Conceptual ideas-II

What are the indirect taxes?

An indirect tax is a tax which is imposed on one person, but paid partly or wholly by another depending on the bargaining power between them. In the sense, indirect tax is conceived as the one which can be shifted or passed on. The prominent examples of the indirect taxes are sales tax, customs and excise duties, incidence of which is transferred to (partly) the ultimate customers. In India contribution of indirect taxes to the total tax revenue of the union government is around 47% in 2008-09.

What is the budget deficit?

In India, the term budget deficit is used to describe the position in the different accounts of the budget. That is on current or revenue account and on capital account. The combination of the state of these two accounts represents the overall state of the budgetary position. The budgetary position on the revenue account represents the current operations of the government, i.e., government administrative expenses which are financed by the tax revenue. The deficit or surplus in the revenue account would be carried over to the capital account. The surplus or deficit on capital account signifies the over all budgetary position. The method of financing budget deficits is known as the deficit financing.

Where does the government look for funds where there is deficit?

Deficit is referred to the excess of expenditure incurred by government over the receipts from levying taxes, fees and so on. To reduce or eliminate the gap between expenses and receipts, modern democratic governments lay their hands on the accumulated reserves, sale of government properties, issuing debt securities which are issued in the market through central banks, borrowing from external sources such as foreign governments and foreign financial bodies and least likely increasing the taxes. In India, the budget deficit of the union government is about six percent (5.63%) of GDP in 2008-09, when sub-national governments are taken together it is about 10% of GDP which is overwhelmingly high.

What is the long run impact of the piling of debt?

In the short run debt gives the relief from the budgetary mismatch. But the accumulation of debt increases the debt service burden on the economy in the long run. Though in the short run debt adds for the economic expansionary policies, it takes away much needed cushion in the times of extreme events and causes for the contraction.

What is the relationship between deficits and taxes?

The term deficit refers to the presence of excess government expenditure over receipts from taxes, duties, fees and so on. Increase in taxes thereby tax revenue is one of the options government can exercise in reducing the burden of deficit. But such an option of increasing taxes to meet the budgetary demands is less attractive to the democratic governments.

What is the relationship between deficits and unemployment rates?

Deficit financing is the most popular economic expansionary policies particularly in the context of emerging markets. In presence of resource crunch, most of the emerging economies resort to the deficit financing as a policy measure to increase the investment spending, employment opportunities thereby increased production. In a way deficit financing reduces the unemployment rates given the economy future resilient prospects to deal with the increased deficit.

What do you understand by the term ‘fiscal responsibility’?

The term fiscal responsibility may be viewed as it is composed with three dimensions; they are managing resources, minimizing the debt and preparing for the future. Managing resources involves assessing needs, setting priorities, and appropriating funds as well. Assessing the needs in various departments and allocating the resources is the crucial part of fiscal responsibility. Preparing and effectively tiding over the potential black swan events by maintaining possible cushion is the prominent dimension of the fiscal responsibility. Eliminating the wasteful expenses, optimizing the expenditure on social security measures are the possible ways to minimizing the debt. Indian government (including sub national governments) running the deficit of around 10% of GDP as on 2008-09, enacted the Fiscal Responsibility & Budget Management to phase out the fiscal deficit.

What are supplementary budgets? Why are they needed?

During the budget year unanticipated needs may arise that affect the central government budget. A particular deparment may, for example, need more money than planned. In such a situation, the Government can revise the central government budget by proposing an increase. This is known as a supplementary budget and proposals for supplementary budgets are submitted by the Government possibly twice a year.

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Conceptual Ideas!!

What are M1, M2 and M3?

M1 is the sum of the physical money that is held outside banks, travelers’ checks and demand deposits. M2 is M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds. M3 is M2 as well as all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. M3 is referred to as broad money supply and is usually the number referred to when talking about money supply. M1 is generally referred to as narrow money.

What is the impact of interest rate on the economic growth?

There is a general consensus that the growth of the economy is negatively associated with the interest rates prevailing in the economy. Interest rates in an economy has twofold effect on economic growth as they act as driving force for the investment activity on one hand (supply side) and stimulate the consumption expenditure on the other hand (demand side). In specific, moderately low interest rates not only drive the increased investment activity but also encourage the individual consumption expenditure.

What Does Nonperforming Asset Mean?

A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the lender for an extended period of time (say, 90 days). The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments. Increased nonperforming assets act negatively to the growth of the economy as the scarce capital could be holdup in unviable economic activities. It is a major concern for the emerging economies as they generally face the resource crunch.

What is a fiat currency?

Fiat currency or fiat money is a type of currency whose only value is that a government made a fiat that the money is a legal method of exchange (is usually the paper currency). Unlike commodity money it is not based on any other commodity such as gold or silver and is not covered by any special reserve. It means fiat currency doesn’t have any intrinsic value and its value depends only on the confidence holders have in the economy and its government. Most currencies in the present world are fiat currencies.

What are the leading, lagging and coincidental indicators?

Usually indicators are used to predict the future outcomes, particularly future trends of the certain economic variables. Some of these indicators are published by government bodies/private organizations eg. Inflation rate, …………..and some are observed in the market place eg. Bond yields. Depending on the prediction they make, such indicators are classified into leading, lagging and coincident indicators.

Leading indicators are the pointers towards the future outcomes. Bond yields may be considered the leading indicator for the trends in the equity markets.

Lagging indicators are of useful in reinforcing or confirming the event occurring or expected to occur. Unemployment rate may be viewed as lagging indicator for the performance of the economy. Falling unemployment rates confirms the encouraging performance of the economy.

Coincident indicators reflect the situations they signify. Increased per capita consumption is the reflection of flourishing economy.

What happens to the interest rates during deflation?

Deflation refers to the fall in the general price level. It is usually caused by the fall in aggregate demand which is in turn resulted from the decline of government spending, private consumption and investment spending. Deflation can also be the result of the fall in the supply of credit and increased interest rates. But once the deflationary situation is settled in, investors mostly become the risk averse and seek for the safe heavens such as investing in treasury securities. The increased demand for the treasury securities due to deflationary conditions brings down the interest rates and some times push the interest rates into the negative territory.

How does credit crunch affect consumption?

Credit crunch refers to the reduction in general availability of credit irrespective of the rise in interest rates. It has multifold effect on the consumption expenditure, particularly on the conspicuous consumption. On the plain grounds, lack of credit availability restricts the consumption on durable goods; on the other hand credit crunch dampens the consumer confidence by causing the steep fall in asset prices, reduction in investment rates and increased unemployment rates. The recent credit crunch resulting from the US housing sector crisis brought down the consumer confidence there by consumption expenditure.

What are the important components of the budget?

Indian budget, known as Union Budget is made up of revenue account and capital account. Revenue account comprises of government revenue mainly from taxes and government administrative expenditure. Capital account comprises of receipts and payments. Receipts on capital account include the loans brought about by the government through central bank from the market as well as other government bodies and profits from the government owned enterprises. Components of payments on the capital account include government investment expenditure on assets, infrastructure etc.

What are the direct taxes?

A direct tax is a tax which is imposed directly on the tax payer. It implies that in the case of the direct taxes the immediate impact and incidence of the money burden lies on the same person. The examples of direct taxes are personal income tax, wealth tax, tax on gifts etc. Most of the modern governments earn major chunk of revenue from imposing direct taxes. In India, contribution of direct taxes to the total revenue of the union government is 53.07% in 2008-09. This reflects the significance of the direct taxes as major source of revenue for the state.

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