FISCAL MEASURES BY GOI

: POST 1991
Macroeconomic Policies
 FISCAL POLICY

A policy under which government uses its
expenditure and revenue programme to produce
desirable effects and avoid undesirable effects on
the national income, production and employment.

 The word fiscal means ‘state treasury’ and fiscal policy
refers to policy concerning the use of ‘state treasury’
or the govt. finances to achieve the macroeconomic
goals.




 Fiscal Policy And
Macroeconomic Goals
 Economic Growth: By creating conditions for increase in
savings & investment. And increase the consumption level.

 Employment: By encouraging the use of labour-absorbing
technology. And to increase the employment level

 Stabilization: fight with depressionary trends and booming
(overheating) indications in the economy.

 Economic Equality: By reducing the income and wealth gaps
between the rich and poor. And increase in overall capital
formation in the economy.

 Price stability: employed to contain inflationary and
deflationary tendencies in the economy so that we can
attain a desirable price level.

 Objectives of Fiscal Policy

It has 2 major


i. GENERAL objective- aimed at achieving

macroeconomic goals.
ii.
iii. SPECIFIC objective- relating to any typical problems
of an economy



 TYPES OF FISCAL POLICY

There are 3 types of fiscal policy :


vAutomatic Stabilization policy

v
vCompensatory Fiscal Policy
v
vDiscretionary Fiscal Policy
 FISCAL DEFICIT
 Difference between the government’s total receipts
( excluding borrowing) and total expenditure. It signals
government about the total borrowing requirements
from all the sources.

 “A budget is a detailed plan of operations for some
specific future period”. Keeping budget balanced (R=E)
or deficit (R<E) or surplus (R>E) as a matter of policy is
itself a fiscal instrument.

 An accumulated deficit over several years (or centuries)
is referred to as the government debt.

 HISTORY OF FISCAL POLICY

Year 1991-92 was one of the toughest year for the Indian economy as:


Ø Economic growth slumped to 1.1%.

Ø
Ø Gross fiscal deficit stood at 8 %.
Ø
Ø Revenue deficit on the current account at 3.5%.
Ø
Ø Fiscal deficit rose by nearly 50 % in one single year to 4.2 % in 1998
- 99 from 2.9 % in 1997-98.
Ø
Ø Prices Shot up to 17%, an all time high.



 ROOT CAUSE
 Unmanageable balance of payments.

 High rate of inflation that were building up in the 80s and climaxed
in 1990-91 hitting 12.1 percent.

 Current account deficit as a % of GDP peaked at a high of 3.1 %
compared to an average level of 1.4 percent in the early 1980s.

 Forex reserves dwindled to a low of US$2.2 billion.

 Central government’s fiscal deficit alone peaked at 7.9 percent as a
% of GDP in 89-90. Thus growing fiscal irresponsibility and the
unviable financing patterns of the fiscal deficit prevailing in the
80s made high levels of annual GDP growth (peaking at 5.6 % in
1989-90)unsustainable.
 STEP to follow


Ø Introduction of an economist into the Cabinet as Finance

Minister, allowed him to evolve and implement path-
breaking economic reforms.
Ø
Ø Introduction of new economic policies and regulatory
framework.
Ø
Ø Took two years to get over the immediate
macroeconomic crisis, initially with the help of a
balance of payments loan facility from the
International Monetary Fund.
 STEP TO FOLLOW
§ Reduction of Fiscal Deficit.
§
§ Fiscal Responsibility and Management Act, 2003.
§
§ Simplifying rules and procedures.


§ Strengthening tax administration.

