changes in trends of fiscal policy in india

7/25/2019 Changes in Trends of Fiscal Policy in India

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CHANGES IN TRENDS OFFISCAL POLICY IN INDIA



Content

This presentation focus on

historical trens

!scal iscipline fra"e#or$s!scal responses to the %lo&al !nancial

crisis

su&se'uent return to a !scalconsoliation path



()*+,()-+

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STARTING FROM BASICSeals #ith the ta.ation an e.peniture

ecisions of the %o/ern"ent

in the hans of %o/ern"ent

INCL0DES1

ta. polic23

e.peniture polic23

in/est"ent or isin/est"ent strate%ies ane&t or surplus "ana%e"ent



IMPACT OF FISCAL POLICY fees into econo"ic trens an in4uences

"onetar2 polic2

De!nes &u%et surplus an &u%et e!cit5 To "eet the aitional e.penitures3%o/ern"ent nees to1

&orro# fro" o"estic or forei%n sources3

ra# upon its forei%n e.chan%e reser/es

or print an e'ui/alent a"ount of "one26 7sei%nora%e89



IMPACT OF FISCAL POLICY(contd.)

e.cessi/e printin% of "one2 leasto in4ation5

&orro#in% too "uch fro" a&roa

leas to a e&t crisis5o#nin% on forei%n e.chan%e

reser/es3 "a2 cause a &alance of

pa2"ents crisisE.cessi/e o"estic &orro#in% "a2

lea to hi%her real interest rates

an 7cro#in% out8 of pri/ate



Prudent fscal ol!c" #orde$elo!n% countr!es

not pruent for a %o/ern"ent to run anunul2 lar%e e!cit5

e/elopin% countries, the nee forinfrastructure an social in/est"ents

ar%ue that runnin% surpluses at the costof lon%,ter" %ro#th "i%ht also not #ise

challen%e to "eet infrastructure an socialnees in a #a2 that the e!cit or theaccu"ulatin% e&t &uren is not too %reat5



Ind!a&s fscal ol!c"arc'!tecture

Feeral for" of %o/ern"ent5

There is also a thir tier of %o/ern"ent

at the local le/elFinance Co""ission 6FC9 6e/er2 !/e

2ears9, assi%n"ent an "eiu",ter"%uiance on !scal "atters

:u%et, a state"ent of its proposeta.in% an spenin% pro/isions forle%islati/e e&ate an appro/al5



!$!s!on O# Poers BeteenCentre And State

Central %o/ern"ent is responsi&le for issues that usuall2concern the countr2 as a #hole3 li$e national efence3 forei%npolic23 rail#a2s3 national hi%h#a2s3 shippin%3 air#a2s3 postan tele%raphs3 forei%n trae3 an &an$in%5

The state %o/ern"ents are responsi&le for other ite"sincluin%3 la# an orer3 a%riculture3 !sheries3 #ater suppl2an irri%ation3 an pu&lic health

The ta.in% po#ers of the central %o/ern"ent enco"passta.es on inco"e 6e.cept a%ricultural inco"e93 e.cise on%oos prouce 6other than alcohol93 custo"s uties3 an

inter,state sale of %oos5

The state %o/ern"ents are /este #ith the po#er to ta.a%ricultural inco"e3 lan an &uilin%s3 sale of %oos 6otherthan inter,state93 an e.cise on alcohol5



Plann!n% rocess

Since ()*+ Inia has follo#e a s2ste" of!/e,2ear plans for ensurin% lon%,ter"econo"ic o&;ecti/es

The "ain !scal i"pact of the plannin%process is the i/ision of e.penitures intoplan an non,plan co"ponents5

aroun <+++3 a ne# !scal isciplinefra"e#or$ #as institute , Parlia"entpasse the Fiscal Responsi&ilit2 an :u%et=ana%e"ent Act 6FR:=A9



F!scal Pol!c" B*FOR* LIB*RALI+ATION

e"phasis on stren%thenin% pu&lic sector enterprises5a"inistrati/e controls on /arious inustries

, a s2ste" of licensin% an 'uotasfor pri/ate inustries5

=ain role of !scal polic2 #as to transfer pri/atesa/in%s to cater to the %ro#in% consu"ption anin/est"ent nees of the pu&lic sector5

