Fiscal Policy of IndiaFiscal policy deals with the taxation and expenditure decisions of the government. Some of the major instruments of fiscal policy are as follows: Budget, Taxation, Public Expenditure, public revenue, Public Debt, and Fiscal Deficit in the economy.

Fiscal policy means the use of taxation and public expenditure by the government for stabilization or growth of the economy. According to Culbarston, “By fiscal policy we refer to government actions affecting its receipts and expenditures which ordinarily as measured by the government’s receipts, its surplus or deficit.” The government may change undesirable variations in private consumption and investment by compensatory variations of public expenditures and taxes.

In other words ‘The means by which the government adjusts its spending levels along with tax rates to influence and monitor the nation’s economy it is known as fiscal policy’

Fiscal policy also feeds into economic trends and influences monetary policy. When the government receives more than it spends, it has a surplus. If the government spends more than it receives it runs a deficit. To meet the additional expenditures, it needs to borrow from domestic or foreign sources, draw upon its foreign exchange reserves or print an equivalent amount of money. This tends to influence other economic variables.

On a broad generalization, excessive printing of money leads to inflation. If the government borrows too much from abroad it leads to a debt crisis. Excessive domestic borrowing by the government may lead to higher real interest rates and the domestic private sector being unable to access funds resulting in the “crowding out” of private investment. So it can be said that the fiscal deficit can be like a double edge sword, which need to be tackled very carefully.

Main Objectives of Fiscal Policy in India

Before moving on the discussion on objectives of India’s Fiscal Policies, firstly know that the general objective of Fiscal Policy.

General objectives of Fiscal Policy are given below:

1. To maintain and achieve full employment.

2. To stabilize the price level.

3. To stabilize the growth rate of the economy.

4. To maintain equilibrium in the Balance of Payments.

5. To promote the economic development of underdeveloped countries.

Fiscal policy of India always has two objectives, namely improving the growth performance of the economy and ensuring social justice to the people.

The fiscal policy is designed to achieve certain objectives as follows:-

1. Development by effective Mobilization of Resources: The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of Financial Resources. The central and state governments in India have used fiscal policy to mobilise resources.

The financial resources can be mobilized by:-

a. Taxation: Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilization in India is taxation.

b. Public Savings: The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises.

c. Private Savings: Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issuance of government bonds, etc., loans from domestic and foreign parties and by deficit financing.

2. Reduction in inequalities of Income and Wealth: Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society.

3. Price Stability and Control of Inflation: One of the main objectives of fiscal policy is to control inflation and stabilize price. Therefore, the government always aims to control the inflation by reducing fiscal deficits, introducing tax savings schemes, productive use of financial resources, etc.

4. Employment Generation: The government is making every possible effort to increase employment in the country through effective fiscal measures. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generate more employment. Various rural employment programmes have been undertaken by the

Government of India to solve problems in rural areas. Similarly, self employment scheme is taken to provide employment to technically qualified persons in the urban areas.

5. Balanced Regional Development: there are various projects like building up dams on rivers, electricity, schools, roads, industrial projects etc run by the government to mitigate the regional imbalances in the country. This is done with the help of public expenditure.

6. Reducing the Deficit in the Balance of Payment: some time government gives export incentives to the exporters to boost up the export from the country. In the same way import curbing measures are also adopted to check import. Hence the combine impact of these measures is improvement in the balance of payment of the country.

7. Increases National Income: it’s the strength of the fiscal policy that is brings out the desired results in the economy. When the government want to increase the income of the country then it increases the direct and indirect taxes rates in the country. There are some other measures like: reduction in tax rate so that more peoples get motivated to deposit actual tax.

8. Development of Infrastructure: when the government of the concerned country spends money on the projects  like railways, schools, dams, electricity, roads etc to increase the welfare of the citizens, it improves the infrastructure of the country. A improved infrastructure is the key to further speed up the economic growth of the country. 9. Foreign Exchange Earnings: when the central government of the country gives incentives like, exemption in custom duty, concession in excise duty while producing things in the domestic markets, it motivates the foreign investors to increase the investment in the domestic country.