§
§ Widening tax base and enhancing buoyancy.
§
§ Rationalization and reduction of both direct and
indirect tax.
Where The Rupee Comes From
SOURCE:
www.indiabudget.nic.in
non-ta x r e ve nue s e rvic e & othe r ta x e s
10% 7%

non-de bt c a pita l r e c ie pts

1% e x c is e
17%

bor r ow ings
19%

c us tom s
12%

c or por a tion ta x
inc om e ta x
21%
13%
Where Does The Rupee Goes To
SOURCE:
www.indiabudget.nic.in

state's share of
other non plan exp.
11% taxes & duties
18%
subsidies
7%
non plan assistance
to states
5%
defence
12% planned state
assistance
7%

interest central plan

20% 20%
Government Expenditure
 Components


 Revenue expenditure.

 Capital expenditure.
 Revenue Expenditure and Capital
Expenditure.


 Capital Expenditure refers to items that

involves acquisition of assets e.g., investment
in railways, roads, bridges, power projects and
irrigation works.

 Salaries of Government employees ,purchase of
stationery, maintenance of public utilities etc.
are part of revenue expenditure.



Revenue expenditure.

 Interest payments.
 Defense.
 Subsidies.
 Grants to States and UTs.
 Pensions.
 Police.
 Economic Services.
 Other general services.
 Social services.
 Grants to foreign
governments.
Capital Expenditure
◦Defense
◦Other non-Plan capital
outlay
◦Loans to public enterprises
◦Loans to States and UTs
◦Loans to foreign
governments
◦Others
 Rupees crores

Ye ar
0
100000
200000
300000
400000
500000
600000
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99

Rev enue ex penditure

1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
c apital ex penditure

2005-06
2006-07 RE
2007-08 BE
Trends in expenditure

SOURCE:
www.indiabudget.nic.in
Percent Of Total Expenditure
Year Revenue expenditure Capital expenditure
1990-91 69.82 30.18
1991-92 73.86 26.14
1992-93 75.60 24.40
1993-94 76.25 23.75
1994-95 75.97 24.03
1995-96 78.45 21.55
1996-97 79.07 20.93
1997-98 77.71 22.29
1998-99 77.49 22.51
1999-00 83.57 16.43
2000-01 85.33 14.67
2001-02 83.21 16.79
2002-03 81.96 18.04
2003-04 76.84 23.16
2004-05 77.14 22.86
2005-06 86.89 13.11
2006-07 RE 87.13 12.87
2007-08 BE 87.10 12.90
Year Developmental Non developmental
expenditure expenditure

1990-91 54.30 45.70

1991-92 51.81 48.19
1992-93 51.94 48.06
1993-94 49.62 50.38
1994-95 50.12 49.88
1995-96 46.12 53.88
1996-97 45.63 54.37
1997-98 46.48 53.52
1998-99 47.73 52.27
1999-00 42.06 57.94
2000-01 41.38 58.62
2001-02 42.52 57.48
2002-03 43.14 56.86
2003-04 44.54 55.46
2004-05 44.98 55.02
2005-06 44.07 55.93
2006-07 RE 43.62 56.38
2007-08 BE 49.79 50.21
 FISCAL RESPONSIBILITY AND
BUDGET MANAGEMENT ACT 2003
Ø FRBM Act 2003 and FRBM rules 2004 came up into force on 5th July
2003.
Ø
Ø The act mandated the central Government to eliminate revenue
deficit by March 2009 and to reduce fiscal deficit to 3 % of GDP
by March 2008.
Ø
Ø Under Section 7 of the act the central government is required to lay
following statements before both the houses of the parliament.
Ø
ü Medium Term Fiscal Policy Statement.
ü
ü Fiscal Policy Strategy Statement.
ü
ü Macro Economic Framework Statement along with the annual financial
statement and demand for grants.
 FRBM RULES 2004

§ Reduction of revenue deficit by 0.5% of GDP or more

every year.
§
§ Reduction of Gross fiscal deficit by 0.3 % of GDP or more
every per year.
§
§ No assumption of additional debt exceeding 9 % of GDP
for 2004 – 2005 and progressive reduction of this limit
by at least one percentage point of GDP in each
subsequent year.