Other %oals inclue the reuction of inco"e an #ealth ine'ualities throu%h

ta.es an transfers3 encoura%in% &alance re%ional e/elop"ent3

fosterin% s"all,scale inustries

so"eti"es in4uencin% the trens in econo"ic acti/ities

to#ars esire %oals



Ta, ol!c" focuse on e.tractin% re/enues fro" the pri/ate sector to

fun the pu&lic sector an achie/e reistri&uti/e %oals

In ()*> %o/ern"ent then in/ite the :ritish econo"istNicholas ?alor to e.a"ine the possi&ilit2 of refor"in% theta. s2ste"5

the s2ste" ine@cient an ine'uita&le %i/en the inae'uatereportin% of propert2 inco"e an ta.ation5

the "a.i"u" "ar%inal inco"e ta. rate at )< percent to &etoo hi%h an su%%este it &e reuce to *

In ()B>,B3 the "a.i"u" rate ta$in% in to account the

surchar%e #as )B5* percent for personal inco"e a&o/e Rs5+5< "illion5

The s2ste" #as also co"ple. #ith as "an2 as ele/en ta.&rac$ets



Ta, ol!c" (contd..)

The Direct Ta.es En'uir2 Co""ittee of ()B(, hi%h ta. rates encoura%e ta. e/asion5

Follo#in% its reco""enations in ()B,B*the personal inco"e ta. rate #as &rou%hto#n to BB percent &ut the #ealth ta. rate#as increase5

In ()-*,- , the nu"&er of ta. &rac$ets #asreuce fro" ei%ht to four an the hi%hestinco"e ta. rate #as &rou%ht o#n to *+percent



Ta, ol!c" (contd..)In inirect ta.es3 a "a;or co"ponent #as the

central e.cise ut2

&2 ()B*,B it #as e.tene to co/er all"anufacture %oos5

The e.cise ut2 structure at this ti"e #as alsoco"plicate 5

So"e co""oities ha speci!c uties #hileothers ha a /alore" rates5

The ta. also ha a "a;or 7cascain% eect8since it #as i"pose not ;ust on !nal consu"er%oos &ut also on inputs an capital %oos5



Ta, ol!c" (contd..)

The Inirect Ta. En'uir2 Report of ()BBreco""ene to con/ert the cascain%"anufacturin% ta. into "anufacturin% /alue

ae ta. 6=ANAT9 The other "ain central inirect ta. is the

custo"s ut25

The taris #ere hi%h5 :2 ())+,)( the taristructure ha a ran%e of + to ++ percent#ith o/er (+ percent of i"ports su&;ecte totaris of (<+ percent or "ore5



Co"position of central %o/ern"entre/enues 6()B+B(9

1970-71 Ê

16%

58%

26%

Direct Tax

Indirect Tax

Non-tax Revenue



Result o# ol!c!es t!ll-/0&sInia8s e.peniture nor"s re"aine

conser/ati/e until the ()-+s5

Fro" ()B>B to ()B-B)3 the central%o/ern"ent continuousl2 ran re/enue

surpluses5 Its %ross !scal e!cit 6GFD9 alsosho#e a slo# %ro#th #ith certain episoesof o#n#ar "o/e"ents

Thereafter3 li"ite refor"s in speci!c areasincluin% trae li&eralisation3 e.portpro"otion an in/est"ent in "oerntechnolo%ies #ere acco"panie &2increase e.penitures !nance &2o"estic an forei%n &orro#in%



the leaer #ho ushere in theliberalization in Indian econo"2 in1991

-10 ON2ARS..



Increase in e.penitures

Inia8s e.peniture nor"s re"aineconser/ati/e until the ()-+s5

Fro" ()B>B to ()B-B)3 the central%o/ern"ent continuousl2 ran re/enue

surpluses5li"ite refor"s in speci!c areas incluin%

o trae li&eralisation3o e.port pro"otion

o in/est"ent in "oern technolo%ies #ere acco"panie &2 increase e.penitures5



The central re/enue e!cit cli"&e fro"(5 percent of GDP in ()-+,-( to <5percent of GDP &2 ()-),)+5

%ross !scal e!cit 6GFD9 cli"&e fro" *5B(

percent to B5>( percent of GDP5

e.ternal lia&ilities of the centre fell fro"B5( in ()-<,-> to *5*> of GDP &2())+,)(

in a&solute ter"s the lia&ilities #ere lar%e5

total lia&ilities increase fro" *(5> to5B* of GDP5

Inia8s e.ternal e&t an e.peniture



De!cits of the Central Go/ern"ent as percenta%e ofGDP 6()B+ to ())+9



Co"position of central %o/ern"ent re/enues 6())+,)(9

1990-91 Ê

13%

65%

22%

Direct Tax

Indirect Tax

Non-tax Revenue

C t l t



Central %o/ern"ent re/enuee.penitures 6()B+B(9



Central %o/ern"ent re/enuee.penitures 6())+)(9

1990-91 Ê

15%

29%

17%

39%

Defence

Interet

!u"idie

#t$er Revenuex&enditure



Li&eralisation3 %ro#th3 an !scal consoliation6())(<++-9Econo"ic li&eralisation3 econo"2 #as opene

up to forei%n in/est"ent an trae3 the pri/atesector #as encoura%e an the s2ste" of'uotas an licences #as is"antle5

