fiscal policy - budget and finance commission · 2018-05-03 · fiscal policy - budget and finance...
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Fiscal Policy - Budget and Finance Commission
There are two policies that are announced in India-Monetary Policy and Fiscal Policy.
The Monetary policy is announced by RBI where as the fiscal policy is announced by the government
Fiscal Policy is also referred to as public finance, is the sum total of all the financial decisions taken by the government regarding expenditure and revenues. Fiscal policy is very important as the expenditure by a government depends on the revenue that it is generating. The policy also refers to the quality expenditure i.e. target subsidies, have more expenditure under the capital head etc.
The objectives of fiscal policy are
To mobilize financial resources
To direct the expenditure
To maintain economic stability
To promote and accelerate growth
Some of the decisions that are taken under fiscal policy are
Budget
Finance Commission
Taxation system
Subsidy
Disinvestment etc
Budget
Budget is presented under article 112 as Annual Financial Statement
The government cannot withdraw money from the consolidated fund of India without the approval of Parliament
Two types budgets are presented in a financial year-Railway and Union
It is presented on the last working day of February in Lok sabha by the finance minister but before that the President addresses the parliament (lays down the cause of the budget)
Lok Sabha enjoys more powers compared to RS (it can only recommend changes but it is the prerogative of LS to accept/reject the recommendations)
No tax shall be levied or collected except by authority of law
The budget is prepared by Department of Economic affairs (Ministry of Finance)
Under the budget, 14 documents are presented and the most important documents are
o Summary document
o Appropriation bill
o Finance bill
o FRBMA documents
The budget has two accounts-expenditure (appropriation bill) and revenue (finance bill)
FRBMA (Fiscal Responsibility and Budget Management Act) 2003- it was passed so as to provide fiscal consolidation. Under this the government of India proposedto reduce FD, RD, but the recession in 2008-09, has led to higher expenditure by the government. The government is on the way to implement FRBMA. In May 2016, government has set up N K Singh committee to review implementation of FRBMA
Process of passage
o Government obtains the prior recommendation from the president to present the budget. The President addressed the parliament and lays the cause for the budget.
o The Budget is then presented on the floor of Lok Sabha by the Finance Minister with the "Budget speech".
o It is then presented on the floor of the Rajya Sabha for discussion, but Rajya Sabha does not have the power to vote on the demands for grants.
o The Discussion on Budget in the Lok Sabha is conducted in two stages-General Discussion (includes broad discussions on the budget, cut motions are not allowed) and Detailed Discussion (done after the standing committee presents the reports, during this stage the cut motions are allowed to be introduced, demand for grants are voted and passed)
o After the voting, an Appropriation Bill is introduced and voted on, which authorizes the government to withdraw and spend money from the Consolidated Fund of India.
o After this the finance bill is introduced, passed and sent for president’s assent.
o For the procedure to be over usually it takes till the end of may but till thenthe government has to incur certain expenditure, which is allowed to be withdrawn with passage of Vote-on-Account (which is usually one sixth thevalue of total demand for grants)
Cut motions
o Economy Cut= the demand for the grants is reduced by the certain amountbased on the economies
o Token cut= to address a grievance of a member, the amount is reduced by Rs 100
o Policy cut= if the underlying policy (regarding the demand) is faulty then the demand for grants is reduced to Rs 1
Budget is divided into two accounts-Capital and Revenue account
o Capital Account-contains items which lead to creation of assets
Capital Receipts
Capital Expenditure
o Revenue Account-day today items which do not lead to creation of assets
Revenue Receipts
Revenue Expenditure
Deficits
o Revenue Deficit=difference between revenue expenditure and revenue receipts
o Budget Deficit= difference between budget expenditure and budget receipts
o Fiscal Deficit=difference between total expenditure and non-debt creating capital receipts
o Primary Deficit=is the deficit if there was no interest liability (the interest is paid in the present year on the loans that were taken in the past)
PD=FD-Interest Payments
o Monetized Deficit= is the scenario wherein the GoI asks RBI to print fresh currency to bridge the deficit
FRBMA 2003
o Bring down revenue deficit by 0.5% per year and eliminate it by 2007-08.
o Bring down fiscal deficit by 0.3% per year and bring it down to 3% by 2007-08.