 Sticking to FRBM Targets

Items Units 2005-06 2006-07 2007-

08*
Central Government Finances 

Revenue deficit/ GDP % 2.6 2 1.5

Fiscal deficit/ GDP % 4.1 3.7 3.3
Gross Tax/ GDP % 10.3 11.4 12.0
Expenditure/ GDP % 14.2 14.1 14.0**
Debt/ GDP % 65.1 64.4 58.6

*From Budget proposals ** SBI share transfer excluded

Receipts of Government
Revenue and Capital account
 Capital Receipts
 Capital receipts are loans raised by the government from the public
which are called market borrowings.

 Borrowing by the government from the Reserve Bank, commercial
banks and other financial institutions through sale of treasury
bills, loan received from foreign institutional originations and
governments.

 It also include government’s market borrowings, P.F., small savings
etc.

 The money raised through borrowings by government or sale of government
property etc., are also constitute capital receipts.



 Revenue Receipts
 RECEIPTS which involve no disposal of assets or
incurring of liabilities are Revenue receipts.

 THE Revenue receipts include direct taxes like
corporation tax, income tax, wealth tax, and
so on.

 THE indirect taxes like customs duty, excise
duty, sales tax etc.

 THE non-tax revenue like net income by public
sector undertakings are also accounted under
Revenue Receipts.
 Capital Receipts
Non-Debt receipts


 Recoveries of loans and advances

 Miscellaneous Capital receipts


Debt receipts to finance Fiscal Deficit



 Market Loans
 Short term borrowings
 External assistance (net)
 Securities issued against small savings
 State provident Funds (net)
 Other Receipts (net)
 Draw-down of cash balance
 Revenue Account

Tax Revenue
Direct Tax
Indirect Tax

Non tax Revenue

Interestreceipts
Dividends and profits
External Grants
Receipts from Union Territories
 Tax Revenue


Direct Taxes
 Taxes on income
 Taxes on property



Indirect Taxes
 Union Excise Duties
 Customs Duties
 Service Tax
 Components of total receipts

700000
600000
500000
400000
300000
200000
R
ro
p
u
c
s
e

100000
0

Reven ue receipts Year

Cap ital receipts To tal receipts

SOURCE: www.finmin.nic.in
Percentage Of Total Revenue Receipts
Year Tax revenue Non tax revenue
1990-91 78.21 21.79
1991-92 75.83 24.17
1992-93 72.91 27.09
1993-94 70.84 29.16
1994-95 74.06 25.94
1995-96 74.40 25.60
1996-97 74.20 25.80
1997-98 71.46 28.54
1998-99 70.01 29.99
1999-00 70.68 29.32
2000-01 70.95 29.05
2001-02 66.33 33.67
2002-03 68.68 31.32
2003-04 70.88 29.12
2004-05 73.47 26.53
2005-06 77.78 22.22
2006-07 RE 81.73 18.27
2007-08 BE 83.03 16.97
 Gross Tax Revenues of the Centre
SOURCE: www.finmin.nic.in
SOURCE: www.finmin.nic.in
 Deficit

Fiscal Deficit
 Total expenditure
 Total receipts


Revenue Deficit
 Revenue expenditure
 Revenue receipts


Primary Deficit
 FiscalDeficit
 Interest Payments
www.finmin.nic.in
 PROGRESS OF FISCAL REFORMS

CENTRAL GOVERNEMENT 
CENTRAL GOVERNMENT
 


Fiscal Deficit – 6.6 %
 Revenue Deficit – 3.3 %
 Primary Deficit – 2.8 %
 
1991

STATE GOVERNEMENT

Fiscal Deficit – 3.3 %
 Revenue Deficit – 0.9 %
 Primary Deficit – 1.8 %
 

Fiscal Deficit – 4.1 %
 Revenue Deficit – 2.6 %
 Primary Deficit – 0.5 %

2005 - 06

STATE GOVERNEMENT

Fiscal Deficit – 3.3 %
 Revenue Deficit – 0.5 %
 Primary Deficit – 1.7 %
URCE: www.indiabudget.nic.in
SOURCE: www.indiabudget.nic.in
SOURCE: www.indiabudget.nic
 COMPARISION OF
REVENUE &
CAPITAL EXPENDITURE
SOURCE:
www.indiabudget.nic.in

