Fiscal Policy
Fiscal Policy of the government refers to the policies adopted with regard to
- Taxation,
- Public expenditure, and
- debt management.
The impact of taxation on the growth of private business in general; and on private investment in particular, is examined through the effect of taxation on (i) people's work - effort: (ii) saving of the households in general and of private firm in particular; and (iii) incentive and ability to invest.
Unfortunately, there is little evidence available in case of India to support or to refute the proposition regarding the adverse effects of taxation on saving and investment. The empirical evidences available for other countries are not strictly conclusive, and even if they are, the same may not be applicable to the Indian economy.
In India, not much evidence is available to show the effect of tax-treatment of depreciation and retained earnings (taxable) on the corporate saving and investment. Regarding the retained earning, the remarks by the National Council of Applied Economic Research (NCAER) are worth mentioning. It remarks that "the fluctuations in retained profits (during fifties) were caused mainly by fluctuations in gross profit because tax provisions as a proposition of profit did not vary widely." It also mentions, "It is difficult to -say definitely what would have been the effect of greater variation in tax rates. Most probably its impact on retained profits would have been no less than that of fluctuations in gross profits."
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