EEP-9 Fiscal Policy Prof. Tarun Das

8/9/2019 EEP-9 Fiscal Policy Prof. Tarun Das

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Prof. Tarun Das, IILM EEP-9 Fiscal Policy 1

Economic Environment and PolicySession-9

Fiscal Policy Reforms in India

Presented by

Dr. Tarun Das, Professor, IILMFormerly, Economic Adviser, Ministry of Finance


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1.1 Major Fiscal Reforms since 1991

a) Reduction of fiscal deficit

b) Fiscal Responsibility and BudgetManagement Act 2003

c) Simplifying tax rules and proceduresd) Strengthening tax administration

e) Widening tax base

f) Rationalisation and Reduction of both directand indirect tax rates


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1.2 Fiscal Responsibility and BudgetManagement (FRBM) Act 2003

FRBM Act 2003 and FRBM Rules 2004came into force w.e.f. 5 July 2004. The Act mandates the Central govt to

eliminate revenue deficit by March 2009and to reduce fiscal deficit to 3% of GDP

by March 2008. Under the Act, the central govt is requiredto lay before both houses of Parliamentthe following documents:

(a) Medium Term Fiscal Policy Statement,

(b) Fiscal Policy Strategy Statement,(c) Macro Economic Framework Statement,(d) Annual Financial Statement and(e) Demand for Grants.


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1.3 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 year. No assumption of additional debt exceeding

9% of GDP for 2004-05 and progressivereduction of this limit by at least onepercentage point of GDP in eachsubsequent year.

No guarantee in excess of 0.5% of GDP inany financial year.

Greater transparency in the budgetaryprocess, rules, accounting standards andfiscal policies

Quarterly review of the fiscal situation.


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1.4 FRBM Rules 2004

The rules mandate the CentralGovernment to take appropriate action ifrevenue and fiscal deficits exceed 45% ofthe budget estimates, or total non-debt

receipts fall short of 40% of the budgetestimates at the end of September i.e.first half of the fiscal year.

Four fiscal indicators viz. revenue deficit,

fiscal deficit, tax revenue and total debt as% of GDP to be projected for the mediumterm.


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3.5 Medium Term Fiscal Indicators(as % of GDP at current market prices)

Items 2007-08 RE

2008-09 BE

2009-10 Tar

2010-11 Tar

1. Rev. Deficit 1.4 1.0 0.0 0.0

2. Fiscal Deficit 3.1 2.5 3.0 3.0

3. Tax revenue 12.5 13.0 13.5 14.0

4. Year-endstock of publicdebt

63.8 59.6 55.7 52.3


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4.1 Progress of Fiscal Reforms

Status in June 1991

(a)Budget support toPSEs: 1.5% of GDP

(b) Price and purchasepreference for PSEs

(c )Preferential

treatment for bankcredits

(d) No hard budgetconstraints for PSEs

(e) No disinvestment(f)SICA does not

include sick PSUs

Status in Dec 2008(a) Support reduced to0.5% of GDP

(b)No price preference,but purchase

preference exists(c )No preferentialtreat-ment for bankcredits

(d) MOUs

strengthened(e) Divestment allowed(f)SICA applicable for

PSUs


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4.2 Fiscal Deficit (as % of GDP)

Status in 1990-91

Central GovtFiscal Deficit 6.6%Revenue deficit 3.3%Primary deficit 2.8%State governments

Fiscal Deficit 3.3%Revenue deficit 0.9%Primary deficit 1.8%General GovtFiscal Deficit 9.9%Revenue deficit 4.2%Primary deficit 4.6%

Status in2007

-08

Central GovtFiscal Deficit 3.1%Revenue deficit 1.4%Primary deficit -0.6%

State governmentsFiscal Deficit 2.3%Revenue deficit 0.5%Primary deficit 0.1%General Govt

Fiscal Deficit 5.4%Revenue deficit 1.9%Primary deficit -0.5%


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4.3 Progress of Fiscal ReformsStatus in June 1991

Public debt aspercentage of GDP

(a) Central govt 61%

- Internal 50%

- External 12%

(b) States 19%

- Internal 19%

(c )General govt 68%- Internal 56%

- External 12%

Status in March 2008

Public debt aspercentage of GDP

(a) Central govt 63%

- Internal 59%- External 4%

(b) States 29%

- Internal 29%

(c )General govt 92%- Internal 88%

- External 4%


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Status in June 1991

Fiscal Deficit wasfinanced by:

(a) RBI Ad Hoc TBs at

4.6% interest(b) Banks through SLRholdings at 38.5%

and CRR 25%

(c ) Market borrowings(d) Public funds

(e) External debt

Status in Dec 2008

(a) Ad hocs replaced byWMAs at market rate

(b) SLR reduced to 25%and CRR 5.5%

(c)Govt. securities aresold at market rates

(d) Reduction ofinterest rates forpublic funds

(e) Less dependence onExternal debt


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Status in June 1991

High duty & tax rates

Maximum rates

Excise duty 110%

Import duty 400%

Income tax 54%

Corporate taxes:

Domestic COs. 49%

and 54%

Foreign COs. 65%

Status in Dec 2008

Duties & taxes reduced

Maximum ratesExcise duty 8%

Cenvat 14%

Import duty 12.5%

Income tax 30%

Corporate taxes:

Domestic COs. 30% +10% surcharge

Foreign COs. 40%+2.5%surcharge


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4.6 Progress of Fiscal ReformsStatus in June 1991

No service tax No MinAlternativeTax No transactions tax No tariff value

Dividend tax on bothindividuals & Cos. Existence of gift tax Limited cases of tax-

holidays No fringe benefit tax

(FBT)

Status in Dec 2008

Service tax @12% MAT introduced Trans. tax introduced Tariff value introduced

Dividend tax on onlycompanies Gift tax abolished Tax holidays widened

to many infrastructure

FBT introduced


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Status in June 1991 No MRP linked

excise duties

No estimatedincome scheme for

retail traders

No presumptive tax

No state level VAT

Status in Dec 2008

Concept of MRP

introduced for

consumer goods

Estimated incomescheme introduced for

retail traders.

Presumptive income

tax scheme introduced

State level VAT

introduced wef April 05


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4.8 Related Financial Reforms

Status in June 1991

CRR 25%

SLR 38.5%

Bank Rate 12%

PLR above 21%

Deposit and interest

rates are controlled

Capital issues andprices determined by

the CCI in MOF

Status in January 2007

CRR 5.5%

SLR 25%

Bank rate 6%

PLR 11% to 11.5%

Deposit and interest

rates are liberalised

The office of CCIabolished and SEBI

established


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4.9 Related Financial Reforms

Status in June 1991

Indian firms not

allowed to raise funds

from foreign stock

exchanges Portfolio investment

by foreign investors in

Indian companies not

allowed Foreigners not

allowed to buy G-secs

Status in Dec 2008

Indian firms allowed to

raise foreign funds by

GDR, ADR, FCCBs &

offshore funds FIIs, NRIs and OCBs

allowed to buy stocks

in Indian markets s.t.

overall limit of 49% FIIs/ NRIs/ OCBs

allowed to buy G-secs


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Thank you

Have a Good Day

EEP-9 Fiscal Policy Prof. Tarun Das

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