o Central government not to provide guarantee (for more than 0.5% GDP) onthe loans of PSU and state governments
o Total liabilities of central government not to increase by more than 9% per year
o Union Government would place three more documents along with the budget documents viz. Macroeconomic Framework Statement, Medium Term Fiscal Policy Statement and the Fiscal Policy Strategy Statement.
o At the end of second quarter, the Finance Minister would make a statement on the trend of fiscal indicators and corrective measures taken thereof.
o Recently the GoI has set up a committee headed by former revenue secretary N K Singh (to submit the report by October 31, 2016)
Review the functioning of the Act in the last 12 years and suggestingchanges
Review the factors that are taken into consideration in determining yearly targets
Whether to have fixed or a range for FD
Can the government re-align FD with the changes in the credit flow in the economy
“We do not require a separate Railway budget"- provide the supporting explanationAnswer
o Post independence railways accounted for more than 75% of public transport and 90% of freight traffic which has been reduced to 20% and 40% respectively in recent times
o Size of Railway budget is small compared to Union Budget (during British era it accounted for more than 80% of the value of the budget but it has come around 10% compared to the size of union budget)
o Since the railways budget was prepared separately from the union budget, there was duplication of efforts, higher involvement of officials, higher expenditure etc
o One of the prominent features of Railway budget has been populist measures, with the merger, this would be somewhat brought under control
o Recommendation of Bibek Debroy Committee-the railway is presented separately as a convention and there is no constitutional provision which
dictates that. Hence all it takes is the executive decision of the governmentto merge it with union budget.
o Presently there is an urgent need to have an integrated transport modal mix in India which can provide seamless transportation. To achieve this merger is necessary.
o The 7th Pay Commission Recommendations will increase the burden on its wage bill. With the implementation of the 7th PC, the salary burden on the ministry will be increasing by more than 50%- from Rs.53,000 crore to Rs.77,325 crore in 2016-17 (not accounting for other costs such as pensions)
o The investment and growth in the railways has been the focus of criticism-the railway lines are of 66000 kms of which only 17000 kms have been laid down post independence
14 th Finance Commission
Was appointed on 2nd January 2013 under the chairmanship of Y V Reddy and the terms of reference given to it are
o Recommendations regarding the devolution of taxes between the Center and the States from the divisible pool which includes all central taxes (excluding surcharges and cess)
o Suggestions regarding the principles which would govern the quantum anddistribution of grants-in-aid
o the measures if needed, to augment State government finances to supplement the resources of local government and to review the state of the finances, deficit and debt conditions at different levels of government
the recommendations are applicable for a period of five years (from 2015-16 to 2020-21)
the major recommendations are
o Vertical Devolution-The 14th FC has recommended a new vertical devolution (the proportion of distribution of central divisible pool of taxes between the centre and the states) formula under which the share of states from the central divisible pool of taxes from 32% to 42%
Finance Commission Share of states out of central divisible pool
11th 29.0%12th 30.5%13th 32.0%14th 42.0%
o Horizontal Devolution- The 14th FC has recommended a new horizontal devolution formula under which the variables for the calculation of the individual states’ share out of the total share allocated for the states
Variable 13th FC 14th FCPopulation (1971) 25.0% 17.5%Population (2011) 00.0% 07.5%Fiscal Capacity/Income Distance 47.5% 50.0%Forest Cover 00.0% 07.5%Area 10.0% 15.0%Fiscal Discipline 17.5% 00.0%Total 100% 100%
o Other types of grants proposed-grant to rural and local bodies, performance grant, disaster relief etc (Rs 5.3 lakh crore)
o It has not given any recommendations regarding sector specific grants (given under 13th FC-recommended the grants be given under roads, bridges, education, water sector management etc)
