy involves changing the interest rate and influencing the money supply. * Fiscal policy involves the government changing tax rates and levels of government spending to influence aggregate demand in the economy. They are both used to pursue policies of higher economic growth or controlling inflation. Monetary Policy Monetary policy is usually carried out by the Central Bank / Monetary authorities and involves: * Setting base interest rates (e.g. Bank of England in UK and Federal Reserve in US) * Influencing the supply of money. E.g. Policy of quantitative easing to increase the supply of money. How Monetary Policy Works * The Central Bank may have an inflation target of 2%. If they feel inflation is going to go above the inflation target,...
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...lows due to recession in 2000-2002. The low interest rates causes the unwanted money supply and this excess credit was invested heavily in the United States in the form of treasury securities and financial derivatives that leaded to bubble in commodities and houses prices. This paper examines the Federal Reserve monetary and fiscal policy during and prior to course of recession in 2008. The economy had faced at least three crises since 2008, fiscal crisis, financial crisis and unemployment crisis. These crises are interrelated. The unemployment crisis during 2008 has causes the fiscal deficit at the frightening level. The economy is still facing the unemployment and fiscal crises. The unemployment rate remains high in the world and the fiscal problem in Europe has not been fully resolved. The Fiscal Policy: The fiscal policy played a considerable role in the financial crisis during 2008. The changes in the fiscal policy have large impact on employment and output and lead to unsustainable budget deficit in the long-run. The expansion in the budget deficit is one of the major reasons for the financial crisis during 2008. The implementing in the fiscal policy has greater impact in the short-run (David Romer). The study...
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...2010-2011 China fiscal policy analysis China ministry of finance undersecretary Wang Jun made a speech in the fourth international taxation dialogue system plenary session. He pointed out that, “from now on, China government will keep put into effect on positive fiscal policy and stable monetary policy, which are aimed at improving the pertinences, flexibility and foresight of fiscal policy.” (Wang, 2011) The policy and target Review back to 2010, China government insists in implementing positive fiscal policy, especially in stimulating the economic growth, transferring the way of economic growth and applying flexible in fiscal policy. As the figure 1 shows, in 2010, China positive fiscal policy facilitate in mainly four aspects: advancing the local fiscal reformation, strengthen the medium-sized and small enterprises and rural construction, promoting the economic development and supporting the social undertaking. Figure 1: Year 2010 China important fiscal policy content Coming out date | Fiscal policy | 4.30 | Treasury department sets fiscal policy: central budget provides specialized fund for helping to expand the minor firms ‘guarantee operations, which can improve the financing environment of minor firms. | 5.13 | Treasury department and SAT (State Administration of Taxation) make an announcement; government will solve the problem that farmers are hard to get loan, by diminishing the sales tax and income tax. | 5.31 | Government will start the trial allowance...
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...was raised by Rs.5 per litre at one go, even without any rise in international prices. These steps are being taken to eliminate the government subsidy on these products in a step-by-step manner. Deregulation of the POL sector is bound to eliminate the direct or indirect subsidies completely. And reduction in subsidy, according to the government, is the need of the hour in order to reduce the fiscal deficit as proportion to GDP. Deregulation is also necessitated in the current neo-liberal environment because if the government keeps subsidizing the public sector owned oil marketing companies (OMCs) like Indian Oil, Hindustan Petroleum and Bharat Petroleum, then the private companies like Reliance and others would not get a ‘level playing field’ and they would not be able to compete in price. In this way, the present subsidy regime indirectly restricts the private players from entering the oil marketing sector. Hence, if the priorities of the government in power are the reduction of subsidies and ensuring a ‘level playing field’ for private players rather than containing inflation and generating employment and growth, it would opt for a policy of deregulation. “A market-determined pricing system for petrol and diesel can be sustained in the long-run by providing level playing field and promoting competition among all players, public and private, in the oil and gas sector” (Kirit Parikh Committee...
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...European Fiscal Policy: Coordination of fiscal policy in Eurozone Wibowo Suhaidi (1235036) Tilburg University Course: Financial Economics Professor: S.C.W. Eijffinger October 2011 ABSTRACT The Stability and Growth pack has been discussed extensively in determining whether it is sufficient to undermine fiscal policy coordination in the Eurozone. Even before the recent sovereign debt crisis hitting the Eurozone the SGP has been in much of critics and the current situation calls for deeper analysis on the SGP and whether more coordinated fiscal policy in Eurozone is necessary in strengthening fiscal policy framework. This paper analyzes the implementation of fiscal policy in Eurozone with the SGP as the guideline and found out that despite effectively maintain the budgetary balances of Eurozone countries, the SGP failed to deliver overall fiscal stability. Therefore, a more coordinated form of fiscal policy is required in order to achieve the goal of fiscal stability in Eurozone. 1 I. Introduction The formation of European Monetary Union and the adoption of Euro as the single currency have the consequence that member countries are losing their monetary policy independence at the national scope. Therefore, one possible solution is to use fiscal policy in order to mitigate the asymmetric shocks, as fiscal policy is still on the hand of the national government of each member countries. However, from the Monetary Union point of view it is not desirable to...
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...goods that are sold in bulk and traded between organizations instead of consumers. Wholesale Price Index (WPI) represents the price of goods at a wholesale stage i.e. goods that are sold in bulk and traded between organizations instead of consumers. WPI is used as an important measure of inflation in India. Fiscal and monetary policy changes are greatly influenced by changes in WPI. WPI is an easy and convenient method to calculate inflation. Inflation rate is the difference between WPI calculated at the beginning and the end of a year. The percentage increase in WPI over a year gives the rate of inflation for that...
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...economic growth. However, since 2009 Greece has been experiencing a recession. The recession was caused from debt accumulating from government borrowing and spending, and not enough tax revenues. Since Greece is part of the Eurozone, it must abide by the European Union’s requirements such as, the government budget deficit cannot exceed 3% and the debt to GDP ratio cannot exceed 60%.Greece has had an inflation rate above 4% and budget deficit of 6-10% of GDP, with the highest being 15/7% in 2010. The debt to GDP of Greece exceed 60% in 2012, it was 70.3 higher. As a result, Greece has implement contractionary fiscal policies to help control its inflation and budget deficits. As the Greek economy undergoes an extended period of economic and political turmoil, bold and committed policy actions were critically needed to restore fiscal sustainability, enhance labor market flexibility, and tackle systemic corruption. As shown in the Greek debt comparison to Eurozone average graph, Greece’s debt is higher than the average in the Eurozone. Greece agreed for a €11.5 billion in spending cuts and a revenue increase of €2 billion from increased taxes. The use of contractionary fiscal policies, raising tax rates and cutting spending, has led to a budget surplus in the first seven months of 2013. The austerity measures aimed for Greece to qualify for its next €31.5 billion tranche, for a total of €130 billion bailout. Objective was to reduce the debt level...
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...prevent the depreciation of the Rupee I. Economics of Currency Predicting currency movements is perhaps one of the hardest exercises in economics as it has many variables affecting the market movement. However, over a longer term currency movement is determined by following factors: Balance of Payments: It is the sum of current account and capital account of a country and is an external account of a country with other countries. Both current account and capital account play a role in determining the movement of the currency: o Current Account Surplus/Deficit: Current account surplus means exports are more than imports. In economics we assume prices to be in equilibrium and hence to balance the surplus, the currency should appreciate. Likewise for current account deficit countries, the currency should depreciate. Capital Account flows: As currency adjustments do not happen immediately to adjust current account surpluses and deficits, capital...
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