C omparision be tw e e n R E & C E

16
14
12
10
Revenue E x pe
RE/CE

8
Capital E x pen
6
4
2
0
2004-05 2005-06 2006-07 2007-08 2008-09
Revenue E x penditure 12.2 12.2 12.5 12.6 15.1
 Budgetary
Development
and
Major Reforms
 What is budget
 As a financial blueprint of a
government, budget is an
important instrument to
carry out its policies and
programmes.


 It is through the budget that a

government arranges
financial resources and
allocates them among
competing uses.

 Structure of the central
government budget

ØRevenue budget

ØCapital budget

ØVarious measures of budget deficit

and their significance

ØMagnitude and timing

 Budgetory development since 1991
vManmohan Singh, in his annual budgets of 1992-93,
opened the economy, encouraged foreign
investments and reduced peak import duty from
300 plus percent to 50 percent.
v
vThe Union Budget for 2000-01 envisaged a reduction
of fiscal deficit from 5.5 per cent in 1999-2000
(provisional and unaudited) to 5.1 per cent of GDP.
As regards revenues, direct tax collections have
been buoyant throughout the current year.
v
v
 Highlights of union budget 2010-11

Sectorial allocation at a glance:-



qRs.4oo crore for extending green revolution.

q
qRs.16752 crore to railway.
q
qRs.137674 crore for social sector.
q
qRs.40100 crore for NREGA.
q
qRs.48000 crore for bharat nirmana.
q
qRs.1900 crore for UIDAI .
 Sectoral allocation continue…
 Rs.147344 crore for defence.
 Rs.18529 crore for communication





Tax Proposals :-


 Surcharge has been reduced to 7.5%

 MAT has been increased from 15% to 18%
 Excise duty on large cars, SUV’s increased to 22%
 Service tax rate has been retained at 10% to pave
the way of GST

 Major reforms
Ø Reforms in Agriculture:
Ø

The share of India’s agricultural exports in world exports
of the same commodities increased from 1.1 percent in
1990 to 1.9 percent in 1991.


In recent years, support prices have

been fixed at much higher levels,
encouraging overproduction. Indeed,
food grain stocks reached 58 million
tons on January 1, 2002, against a
norm of around 17 million tons!
 Agricultural reforms contd……


 Green revolution reform resulted in a substantial

increase in the production of food grains,
mainly wheat and rice.


 Budget 2010 presented the overall integrated

approach to agriculture. There are provisions
for cultivation, post harvest technology,
commerce and conservation.
 Tax Reforms
vThe tax structure during the initial
decades after independence was
characterized by multiplicity of tax
rates which were increased to very
high levels across all the taxes.
v
vTax reforms in the form of speedy
implementation of Goods and
Service Tax (GST) which necessitates
an exit from Central Sales Tax (CST)
currently standing at 2%.
 Trade Policy reforms


• Trade Reforms form the crux of the
economic reforms in India.