Types of Fiscal Policies

1. Contractionary Fiscal Policy

This involves cutting government spending or raising taxes. Thus, the tax revenue generated is more than government spending. Also, it cuts on the aggregate demand in the economy. So, the economic growth leading to the reduction in inflationary pressures of the economy.

2. Expansionary Fiscal Policy

This is generally used to give a boost to the economy. Thus, it speeds up the growth rate of the economy. Also, during the recession period when the growth in national income is not enough to maintain the current living of the population.

So, a tax cut and an increase in government spending would boost economic growth and decrease the unemployment rates. Although this is not a sustainable solution. Because this can lead to a budget deficit. Thus, the government should use this with caution.

3. Neutral Fiscal Policy

This policy implies a balance between government spending and  Furthermore, it means that tax revenue is fully used for government spending. Also, the overall budget outcome will have a neutral effect on the level of economic activities.

Types of Fiscal Policy

There are major components to the fiscal policies and they are

Expenditure Policy

Government expenditure includes capital expenditure and revenue expenditure. Also, the government budget is the most important instrument that embodies government expenditure policy. Furthermore, the budget is also for financing the deficit. Thus, it fills the gal between income and government spending.

Taxation Policy

The government generates its revenue by imposing both indirect taxes and direct taxes. Thus, it is important for the government to follow a judicial system for taxation and impose correct tax rates. This is because of two reasons. The higher the tax, the reduction in the purchasing power of the people.

This will lead to a decrease in investment and production. Furthermore, the lower tax will leave more money with people that lead to high spending and thus higher inflation.

Surplus and Debt Management

When the government receives more amount than it spends than it is known as surplus. Also, when the spending is more than the income than it is known as a deficit. In order to fund the deficits, the government needs to borrow from domestic or foreign sources.

The term fiscal policy refers to a variety of activities of the government related to taxing and spending, borrowing and lending and buying and selling. The importance of use of fiscal policy to influence the trends in economy, may it be in prices or employment, may it be on generation or distribution of income, is a phenomenon of last six decades. The philosophy of non-intervention and balanced budgets with low taxes and low spending, guided government actions in the past centuries.

According to Arthus Smithies, “Fiscal Policy is a policy under which the government uses its expenditure and revenue programme to produce desirable effects and avoid undesirable effects on national income, output and unemployment.” In other words, Fiscal Policy refers to governments spending, ‘taxing, borrowing and debt management to attain and maintain full employment.

From the beginning, the government of independent India has heavily relied on use of fiscal policy for attainment of socioeconomic objectives.

2. Objectives of Government of India’s Fiscal Policy:

Some of the major objectives of the fiscal policies of the GOI are discussed below:

1. Acceleration of Economic Growth:

Since the launching of the First Five Year Plan, objective of economic growth has dominated most economic actions of the GOI. In the subsequent five year plans, the government has defined the targeted rates of growth in the country’s Gross National Product (GNP). Plans not only detail the investments in creation of capital from the country in form of plant, machinery, dams, roads, power houses and other physical assets but also detailed investments in social assets like education, health and family welfare.

Plans also define the scheme for raising resources for the planned investment. Fiscal policy is the major tool for achieving economic growth.

2. Encouragement to Savings:

Capital formation in the less developed countries like India necessitates raising the levels of savings in the economy. Fiscal policy aims at encouraging savings in the economy by various exemptions from direct and indirect taxes. Savings in business and industry are encouraged by schemes like depreciation allowances and development rebates.

3. Direction of Inevitable Resources:

Fiscal policy is aimed at encouraging direction of the resources in sectors and regions identified as essential and by discouraging their use for inessential economic activities by judicious use of taxes, subsidies and control.

4. Income Re-Distribution:

Disparity of incomes has been a striking feature of India’s economy. The GOI has given priority to reduction in inequalities of income and wealth in its objectives of planning. Progressive taxation based on the fiscal principle of ‘ability to pay’, has been an important tool of fiscal policy.

5. Generation of Employment:

Unemployment of large mass of people, especially in the rural sector, has been one of the major economic problems of India. It is the cause of poverty in the country. Creation of employment through various employment generation schemes has been a major objective of the fiscal policy of the Government of India.