Ta. Refor"s Co""ittee pro/ie a &lueprint forrefor"in% &oth irect an inirect ta.es5 =ainstrate%2 #as to reuce the proportion of traeta.es in total ta. re/enue3 increase the share of

o"estic consu"ption ta.es &2 con/ertin% thee.cise into a AT an enhance the contri&utionof irect ta.es to total re/enue5



Ta. Refor"sPersonal inco"e ta. reuce to <+5>+ an + percent

in ())<,)> an to (+3 <+3 an >+ percent in ())B,)-

=a.i"u" rate of #ealth ta. #as reuce to ( percent5

custo" uties &rou%ht o#n to (*+ in ())(,)<3+in ())B,)-3 >+ in <++<,+>3 <* in <++>,+3 an(*in <++*,+5

introuction of the ser/ice ta. in ()),)* an &eca"ea "a;or source of re/enue5

Introuction of AT in <++* ensures reportin% of inputs

an outputs resultin% in su&stantial reuction in ta.e/asion5

shift fro" inirect ta.es to#ars irect ta.es5



Co"position of central %o/ern"ent re/enues 6())+,)(9

1990-91 Ê

13%

65%

22%

Direct Tax

Indirect Tax

Non-tax Revenue



government revenues(1995-96)

1995-96 Ê

20%

5'%

26%

Direct Tax

Indirect Tax

Non-tax Revenue



Composition of centralgovernment revenues (2000-01)



Fiscal situation i"pro/es an falls

Risin% re/enues fro" ta. a"inistration refor"san e.peniture control resulte in the e!cits&ein% &rou%ht uner control5

The e&t to GDP ratio #ent o#n to 5> per

cent of GDP in ())*) an reache a furtherlo# point of <5)) per cent in ()))++5

Ho#e/er3 %o/ern"ent e&t an !scal isciplinea%ain see"e to %i/e #a2 in the earl2,<+++s5

Cli $ i t i t



*NT*RING T3* 4-ST C*NT5RY

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FR:=A1

(5 Enacte fro" < Au%ust <++>

<5 FR:= &ill #as introuce &2 for"er !nance "inister =r5 Yash#ant Sinha in Dec5 <+++

>5 Gra"", Ru"an,Hollin%s :alance :u%et Act 60SA9an Sta&ilit2 an Gro#th pact 6European 0nion9 are the

precursor

Reasons1

(5 Total lia&ilities e'ui/alent to ti"es its annual re/enue &2the en of <+++ at central le/el

<5 Interest pa2"ents alone #ere consu"in% one,thirs of theta. re/enue

>5 Hi%h re/enue e!cit an !scal e!cit5



FRBMA (contd..)

O&;ecti/es 1(5 Transparent !scal "ana%e"ent s2ste"s

<5 =ore e'uita&le an "ana%ea&le istri&ution of thecountr2s e&ts o/er the 2ears

>5 Fiscal sta&ilit2 for Inia in the lon% run

5 =ana%e the In4ation

Content of the Act1

(5 =eiu",ter" Fiscal Polic2 State"ent

<5 Fiscal Polic2 Strate%2 State"ent>5 =acro,econo"ic Fra"e#or$ State"ent

5 Annual Financial State"ent An De"ans For Grants



FRBMA (contd..)

Tar%ets1(5 Re/enue e!cit

Date of eli"ination >( =arch <++) 6postpone fro" >(=arch <++-9

=ini"u" Annual reuction +5* of GDP

<5 Fiscal De!cit

Ceilin% > of the GDP &2 >( =ar <++-

=ini"u" Annual reuction +5> of GDP

>5 Total De&t ) of the GDP 6a tar%et increase fro" the

ori%inal re'uire"ent in <+++*9 Annual Reuction ( of GDP

5 R:I purchase of Go/ern"ent &ons to cease fro" ( April<++



FRBMA (contd..)