Features
o The devolution to the state governments has received the highest jump/increase
o Another feature is that the recommendations are progressive in nature- the states with lower NSDP will be receiving on average much larger transfers per capita
o The flow of the grants to the local bodies and urban bodies will be increasing
o Some of the gainers as a result of new methodology are Madhya Pradesh, Bihar, Uttar Pradesh, Chhattisgarh, Karnataka, Jharkhand etc
FISCAL POLICY/ PUBLIC FINANCE
The main objectives are
To mobilize financial resources
To direct the expenditure
To maintain economic stability
To promote and accelerate growth
Fiscal Policy consists of
Budget
Finance Commission
Taxation system
Subsidy
Disinvestment etc
BUDGET-POINTS TO BE COVERED
Important points of budget
Important concepts
Process of Budgeting
Railway budget
14th Finance Commission
IMPORTANT CONCEPTS
Types of Accounts-
Consolidated fund
Public Account
Contingency fund
Types of Bills
Money Bill
Financial Bill
Constitutional Amendment Bill
Ordinary Bill
IMPORTANT CONCEPTS (CONTD…)
Expenditure charged (non-votable) and
expenditure made (votable)
Cut motions
Economy cut
Policy Cut
Token Cut
Appropriation and Finance Bills
FRBM Act 2003
BUDGET PASSAGE
BUDGET-TWO ACCOUNTS
Government Expenditure
Revenue Expenditure
>Law and Order
>Defence
>Interest Payment
>Subsidies
>welfare payments
>Pension Payments
Capital Expenditure
>Exp on Infrastructure
>Repayment of Loans
>Loans to states, UTs etc
DEFICITS
Revenue Deficit
Budget Deficit
Fiscal Deficit
Primary Deficit
Monetized Deficit
RAILWAY BUDGET
DO WE NEED RAILWAY BUDGET?
Size of Railway budget is small compared to Union Budget (usually around 10% compared to the size of union budget)
Recommendation of Bibek Debroy Committee-no constitutional requirement
Integration required into union budget to have a seamless national travel policy
The 7th Pay Commission Recommendations will increase the burden on its wage bill
FINANCE COMMISSION
Set up under article 280
Set up by the President every fifth year
Consists of 5 members 1 chairman+4 members
Qualification Chairman must have experience in public affairs
Judge of HC or one who is qualified
Person who has specialized knowledge in finance and accounts of the government
Person who has experience in financial matters and administration
Person with special knowledge in economics
Terms of reference
Distribution of taxes between centre and states
Principles governing grant-in-aid to states by the centre
Measures needed to augment consolidated fund of India
Any other matters referred to it
14th Finance commission (2015-20)
Finance Commission
Share of states out of
central divisible pool
11th 29.5%
12th 30.5%
13th 32.0%
14th 42.0%
14th Finance commission (2015-20)
14TH FINANCE COMMISSION
The 14th Finance Commission has given a new
horizontal formula
Has included two new variables-forest cover and
population (reduced weightage Fiscal Discipline
to zero)
Other types of grants proposed-grant to rural and
local bodies, performance grant, disaster relief
etc (Rs 5.3 lakh crore)
A WATERSHED MOMENT
New Vertical and horizontal devolution formula
Has proposed transfers to local bodies, grants for disaster management, grants for performance etc (will transfer more that Rs 5.3 lakh between 2015-20)
The FFC transfers are more progressive because of the new transfer formula (is a better methodology to transfer than CAS-Central Assistance to States)
The states have better fiscal discipline and it will improve because of transfers through FFC
14TH FC-HIGHER FLOW TO THE STATES?
QUESTIONS
With reference to the Union Government consider the following statements. (2015)
1. The Department of Revenue is responsible for the preparation of Union Budget that is presented to the parliament
2. No amount can be withdrawn from the Consolidated Fund of India without the authorization of Parliament of India.
3. All the disbursements made from Public Account also need the Authorization from the Parliament of India
Which of the following statements given above is/are correct?
a) 1 and 2 onlyb) 2 and 3 onlyc) 2 onlyd) 1, 2 and 3
QUESTIONS
There has been a persistent deficit budget year after year. Which of the following actions can be taken by the government to reduce the deficit? (2015)
1. Reducing revenue expenditure
2. Introducing new welfare schemes
3. Rationalizing subsidies
4. Expanding industries
Select the correct answer using the code given below.
