Globalization and fiscal policy have impacted India's economy in several ways since the 1990s. Liberalization in the 1990s lowered trade barriers and accelerated globalization. Direct taxes increased 100% from 1990-1991 to 2000-2001 while indirect taxes decreased 31%. Government expenditures on defense decreased 13.33% from 2000-2001 to 2005-2006, while interest payments increased 24.13% in that period. Subsidies decreased 41.2%. India's exports of commercial services have grown significantly, with the services export growth rate reaching 36.9% in 2006-2007. Globalization has benefited India's GDP and foreign exchange reserves but negatively impacted the agricultural sector.
1. By : Patel Sonukumar Bharatbhai
sonupatel48@gmail.com
2. What is Globalization?
ïGlobalization is a process of interaction and
integration among the people, companies and
government of different nations.
ïA process driven by international trade and
investment â aided by information technology.
3. India towards Globalization
ïTill 90s the process of globalisation of the Indian
economy was constrained by the barriers to trade and
investment.
ïLiberalisation of trade, investment and financial flows
initiated in the nineties has progressively lowered the
barriers to competition and hastened the pace of
globalisation.
5. What do you mean by
Fiscal Policy?
ïFiscal policy deals with the taxation and expenditure
decisions of the government.
ï Monetary policy, deals with the supply of money in
the economy and the rate of interest.
ïThese are the main policy approaches used by
economic managers to steer the broad aspects of the
economy.
6. ïIn most modern economies, the government deals
with fiscal policy while the central bank is
responsible for monetary policy.
ïFiscal policy is composed of several parts
ï These include,
1.
2.
3.
4.
Tax policy,
Expenditure policy,
Investment or disinvestment strategies
Debt or surplus management.
7. Fiscal and Monetary Policy
ïFiscal policy also feeds into economic trends and
influences monetary policy.
ï When the government receives more than it spends,
it has a surplus.
ï If the government spends more than it receives it
runs a deficit.
ï To meet the additional expenditures, it needs to
borrow from domestic or foreign sources, draw upon
its foreign exchange reserves or print an equivalent
amount of money.
8. Effects
1.
2.
3.
4.
5.
On a broad generalization, excessive printing of
money leads to inflation.
If the government borrows too much from abroad it
leads to a debt crisis.
If it draws down on its foreign exchange reserves, a
balance of payments crisis may arise.
Excessive domestic borrowing by the government
may lead to higher real interest rates
the domestic private sector being unable to access
funds resulting in the âcrowding outâ of private
investment.
9. Challenges for Government
ïSo the challenge then for most developing country
governments is to meet infrastructure and social
needs while managing the governmentâs finances in a
way that the deficit or the accumulating debt burden
is not too great.
19. Conclusion
ïExpenditures due to defense has decreased by 13.33%
ïCalculation -> (13 â 15)/15 = 13.33%
ïInterest payment by government has increased by
24.13%
ïCalculation -> (36 â 29)/29 = 24.13%
ïSubsidies provided by the government decreased by
41.2%
ïCalculation -> (10 â 17)/17 = 41.2%
21. Indiaâs -Export of Commercial Services
ïIndia has become one of the top five exporters of
services amongst developing countries.
ïIndiaâs exports of services are mainly to the European
countries and the US.
ïIndiaâs export services growth rate was 33.3% in 2005-06,
36.9% in 2006-07, 25.9% in 2007-08 and 16.3 in 2008-09.
(Recession)
ïIndia has been deemed as a major exporter of services in
the world with a market share of 2.72% in 2008 as against
0.6% in 1995.
22. The Bright Side of Globalization
ïThe rate of growth of the Gross Domestic Product of India
has been on the increase from 5.6 per cent during 1980-90 to
7% in the 1993-2001 period.
ïThe foreign exchange reserves (as at the end of the financial
year) were $ 39 billion (2000-01), $ 107 billion (2003-04), $
145 billion (2005-06) and $ 180 billion (in February 2007).
ïAs per the Forbes list for 2007, the number of billionaires of
India has risen to 40 (from 36 last year) more than those of
Japan (24), China (17), France (14) and Italy (14) this year.
23. The Dark Side of Globalization
ïThe foremost casualty being the agriculture sector.
ïGlobalisation has lowered the per capita income of the
farmers and increased the rural indebtedness.
ïThe agricultural growth of 3.2 percent observed from 1980
to 1997 decelerated to 2 percent subsequently.
ïWith more than half the population directly depending on
this sector, low agricultural growth has serious implications
for the inclusiveness of growth.
24. Impact of Globalization
1.
2.
3.
4.
5.
6.
7.
Government Purchases has increased
Poverty has been reduced,
Employment has increased,
Begging by India for economic aid has stopped,
Long-term inflation rate has gone down,
Scarcity of goods have disappeared,
The quality of products available have improved
substantially
26. What do mean by
Aggregate Demand?
ïAggregate demand refers to the demand of goods and
services i.e. is the willingness of firms, households,
government, customer to buy goods and services.
27. HOW FISCAL POLICY INFLUENCES
AGGREGATE DEMAND
ïFiscal policy refers to the governmentâs choices
regarding the overall level of government purchases or
taxes.
ïFiscal policy influences saving, investment, and
growth in the long run.
ïIn the short run, fiscal policy primarily affects the
aggregate demand.
28. Changes in Government Purchases
ïWhen policymakers change the money supply or
taxes, the effect on aggregate demand is indirectâ
through the spending decisions of firms or
households.
ïWhen the government alters its own purchases of
goods or services, it shifts the aggregate-demand
curve directly.
29. Changes in Government Purchases
ïThere are two macroeconomic effects from the
change in government purchases:
ïThe multiplier effect
ïThe crowding-out effect
30. The Multiplier Effect
ïGovernment purchases are said to have a multiplier
effect on aggregate demand.
ïEach dollar spent by the government can raise the
aggregate demand for goods and services by more than
a dollar.
ïThe multiplier effect refers to the additional shifts in
aggregate demand that result when expansionary fiscal
policy increases income and thereby increases
consumer spending.
32. A Formula for the Spending Multiplier
ïThe formula for the multiplier is:
Multiplier = 1/(1 - MPC)
ïAn important number in this formula is the marginal
propensity to consume (MPC).
ïIt is the fraction of extra income that a household
consumes rather than saves.
33. A Formula for the Spending Multiplier
ïIf the MPC is 3/4, then the multiplier will be:
Multiplier = 1/(1 - 3/4) = 4
ïIn this case, a $20 billion increase in government
spending generates $80 billion of increased demand
for goods and services.
34. The Crowding-Out Effect
ïFiscal policy may not affect the economy as strongly
as predicted by the multiplier.
ïAn increase in government purchases causes the
interest rate to rise.
ïA higher interest rate reduces investment spending.
ïThis reduction in demand that results when a fiscal
expansion raises the interest rate is called the
crowding-out effect.
ïThe crowding-out effect tends to dampen the effects
of fiscal policy on aggregate demand.
36. The Crowding-Out Effect
ïWhen the government increases its purchases by $20
billion, the aggregate demand for goods and services
could rise by more or less than $20 billion, depending
on whether the multiplier effect or the crowding-out
effect is larger.
37. Changes in Taxes
ïWhen the government cuts personal income taxes, it
increases householdsâ take-home pay.
ïHouseholds save some of this additional income.
ïHouseholds also spend some of it on consumer goods.
ïIncreased household spending shifts the aggregate-
demand curve to the right.
ïThe size of the shift in aggregate demand resulting
from a tax change is affected by the multiplier and
crowding-out effects.
ïIt is also determined by the householdsâ perceptions
about the permanency of the tax change.