Criticis"1

,Reuce social e.peniture necessar2 to create productiveassets an %eneral uplift"ent of rural poor of Inia



De!cits Of The Central Go/ern"ent As Of GDP 6())+)( To <++)(+91

0

1

2

3

'

5

6

7

8

9

(ro )ica*

Deficit

Revenue Deficit



De!cits Of The State Go/ern"ents As Of GDP 6())+)( To <++)(+91

-2

-1

0

1

2

3

'

5

(ro )ica* Deficit

Revenue Deficit



ACHIEE=ENTS1

(5 In <++B+-3 the central %o/ern"ent8s re/enue e!citca"e o#n to (5+ of GDP #hile the GFD #as >5>> fro" an *5* respecti/el2 in <++>,<++5

<5 The state %o/ern"ents achie/e a re/enue surplus of+5*- of GDP an a GFD of (5-( of GDP &2 <+++B

fro" <5 re/enue e!cit an 5< !scal e!citrespecti/el2 in <++>,<++ 5

>5 This fe into other econo"ic /aria&les in a positi/e"anner5

5 The a%%re%ate is&urse"ents of the central an state

%o/ern"ents sho#e an increase in capital outla2s fro"((5-B in <++<+> to (-5*) in <++B,+-5

*5 In4ation #as "oerate an %ro#th #as &uo2ant at )5 in <+++B5



Glo&al Financial Crisis1,RED

SEPTE=:ER

(5 The %lo&al !nancial crisis of <++- is the #orst of its $insince the Great Depression

<5 :e%an #ith failures of lar%e !nancial institutions in the0nite States =or%an Stanle23 Gol"an Sachs3 =errillL2nch3 Deutsche :an$ 3:arcla2s5

>5 Rapil2 e/ol/e into a %lo&al crisis resultin% in anu"&er of European &an$ failures

I t f GFC i



I"pact of GFC inINDIA1

(5 STOC? =AR?ET DOJN<5 EFFECT ON EKCHANGE RATES INDIAN C0RRENCY AL0E

(M)5-)

>5 INFLATION RATE (<5

5 NEGATIE I=PACT ON EKPORTS

*5 GDP TOJARDS DOJN

5 CONTAGION RIS?S TO THE FINANCIAL SECTOR

Go t Jor$ To



Go/t5 Jor$ ToReco/er1

O/erall central e.cise ut2 reuce &2 per cent Interest su&siies for e.port !nance

Further < per cent reuction of central e.cise anser/ice ta. for e.port inustries

Rural far" loan #ai/er sche"e

E.pansion of National Rural E"plo2"ent Guarantee Act6NREGA9

Parlia"entar2 elections of <++- also resulte in further%o/ern"ent e.penitures

Re/ise salaries for central pu&lic ser/ants as per thereco""enations of the Si.th Pa2 Co""ission5



Reco$er"

(5 Fiscal e!cit for <+(+(( ecline to a &etter thantar%ete *5( per cent of GDP5

<5 :u%et of <+(+(( aopte a polic2 tar%etin% a !scale!cit of *5* per cent of GDP in <+(+(( fro" a le/el of5* per cent 6inclusi/e of &ons in lieu of securities9 in

<++)(+5>5 In <+(+(( the non,ta. re/enues fro" the auction of

teleco" spectru" 6>G an &roa&an9 resulte in hi%herthan anticipate receipts5 5

Pl i h



Plannin% ahea

Polic2"a$ers ha/e co"e to accept strict

&u%etar2 constraints3 #hile atte"ptin% to"a.i"ise resources for e/elop"entalacti/ities5

Plannin% Co""ission in approach paper for the

(<th Fi/e Year Plan 6<+(<(B95

En/isa%es an a/era%e !scal e!cit of >5<* percent of GDP for the entire plan perio

Fiscal e!cit pro;ecte to co"e o#n fro" 5(per cent in <+(<(> to >5* per cent in <+(>(5

It is then e.pecte to re"ain at > per cent ofGDP for the ne.t three !nancial 2ears5

Pl i h



Plannin% aheaGross &u%etar2 support for plan is pro;ecte to

increase fro" 5)< per cent of GDP in <+(((<to *5B* per cent &2 en of (<th Fi/e Year Plan5

Re/enue tar%ets are pro;ecte at conser/ati/ele/els5

Net ta. re/enue for the centre is e.pecte toincrease fro" B5 per cent of GDP in <+(((< to-5)( per cent in <+((B5

Gross ta. to GDP ratio is pro;ecte to &e (+5>

per cent of GDP in <+(((< risin% to (<5> percent &2 <+((B5

Pre/iousl2 pea$e at ((5) per cent in <++B+-5



Future A'ead

The post,crisis reco/er2 of the Inianecono"2 is #itnessin% a correction of the!scal polic2 path to#ars a re%i"e ofpruence5

Rel2in% on ta. refor"s3 in particular theGST to eli/er re/enue &oost5

In the future3 the focus #oul pro&a&l2 &eon &rin%in% in ne# ta. refor"s an &ettertar%etin% of social e.penitures

changes in trends of fiscal policy in india

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