• Export Promotion has been and
continues to be a major thrust of
India’s trade policy.
 PROGRESS OF FISCAL REFORMS

1991 
2005 – 06
A)Budget support to PSEs 1.5% A)Support reduced to .5% of
of GDP. GDP.
B) B)
C)Price and purchase C)No price preference but
preference for PSEs. purchase preference
D) exists.
E)Preferential treatment for D)
Bank credits. E)No preferential treatment
F) for bank credits.
G)No hard budget constraints F)
for PSEs. G)Strengthened MOU’S.
H) H)
I) No Disinvestment. I) Divestment allowed.
PROGRESS OF FISCAL REFORMS
A)High Duty and tax A)Duties and Taxes
rates. reduced.
B)No MAT . B)MAT introduced.
C)No transaction tax . C)Service tax @ 12 %.
D)Dividend tax on both D)Dividend tax on only
individuals & Cos. companies.
E)Existence of Gift tax. E)Gift tax abolished .
F)

1991
 
2005 - 06
PROGRESS OF FISCAL REFORMS

1991 
2005 – 06
A)No MRP linked excise A)Concept of MRP
duties. Introduced for
consumer goods.
B)
B)
C)No presumptive tax. C)Presumptive income tax
D) scheme introduced.
E)No state level VAT. D)
E) State level VAT introduced
w.e.f April’ 05.
 VAT

A value added tax (VAT) is a form of consumption

tax. It is a tax on the estimated market value added
to a product or material at each stage of its
manufacture or distribution, ultimately passed on to
the consumer.

This is an input tax.

 INTRODUCTION

qThe decision to introduce VAT arrived at during the Conference of Chief

Ministers of States/UTs held in 1999 was reiterated during the subsequent
meetings held in June 2000 and July 2001.

qAn Empowered Committee of State Finance Ministers was also constituted

in July 2000 to monitor the process of introduction of VAT.

qThe consensus arrived at to introduce VAT from April 1, 2003 could not be
adhered to as States were not fully prepared both in terms of legislative
requirements as well as administrative infrastructure required for the
purpose.

qAt the meeting of the Empowered Committee (convenor: Dr. Asim

Dasgupta) held on June 18, 2004, it was agreed to implement State level VAT
from April 1, 2005.

qThis decision has been further reaffirmed in subsequent meetings of the

Empowered Committee held on September 23, 2004 and November 2, 2004.
 INTRODUCTION
qBy 31 December, 2005 only 25 states had implemented the VAT by
replacing the sales tax. Eight states were yet to introduce VAT and these
were Chhattisgarh, Gujarat, Jharkhand, Madhya Pradesh, Pondicherry,
Rajasthan, Tamil Nadu and Uttar Pradesh.

q5 other states had also introduced VAT which did not include
Utterpradesh.

q Sales Tax/VAT is a State subject, the Central Government has played the
role of a facilitator. A compensation formula has also been finalised in
consultation with the States, for providing compensation, during 2005-06,
2006-07 and 2007-08.Government agreed to compensate the estimated loss
to the extent of 100 per cent of the loss in the first year, 75 per cent of the
loss in the second year and 50 per cent of the loss in the third year of
introduction of VAT.

q Technical and financial support has also been provided to the States for
VAT computerization, publicity and awareness and other related aspects.

qA white paper was given by the Empowered Committee of State

Finance Ministers on January 17, 2005. which includes all the salient features
of VAT.
 FEATURES
Some salient features of VAT are :
a)The rates of VAT on various commodities shall be uniform for all the
States/UTs. There are 2 basic rates of 4 per cent and 12.5 percent,
besides an exempt category and a special rate of 1 percent for a few
selected items. The items of basic necessities have been put in the zero
rate bracket or the exempted schedule. Gold, silver and precious stones
have been put in the 1 per cent schedule. There is also a category with
20 per cent floor rate of tax, but the commodities listed in this schedule
are not eligible for input tax rebate/set off. This category covers items
like motor spirit (petrol), diesel, aviation turbine fuel, and liquor.
b)
c)There is provision for eliminating the multiplicity of taxes. In fact, all the
State taxes on purchase or sale of goods are required to be subsumed in
VAT or made VAT able.
d)
e)Provision has been made for allowing “Input Tax Credit (ITC)”, which is the
basic feature of VAT. However, since the VAT being implemented is intra-
State VAT only and does not cover inter-State sale transactions, ITC will
not be available on inter-State purchases.
 FEATURES

d) Exports will be zero-rated, with credit given for all taxes on inputs/
purchases related to such exports.