6. Modernization:

Modernization of the socio-economic structure of the country through scientific and technological development has acquired greater importance in the GOI’s priorities in the recent years. Development of communication, modernisation of railways, development of electronic industry, growth of atomic research efforts, support of research and development efforts through tax incentives and similar actions of the GOI have been aimed at initiating and encouraging the process of modernisation of the economy.

7. Liberalisation:

Liberalization of the economy by reduction of regulation and control of industrial activities and controls has been a major thrust area for the GOI particularly since 1991. Fiscal policy has been aimed at liberalisation of imports by free imports of capital goods, industrial raw material and intermediate goods.

8. Price Stability:

Stable prices are essential for meaningful economic development. The process of economic development through deficit finance dependent investment strategy is present on prices. A major objective of economic policy of the GOI in general and of fiscal policy in particular has been control of inflationary pressures in the economy.

9. Import Substitution and Export Promotion:

The GOI’s fiscal policy has been directed to provide protection to indigenous industry against competition from foreign industry and to promote exports. With emphasis on liberalisation the recent fiscal policies measures have re-emphasised import substitution and have emphasised export promotion.

10. Support to Priority Sector:

GOI has identified sectors of Indian economy to receive higher priorities in its economic agenda. Through support price programmes, subsidies, tax exemption of relief and incentives, the GOI has aimed at supporting the priority sector.

11. Meeting Debt-Service Obligation:

Over the years of planning successive governments have relied on public borrowings, internally and internationally, for budgetary support. Payment of interest on these borrowings and repayment of debt on its maturity has been a statutory obligation the GOI meets through its fiscal policy.

12. Defence:

Defending the country against external aggression has always been a high priority of any government in any country. Independent India has been involved in arm conflicts with neighbouring countries a four times in forty years. (Thrice with Pakistan and once with China). With the prominence that India has in the regional geo-political equations, strong and ever prepared defence establishment has become an integral part of country. Today the expenditure on defence budget exceeds rupees forty thousand crores.

13. Simplification:

In recent years, simplification of tax system has become a major objective of the GOI. Policy actions have been aimed at reducing the cumbersome structure of direct and indirect taxes and ensuring continuation of policy thrust by measures like Long-term Fiscal Policy.

3. Fiscal Policy in India- Success Parameters:

Since Independence, the Government of India has extensively employed varieties of instruments of fiscal policy so as achieve social justice.

The following are the success parameters of the fiscal policy during the plan period:

1. Resource Mobilisation:

In the economy vast resource mobilisation could be possible due to rapid economic growth. In its various fiscal policies announcement, a part of the government revenue has been used for the development purposes. Efforts have been made for additional taxation both direct and indirect for raising more and more funds.

The government has also resorted to extensive public borrowings, mobilisation of small savings certificates, etc., for financing development programmes. According to an estimate, budgetary resources form nearly 87 per cent of the total resources of development.

2. Economic Growth:

A major proportion of budgetary resources of the government have been allocated for development purposes. A large part of the public sector investment has been on the development of basic and heavy industries, e.g., power generation, transportation and communication, etc. Through developmental expenditure the government has been successful in developing an infrastructure which was necessary for rapid economic development.

3. Promotion of Expenditure:

The Government of India initiated varieties of development programme, e.g., rural electrification, Integrated Rural Development Programme, Agricultural and Community Development Programme, Drought-Prone Areas Programme, etc., for creation of employment opportunities in rural areas. Similarly, the government has also taken-up the self-employment schemes with a view to provide employment to technically a nullified person in rural areas.

4. Equitable Distribution of Income:

With a view to achieve the objectives of social justice, the government has resorted to progressive tax system under which taxes at higher rates are imposed on the personal income of persons belonging to affluent society. The government has also imposed heavy taxes on the luxury goods. The government, on the other hand, has also given subsidies and number of tax concessions to small traders and manufacturers. However, the results of the fiscal measures have not been much encouraging in this regard.

5. Stability:

The government has extensively used variety of measures of fiscal policy to tackle inflationary pressures on the economy. Whereas on the one hand, the government raised the rate of direct taxes, on the other hand, widely used public borrowings. But the anti-inflationary effects of taxes have been more than offset by increase in indirect taxes and increase in public expenditure.