(a) 1 and 3 only
(b) 2 and 3 only
(c) 1 only
(d) 1,2,3 and 4
QUESTIONS
With Reference to the Fourteenth Finance Commission, which of the following statements is/are correct? (2015)
1. It has increased the share of States in the central divisible pool from 32 percent to 42 percent
2. It has made recommendations concerning sector-specific grants
Select the correct answer using the code given below.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
QUESTIONS (200 WORDS)
Critically evaluate the recommendations of 14th
Finance commission
Discuss the process of budgeting
We do not require a separate Railway budget-
Analyze
Implementation of recommendations of 14th FC is
a watershed movement-Discuss
INDIA
&
INTERNATIONAL
TRADE
POINTS TO BE COVERED
Exchange Rate
Fed Tapering
Balance of Payments
Foreign Trade Policy
Position of the Indian government
EXCHANGE RATE
RECEIPTS-DOLLAR INFLOWS-SUPPLY
Exports of goods and services
Inflow of tourists
Inward remittances
Borrowing by the government from external agencies
FDI/FPI
Deposits by NRIs
PAYMENT-DOLLAR OUTFLOW-DEMAND
Imports of goods and services
Indians going abroad for study/tourism
Outward remittances
Repayment of loans/interest
Outward FDI/FPI
Withdrawal of NRI deposits
FOREIGN EXCHANGE
Popularly referred to as “FOREX”
The conversion of one country's currency into
that of another.
It is the minimum number of units of one
country’s currency required to purchase one unit
of the other countries currency.
Three Types – Fixed, Floating and Managed
SOME TERMS
Devaluation and Revaluation
Depreciation and Appreciation
FOREX MARKET-EQUILIBRIUM
CURRENCY CRISIS
When a currency depreciates (usually by 15% of
its value) in a quick time then the situation is
referred to as a currency crisis
If the currency continues to depreciates then it
completely looses its value
In India the central bank intervenes to stabilize
the currency by selling the dollars in the market
and purchasing rupees. This is referred to as
Dirty float
RBI INTERVENTION IN THE MARKET
FACTORS INFLUENCING THE EXCHANGE RATE
FEDERAL TAPERING &
FED POLICY RATE
BASICS
BASICS
BASICS
FED TAPERING – QUANTITATIVE EASING
QUANTITATIVE EASING
It is an unconventional Monetary Policy
It is an expansionary monetary policy
The central bank uses it when all the other tools being used does not have an intended effect
Under this the central bank goes ahead and starts buying the government securities or reduces the lending rate to a very minimal level which leads Cheap credit
Higher liquidity
Origin Country (OC)-USA (usually developed countries)
Source Country (SC)-India (usually developing countries)
IMPACT
Positives The credit is available in the OC at a cheaper cost
Boosts the lending and investment
Will boost job generation
There will be flow of capital from origin country into sourcing country
Will increase the capital flow into the stock markets of sourcing country
Negatives
Will affect the domestic currency value of sourcing country
Will affect exports and imports
Will likely lead to inflation in sourcing country
Considerable part of the money that comes in is “hot money”
FED TAPERING
Federal Reserve goes for tapering (is an indicator of growth)
Supply of dollars become lesser
Foreign investors such as FPIs will withdraw investments
Rupee depreciation-good for exports and bad for imports and apart from it there are external
borrowings (impact on the Balance on Payments)
WHY WAS FEDERAL FUNDS RATE HIKED?