e) There are provisions to make the system more business-friendly. For

instance, there is provision for selfassessment by the dealers. Similarly,
there is provision of a threshold limit for registration of dealers in terms of
annual turnover of Rs. 5 lakh. Dealers with turnover lower than this
threshold limit are not required to obtain registration under VAT and are
exempt from payment of VAT. There is also provision for composition of
tax liability up to annual turnover limit of Rs. 50 lakh.

f) Regarding the industrial incentives, the States have been allowed to

continue with the existing incentives, without breaking the VAT chain.
However, no fresh sales tax/VAT based incentives are permitted.
 EXPERIENCE

2005-06: Despite the initial transitional problems and lack of clarity, the
implementation of VAT was smooth and the results were encouraging.

ØThe initial trend in revenue collection in the VAT implementing

States was quite encouraging. During the first 7 months of VAT
implementation (April-October 2005), the total revenue
(Provisional) for VAT implementing States showed an increase of
around 14.4 percent, which was higher than the compound
annual growth rate of these States for the last 5 years.
§
ØThe non-implementation of VAT by eight States/UTs was
creating complications and also led to undesirable diversion of
trade and business from one State to another.
§
 EXPERIENCE
2006-07:same as in previous yr. , During 2006-07, the tax revenue of the 31
VAT State/UTs had collectively registered a growth rate of about 21 per cent
over the tax revenue of 2005-06. This indicates that the VAT system is
gradually stabilizing and has started yielding the desired results.

2007-08: the tax revenue growtin the VAT states over the tax revenue of
2006-07, which included a growth of about 24 percent in the revenue from
VAT items.

2008-09: the provisional growth registered in the tax revenue of 33 VAT

states for the period April-December 2008, has been 19.1 per cent over the
corresponding
period in financial year 2007-08.
 GST
qThe Goods and services tax is a uniform indirect tax levied on all goods and
services produced in the country and all goods and services imported from
abroad. GST will be a single uniform indirect tax which will treat India as
one market.

qIn 1954, GST was introduced for the first time in France. Today this tax has
spread across 140 countries. And in India GST is going to be applicable from
01.04.2011 in India.

qThe introduction of GST would entail a restructuring of state VAT and

central excise and as such involves a degree of coordination and due process
of consultation with various stakeholders. It will replace all Central and state
indirect taxes like excise, customs, VAT, state excise, etc.

qIn India, dual GST is expected to be proposed wherein Centre and State
will be levying on the transactions of the value of Goods or Service.
q
qThe GST will enable a benefit to the economy from a fall in product prices,
a single price of a product across the country, lower working capital for
companies and a more simplified tax system.
The basic features of GST as explained in the discussion paper are as
follows:

qThere is a dual system of taxation at state level and the central level. The
dual system is for essential goods and services and standard goods and
services. At the states level the GST would replace VAT, entertainment tax,
luxury tax, taxes on lottery, betting and gambling, and surcharges, entry tax
levied in lieu of octroi. The central taxes to be replaced include service tax,
excise duty, additional excise and customs duties, countervailing duty,
surcharge

qThere also is a separate categorization of precious metals and a list of

exempted items.

qThe centre would impose an Integrated Goods and Services tax (IGST)
which would be a composite Central and state goods and services tax (CGST
and SGST).
 GOVERNMENT DEBT

Government debt (also known as public debt, national debt)

[ is money (or credit) owed by any level of government;
either central government, federal government, municipal
government or local government.

A broader definition of government debt considers all government

liabilities, including future pension payments and payments for goods
and services the government has contracted but not yet paid.
www.indiabudget.nic.in
SOURCE: www.indiabudget.nic
 Prepared By:-
Jain, Parul Aggarwal, Rashi Garg, Priyanka Goyal, Vicky Bhagc
QUESTIONS…???