4. Features of Fiscal Policy in Recent Years:

The complexion of India’s fiscal policy has undergone some change in recent years.

Following are the leading features of the policy:

1. Reliance on Deficit Financing:

Deficit financing has become an integral part of India’s budgetary polices. A disturbing feature of deficits finance in recent years has been recurring deficits on ‘revenue account’. The revenue receipt of the government have been falling short of the revenue expenditure, necessitating borrowings or diversion of capital receipts for revenue expenditure. However, the trend has been reversed since 1991.

2. Mounting Public Debt:

The public debt of GOI has reached alarming proportions. The total of internal debt is nearly 2,50,400 crore rupees whereas, external debt is almost of the magnitude of 1,00,000 crore rupees. With ever increasing debt, mounting debt service obligations have become a standard feature of budgets of GOI.

3. Reliance on Indirect Taxes:

The tax policy is increasingly becoming regressive in nature by large dependence on indirect taxes like excise duty or custom duty as compared to that on direct taxes like income taxes, corporation tax, capital gains tax etc. According to one estimate, direct taxes constitute only 15 per cent of our tax revenue and 85 per cent is contributed by indirect taxes. But the situation is now taking happy turn after 1990-91.

4. Long Term Fiscal Policy:

Since 1986 budget, the GOI has introduced long-term fiscal policy to provide greater certainties in its budgetary policies and to improve the overall environment of business. Under the policy, the GOI has announced the policy framework for a period of three years and also assured in advance the stability or reduction of rates of taxes.

5. Impact on Rural Employment:

Generation of employment has been an important objective of fiscal policy. The GOI has introduced new employment schemes like Jawahar Rojgar Yojna or strengthened the existing schemes like Integrated Rural Development Programme or National Rural Employment Programme. It is to be noted that these programmes have so far had limited impact on the massive and complex problem of unemployment in the country.

6. Black Money:

Unaccounted money has been a constant feature of India’s economy. The magnitude of black money is difficult to assess but estimates have ranged from Rs.10,000 crores to Rs.75,000 crores. Fiscal measures have generally failed to reduce the creation of black money. Schemes like Voluntary Disclosure, Bearer bonds or Indira Vikas Patra have had marginal impact on the incidence and growth of black money.

7. Inflationary Potential:

With large budget deficits, indirect taxes, shortages, black money and rising money incomes, inflationary trend in economy has been remarkable. The fiscal policy instead of being a cure of inflation has become the cause of inflation.

8. Use of Administrated Prices:

With reduction of options to raise revenue, the GOI prices of products like petroleum products, coal and electricity, which are supplied by public sector and of cement, paper, sugar, etc. (being

produced in both sectors), have been greatly administered by the government machinery and it has created problems.

9. Rationalization of Product Classification Codes:

A very welcome change brought about for administrative convenience is the adoption of the rationalized standard product code structure for indirect taxes. The change has resulted in reduced disputes and litigation about product classification.

10. Introduction of MODVAT:

In 1986 the introduction has helped to reduce cumulative impact of indirect taxes on manufactured products. Under MODVAT the manufacturer while charging full rate of excise duty on his output, gets credit for tax paid on inputs. This reduces the ‘cascading’ effect of excise duty.

11. Inadequate Public Sector Contribution:

Contrary to repeated assertion by the GOI, public sector continues to be a drain on the meagre resources of the government. Plan schemes of finance have expected sizeable contribution from public sector which has not materialised in most cases.

12. Common Accounting Year for Income Tax:

A welcome in the taxation policy has been adoption of a standard accounting year (April-March) for the purpose of income tax. The change is intended to reduce the malpractices and raise tax revenues. It has proved to be a good step. It has reduced inefficiencies and corruption in the collection of taxes.

5. Indian Taxation Policy:

1. Trends in Public Revenue:

Taxation is perhaps the most effective instrument of fiscal policy. With a view to promote economic development of the country taxation may be used to achieve certain objectives. In India additional taxation refers to additional mobilisation of resources. These additional taxes have been imposed either by levying additional taxation or through changes in the tax base.

In addition, efforts have also been made in the forms of greater efforts of tax collection and by raising the administered prices of goods produced by public enterprises. In recent years this has emerged as an important source of financing for various five year plans. A major part of revenue comes from taxes. Therefore we can safely conclude that tax revenue has been increasing constantly during last four decades.