The GDP growth rate has been 2%
The Unemployment rate has come down to 4.6%
Inflation rate is at a comfortable position -1.2%
The Federal Reserve answers to the Joint Economic
Committee of Legislature
FEDERAL FUNDS RATE-IMPACT ON INDIA
Capital flight
Higher volatility/liquidity
Devaluation of Indian currency/Rupee
Will make imports costlier (gold, crude oil etc)
May hurt the investment that was flowing into start-
ups
IMPACT ON INDIA
IMPACT ON INDIA
FED TAPERING-HOW TO CONTROL IMPACT
Higher foreign exchange reserves
Moderate global commodity prices
Fiscal consolidation
Easing inflation
Higher inflows through other measures-NRI
deposits, inward remittances etc
BOP A/C
REVENUE EXPENDITURE
CURRENT
A/C
EXPORTS
INVESTMENT
INCOME
INREMITTANCES
IMPORTS
DEBT SERVICE
PAYMETS
OUTREMITTANCES
CAPITAL
A/C
FOREIGN LOANS
FDI
FII
FOREIGN LOANS
FDI
FII
TERMS
There are two accounts-Current and Capital
Balance of Trade
BoT=Exports ~ Imports
Exports>Imports BoTS
Exports<Imports BoTD
Current A/C
Revenue>Expenditure CAS
Revenue<Expenditure CAD
India Faces BoTD and CAD because of higher imports
BoP surplus/deficit and BoP crisis
TERMS (CONTD…)
How to take care of BoPD
> Increasing exports
> Decreasing imports
> Doing above two simultaneously
> Encouraging more FDI and FII
> Reduction of non-essential imports
> Currency Devaluation
> Long term way-out is increasing exports
Note-the exports should be made as a function of quality than quantity
ECONOMIC SURVEY 2015-16
TRADE DEFICIT
FTP 2015-20
GOVERNMENT EXPOSURE
TOTAL EXPOSURE
CURRENCY SWAPS
Done usually by companies and the governments
Under this the exposure/risk to exchange rate
fluctuation is hedged
Involves exchange of a notional principal and
interest with one another in order to gain
exposure to a desired currency
QUESTIONS
The price of any currency in international market
is decided by the (2012)
1. World Bank
2. demand for goods/services provided by the country
concerned
3. stability of the government of the concerned country
4. economic potential of the country in question
Which of the statements given above are correct?
(a) 1, 2, 3 and 4
(b) 2 and 3 only
(c) 3 and 4 only
(d) 1 and 4 only
QUESTIONS
Which of the following constitute Capital Account? (2013)
1. Foreign Loans
2. Foreign Direct Investment
3. Private Remittances
4. Portfolio Investment
Select the correct answer using the codes given below.
(a) 1, 2 and 3
(b) 1, 2 and 4
(c) 2, 3 and 4
(d) 1, 3 and 4
QUESTIONS
The balance of payments of a country is a
systematic record of (2012)
(a) all import and export transactions of a country
during a given period normally a year
(b) goods exported from a country during a year
(c) economic transaction between the government of
one country to another
(d) capital movements from one country to another
QUESTIONS
Discuss the FTP 2015 and in the present economic turmoil that the targets can be achieved
Explain fed tapering and possible impact on India and what can the government of India do to reduce it
Discuss various types exchange rate mechanisms
Discuss the role of RBI in deciding the exchange rate mechanism
Discuss the factors that would affect the exchange rate
India and International Trade
Exchange Rate
Foreign Exchange or Forex is the market where the currencies are bought/sold
It is the minimum number of units of one country’s currency required to
purchase one unit of the other countries currency or vice versa. The need for
changing our currency with other arises as India trades with rest of the world
(apart from trade there is also remittances, investment, tourism etc)
There are three methods of determining the exchange rate
o Fixed
o Floating
o Managed
Fixed ER
o It is the system of following a fixed rate for converting currencies.
o In this system, the government (or the central bank acting on its behalf)
intervenes in the currency market in order to keep the exchange rate close
to a fixed target.
o It does not allow major fluctuations from the central rate.
o Example-Currency Board (Singapore and Argentina-The currency board
fixes the exchange rate. Especially useful during the hyperinflation when
there is a lot of money under circulation)
o Advantages
It ensured stability in forex market
Countries could formulate long term policies
During the period of stability and certainty, the trade grows faster
o Drawbacks
It’s a rigid system, which doesn’t factor in changing economic
scenario
It would bring in stagnancy in the policies of the governments
The situation in each of the countries keeps changing with time
Floating
o Under the flexible exchange rate system, the rate of exchange is allowed
to vary to suit the economic policies of the government.
o Flexible exchange rates are exchange rates, which fluctuate according to
market forces.
o The value of the currency is determined solely by the forces of demand
and supply in the exchange market
o Advantages
Try to attain efficiency
Try to eliminate the need to hold foreign reserves
Try to eliminate barriers on the trade and capital movements
o Drawbacks
The volatility
Can have an impact on the exporters/importers
Managed
o Managed means the exchange rate system has attributes of both systems.
o Managed exchange rate systems permit the government to place some
influence on an exchange rate that would otherwise be freely floating.