2. Importance to State Government:

In the federal system greater importance has been accorded to State Governments. In comparison to other federation, the areas within which public revenue are raised and spent regionally is much wider in India. It testifies to the greater importance of State Government in our federal system.

The principal tax revenue sources of State Government mainly includes share of State Government in the union excise duties, commercial taxes, land revenue, stamp duties and registration fee, share in union division of income tax and the state excise duties on alcohol and other narcotics. In all the aforesaid sources, commercial taxes have been most important which include taxes on motor spirit, entertainment taxes and duties on electricity and other commercial taxes.

i. These objective includes mainly:

(i) To put a curb on consumption and thus transfer resources from consumption to investment,

(ii) To increase the incentives to save and invest,

(iii) To transfer resources from the hands of the public to the hands of the government in order to make public investment possible,

(iv) To modify the pattern of investment,

(v) To reduce economic inequalities, and above all,

(vi) To mobilise economic surplus.

ii. The first plan was financed from additional taxation to the extent of 14 per cent, the second plan 22 per cent, the Third Plan 34 per cent, the Fourth Plan 26 per cent and Fifth Plan 37 per cent and the Sixth Plan 30 per cent.

Until the beginning of the World War II states raised roughly 35 per cent of the revenue front commercial taxes. Thereafter its importance started declining. Its contribution to states’ tax revenue declined from 9 per cent in 1967-68 to 1.6 per cent in 1988-89. Due to rising trend to stress by the states on prohibition in the country, the revenue collection from the excise duty on alcoholic liquors and narcotics has not increased to the desired level.

For example- in 1988-89 state excise duties accounted for 9.3 per cent of the total tax revenue of the states. Dependence of the states on sales tax has considerably increased over the years. It accounted for 39.4 per cent of the State Governments’ tax revenue.

The Central Government in India levies four main taxes, viz., personal income tax, corporation tax, custom duties and union excise duties. These taxes account for large collection from tax proceeds of the Central Government. Custom duties had remained the major sources of the revenue of the Central Government since long. On account of increased share of states in the union excise duties, there relative importance as a source of revenue for the Central Government has diminished.

3. Direct and Indirect Taxes:

As between direct and indirect taxation, the tax structure in India has undergone significant changes during the last two decades. In India, about four-fifth of total tax revenue is collected from indirect taxes. The percentage share of indirect taxes in taxes has been increasing over the years.

4. Built-in Flexibility and Buoyancy:

The taxation system is said to have built-in flexibility of elasticity of various taxes levied in a country is high. Presence of built-in flexibility in any tax structure implies that the increase in tax proceeds would be more than proportionate in response to a rise in national income. The concept of buoyancy in taxes is relatively wider one which implies that when there is change in tax rates and expansion in tax base the same are also taken into consideration for estimating the response of tax proceeds to rise in nation income and buoyancy of tax structure is assessed.

The National Institute of Public Finance and Policy estimated both elasticity and buoyancy of India’s tax system for 1970-71 to 1983- 84. The result of the study revealed that while the elasticity of total tax revenue was less than (.96) its buoyancy was greater than unity (1.2). Moreover, it has also been revealed in the study that tax revenue of the states was both more elastic and buoyant than tax revenue of the centre.

5. Administrative Efficiency:

One of the important feature of Indian tax policy has been lack of efficiency in administration of Indian taxation machinery. Both direct and indirect taxes are highly complex. There exists enough opportunity of tax evasion in Indian tax structure. The Indian tax system also violates the cannons of simplicity and certainty. According to Kaldor, there also exists definitional defects in India’s tax system which give elaborate to tax authorities to interpret tax law according to their whims and fancies.

This has resulted in widespread varieties of corruption in tax administration. In India, taxation is being used as an important tool for influencing allocation of resources, capital formation as well of reducing the regional and personal disparities.

6. Multiplicity of Tax Laws and Lack of Integration:

Another important feature of Indian taxation policy has been that it has been dominated by multiplicity of direct and indirect taxes. For example, similar kind of, i.e., the tax on income, the annual wealth tax and the gift tax may be placed in the category of direct taxes. Since each type of these taxes has a different basis, therefore it is often suggested that all these taxes should be integrated into a single direct tax.