Through such official interventions it is possible to manage both fixed and
floating exchange rates.
o India-Managed Market Determined Exchange Rate (The methodology
adopted by RBI has been referred to as a Dirty Float)
o China-Pegged Exchange Rate Mechanism
Devaluation and Revaluation
o Devaluation and Revaluation are done by the Central bank
o In devaluation more home currencies are offered for every unit of foreign
currency and vice versa happens in revaluation
o Devaluation makes imports costlier and gets higher returns on exports
and Revaluation makes imports cheaper and returns on exports are
reduced
Depreciation and Appreciation
o Are determined by market based on supply and demand of currencies
o No role of the government
o Depreciation makes imports costlier and gets higher returns on exports &
Appreciation makes imports cheaper and returns on exports are reduced
Currency Crisis- Whenever there is a continuous outflow of dollars, it leads to
appreciation of dollar and depreciation of rupee and if this scenario (where there
is a gradual erosion of faith in the domestic currency leading to domestic
currency being converted to just a piece of paper) is not contained then the
domestic currency will lose all its value, hence to prevent this situation, the
central bank intervenes wherein it dumps the dollars and buys rupee from the
market thereby stabilizing the value of domestic currency. Post the 2008 crisis,
RBI dumped around $900 mn in order to stabilize the rupee.
Factors influencing the exchange rates
o Interest rates- various investors are on the lookout for the country that
pays higher interest. Whenever a country pays higher interest foreign
currencies will flow into this country thereby leading to appreciation of the
domestic currency and the domestic investors also will invest within the
same country
o Incomes- the rise in the income denotes higher expenditure on
consumption as a result of which the demand for imported goods will
increase thereby leading to depreciation of the domestic currency
o Inflation- the cost of the goods in a country with lower inflation rate will
increase slowly and steadily compared to a country where the inflation
rate will be high. As a general rule it has been seen that the country with
lower inflation has experienced appreciation in its domestic currency as
the purchasing power in this country is higher compared to other
countries.
o CAD- CAD represents how much exports and imports have been done in a
short term. If the import value is more it means the country has to pay
more in terms of dollars compared to how many dollars it has earned. In
simple terms when a country suffers from CAD, there is a depreciation of
the domestic currency
o Public Debt- higher government or public debt means, that the
government has to borrow more and this situation leads invariably to
inflation thereby depreciating the domestic currency
o Terms of Trade- is the ratio of export prices to import prices. If the export
prices continuously increase compared to import prices then there is a
huge inflow of dollars leading to appreciation of domestic currency
o Political Stability- it has more to do with the confidence of the investors. If
a country has exhibited good political stability with sound economic
principles then the foreign investors are attracted towards such a country,
thereby leading to appreciation of domestic currency
Balance Of Payments
It represents the trade relationship of a country with rest of the world i.e.
balance of expenditure and revenue that a country must pay/receive from the
rest of the world
The BoP, has two accounts-Current account and capital account
o For every component on revenue side there is a component on the
expenditure side
o Revenue represents inflows, where as expenditure represents outflows
REVENUE EXPENDITURE
CURRENT A/C EXPORTS INVESTMENT INCOME
INREMITTANCES
IMPORTS DEBT SERVICE PAYMETS
OUTREMITTANCES
CAPITAL A/C FOREIGN LOANS FDI FII
FOREIGN LOANS FDI FII
o The current a/c has the exports in visible (goods/merchandise) and
invisibles (services), income and transfers (grants, gifts and remittances)
o The capital a/c capital inflows (debt or equity; maturity) and has FDI, FPI,
loans etc
Balance of Trade (BoT) - the trade is in the form of merchandise/goods. The BOT
could be surplus/deficit
o BOT Deficit = value of exports<value of imports
o BOT Surplus = value of exports>value of imports
India suffers from BoTD (from April 2015 to January 2016); India exported $ 217.7
bn and imported $ 324.5 bn, leading to trade deficit of $106.8 bn. The exports
declined by 17.6 and imports by 15.5% during this period. It was because
o Decline in the oil prices
o Decline in the global demand for commodities such as steel and
aluminum
Current Account
Revenue>Expenditure = CAS (Current a/c surplus)
Revenue<Expenditure = CAD (Current a/c deficit)
Although on the face of it, CAD is dangerous, a developing county such as India
(which is scarce in resources) will require high imports, which may lead to deficit
but a higher CAD might cause more harm
The CAD can be bridged by a country by
◦ Using part of the gold stocks that it has
◦ May use foreign currency reserves
◦ May borrow loans
◦ Attract investments and deposits
Generally the countries prefer the last mode as it is in their interest
Which is more dangerous-CAD or FD
Comparatively CAD is more dangerous because
o CAD is in terms of dollars and FD is in domestic currency
o CAD is external and FD is internal
o Fluctuations in exchange rates will have impact on CAD
BoP-overall the BoP account can be a surplus or a deficit. If it is deficit then the
foreign exchanges are taken from the third account-Forex Account (Balancing
Account) and the deficit is bridged. If the reserves in the forex account are falling
short then this scenario is referred to as BoP crisis. The last time India suffered
from BoP crisis was in 1991 and it had approached IMF for assistance.
How to take care of BoPD
o Increasing exports-the exports lead to accumulation of the foreign
currencies
o Decreasing imports will reduce the outflow of foreign currencies
o Doing above two simultaneously
o Encouraging more FDI and FII (more inflow of dollars)
o Reduction of non-essential imports
o Currency Devaluation
o Long term way-out is increasing exports (and it should be noted that the
exports have to made a function of quality)
Foreign Trade Policy (2015-20)
o Is applicable for a period from 2015-2020
o MEIS and SEIS (Service Exports from India Scheme)-all the previous
schemes for promoting merchandise exports have been merged into MEIS.
Served From India Scheme (SFIS) has been renamed as SEIS. Certain listed
goods and services sent to certain listed countries will get incentives
o Aim is to increase the exports from India to $900 bn by 2020 (since 2011,
our exports are hovering around $ 300 bn and if the target has to be
achieved then the exports have to grow by CAGR of 23% which is very
ambitious)
o The duty credit scrips are transferable
o FTP to be aligned with Make In India
o Challenges
Port Infrastructure needs huge improvement as they handle almost
95 per cent of trade volumes or 68% in terms of value
There has to be ease of documentation
The banks must provide credit for both import and export,
warehousing facilities etc
SHYAM S KAGGOD
(ECONOMICS FACULTY-BYJU’S)
POINTS TO BE COVERED
Taxation-concept
Types of taxation systems
Some concepts-GST, Capital gains tax, cess etc
Problems with Indian Taxation System
Progressive & Regressive
Direct & Indirect
Advalorem & Specific
Tax avoidance and Tax evasion
Surcharge & Cess
Countervailing & Antidumping
Types of Taxation Systems
SOME OF THE CONCEPTS
Service tax
VAT
Presumptive Taxation
GAAR
Capital Gains tax
GST
GST-CASCADING EFFECT
A B C Selling
Price=₹ 100 Selling
Price=₹ 130
Tax @ 10%
Will buy it
at ₹ 110 &
adds profit
of ₹ 20 Tax @ 10%
Will buy it
at ₹ 143
GST-INPUT TAX CREDIT
A
Tax paid is ₹ 100
B
Tax paid is ₹ 120
C
Tax paid is ₹ 130
Tax to be paid
is ₹ 400
INPUTS
OUTPUT
Tax Paid to
the
government
is ₹ 50
WHY GST?
Cascading effect
Multiplicity of indirect taxes
Setting off not allowed/difficult in some case
The transportation costs will add to the costs
Lines between goods and services have blurred (eg-
IPR are considered goods for imposing sales tax and
as services for imposing service tax)
GST
Streamlining/subsuming all the indirect taxes-
one nation one indirect tax
First introduced in 2011 and again in December
2014
115th CAB and 122nd CAB
PROVISIONS OF GST BILL
The bill empowers both central and state governments
to take decisions/make laws regarding taxes
GST council
Set up by the president
Union Finance Minister + state Finance ministers
Functions-model GST laws, taxes/surcharge/cess to
be levied by the centre and state, exemptions to be
given etc
GST council to decide regarding resolution of disputes
PROVISIONS OF GST BILL
PROVISIONS OF GST BILL
The additional Interstate GST will be levied by
central government (additional levy of 1%
withdrawn)
Exemption-alcoholic liquor for human
consumption, GST council to decide when to
impose taxes on crude petroleum, high speed
diesel, petrol, natural gas and Aviation Turbine
Fuel (ATF)
Compensation to be given for 5 years
GST
OLD VS NEW
Old method GST
Goods and services were taxed
separately
No differentiation between Goods
and services
Different states different tax rates Uniform tax rates across the
country
National market not possible National market can be
established
Tax on production (origin based
taxation)
Tax on consumption (target/end
based taxation)
Cascading effect No cascading effect
Many indirect taxes Only one
Setting off in some cases not allowed Setting off is allowed
GST EXAMPLE
SUBRAMANIAN COMMITTEE
Simplify tax administration, protect revenues and encourage
compliance
Three rates-Standard rate (17% to 18%),Lower rate
(12%),Sin rate/demerit rate (40%)
Alcohol and real estate must be brought under GST
1% Interstate GST should not be implemented
Compensation to reinforce trust between centre and states
GST implementation must be evaluated every 1 or 2 years
SUBRAMANIAN COMMITTEE
COMPOSITION SCHEME
BENEFITS OF GST IMPLEMENTATION
GST - CONCERNS
Anti-Profiteering measures
Tax rate - multiple tax rates
Revenue protection
e-Way bill system
Inflation
Compliance amongst the small businesses
SOME OF THE PROBLEMS RELATED TO
INDIAN TAX SYSTEM
India under taxes and under spends compared to developed countries
The ratio of voters to tax payers is only 4% (it should be 23%)
The exemption limits have been increased from time to time (in case of Income Taxes)
Most of the economy is not covered under taxation. Only 5.5% of the income earners pay tax
Government provides tax exemptions to corporates
EXEMPTION LIMIT
STEPS TO BE TAKEN BY GOI
To refrain from raising exemption thresholds
Reducing corruption
Subsidies for the well-off need to be scaled back
Property tax needs to be developed
SOME TAXATION REFORMS
GoI has announced that it will be phasing out tax
exemption given to corporates (tax incentives to the
corporates for 2015-16 were Rs 68711)
SOME TAXATION REFORMS
Recommendations of R V Easwar committee report to be implemented
Computerization of IT department work
The tax refunds must be provided faster and in case of delays the beneficiary has to be incentivized
Treat stock trading returns up to Rs 5 lakh as capital gains and not as business income
TDS rates for individuals must be reduced from 10% to 5%
GST reform
GAAR reform
QUESTIONS
Which one of the following is not a feature of “Value Added Tax”? (2011)
(a) It is a multi-point destination-based system of taxation
(b) It is a tax levied on value addition at each stage of transaction in the production-distribution chain
(c) It is a tax on the final consumption of goods or services and must ultimately be borne by the consumer
(d) It is basically a subject of the Central Government and the State Governments are only a facilitator for its successful implementation
QUESTIONS
The sales tax you pay while purchasing a
toothpaste is a
(a) tax imposed by the Central Government.
(b) tax imposed by the Central Government but
collected by the State Government
(c) tax imposed by the State Government but
collected by the Central Government
(d) tax imposed and collected by the State
Government
QUESTIONS
What is/are the most likely advantages of implementing
‘Goods and Services Tax (GST)’?
1) It will replace multiple taxes collected by multiple authorities
and will thus create a single market in India.
2) It will drastically reduce the ‘Current Account Deficit’ of India
and will enable it to increase its foreign exchange reserves.
3) It will enormously increase the growth and size of economy of
India and will enable it to overtake China in the near future
Select the correct answer using the code given below:
(a) 1 only
(b) 2 and 3 only
(c) 1 and 3 only
(d) 1, 2 and 3
QUESTIONS
Consider the following statements
1. Tax revenue as a percent of GDP of India has steadily increased in the last decade
2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade
Which of the statements given above is/are correct ?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
QUESTIONS (200 WORDS)
Discuss the recommendations of Subramanian
Committee on GST
Discuss the recent initiatives of the Indian
government in the taxation segment
‘GST is not the panacea for all the ills of Indian
Economy’ –critically evaluate
GST regime represents an improvement in form as
well as substance compared to previous tax regime-
explain
QUESTIONS
GST has led to co-operative federalism/economic
Union of India-elaborate
GST though revolutionary needs fine-tuning if
India wants to reap its benefits-discuss
GST implementation rather than reducing the
litigation may lead to tax terrorism-discuss