The Direct Law Committee headed by S.C. Chokshi also recommended that there must be a single direct taxation law, namely, the Direct Taxes Management and Administration Act.

7. Imbalance in Tax Structure:

There has been noticed grave inter-sectorial imbalance in India’s tax structure. For example, income from agriculture is free from tax. Indian tax structure shows imbalance in favour of agriculture. Agriculture which has the largest percentage contributor to the national income is under-taxed. Despite the fact that the income of the rich farmer has increased over the years, agriculture income is not subject to tax.

There were not large numbers of people engaged in agriculture at the time of independence. Income of the people could be made liable to pay income tax. But after independence when land reforms laws were carried out and new technology was introduced in agriculture encouraged a new class of large farmers engaged on the scene having fairly high income and paying no tax. This problem created serious imbalance in tax structure.

8. Progressive:

It means that higher incomes are taxed at relatively higher rates. Indian tax structure possesses the feature progressively as the tax structure is to be found not only in direct taxes but it is also hidden in indirect taxes.

6. Fiscal Policy of India (Features):

Fiscal Policy indicates the changes that have been taken in the taxation and public finance policy. So far India’s fiscal policy is concerned it considered changes in the light of developments taken place in India’s taxation and public finance policy. What has been the policy regards to public expenditure and public revenue? What has been trend in the policy regard to public debt?

The important features of India’s fiscal policy are as follows:

1. Fiscal Consolidation:

Fiscal consolidation, a key element in the package of economic reforms remains an unfinished task. Of the components of economic reforms, inadequate progress has been made in consolidating the fiscal deficit. After showing some signs of reduction in the mid-nineties, the fiscal deficit started rising from 1997-98. The fiscal deficit declined from 6.6 per cent of GDP in 1990-91 to 4.1 per cent in 1996-97 and then rose to 4.8 per cent in 1997-98 and further to 5.9 per cent in 2001-02.

Higher fiscal deficits besides constraining growth have resulted in higher Government borrowings. The change in the composition of fiscal deficit of the centre is an equally worrisome feature. The revenue deficit, which constituted 49.4 per cent of fiscal deficit in 1990-91 accounted for 70.2 per cent of fiscal deficit in 2001-02. This is reflective of the fact that a large portion of fiscal deficit goes to finance public consumption expenditure pre-emptying public investment.

A number of factors have contributed to this deterioration. The main factors are raising expenditure on salaries, unfounded pensions, interest payments, improperly targeted subsidies and stagnation in the tax-GDP ratio. The share of wages and salaries in total Central Government expenditure increased from 9.7 per cent in 1996-97 to 10.5 per cent in 1999-2000 and remained at 10.3 per cent in 2000-01 as per Economic and Functional Classification.

The share of pensions in total government expenditure increased from 2.2 per cent in 1996-97 to 3.7 per cent in 1999-2000 and remained at 3.6 per cent in 2000-01. Interest payments as a proportion of GDP increased from 3.8 per cent in 1990-91 to 4.7 per cent in 1999-2000 and remained at 4.6 per cent in 2001-02.

2. Taxation Policy:

As an important component of fiscal policy to generate more public revenue, progressive taxation policy has been adopted. It has not increased only quantum of public revenue, but has also proved conducive in proper allocation of national resources. The share of taxation in the gross domestic product was only 6 per cent in the initial years of First Plan, i.e., 1950-51.

It has increased continuously during subsequent years. In 1960-61 it reached to 9 per cent, in 1980-81 it reached to 13.9 per cent and in 1990-91 reached to 15.4 per cent and finally in 2000-01 to 15.4 per cent. According to revised estimates it is 14.6 per cent. Amongst developing nations tax rates in India are the highest. This tendency was not prevailed in India before 20 years.

3. Agriculture Income is Exempted from Income Tax:

One of the important features of India’s fiscal policy is that agricultural income is absolutely exempted from income tax. Though the contribution of agriculture in national income is quite significant, but imposition of tax on agriculture income has become a political issue.

Agricultural income should be taxed or not, has been a controversial issue in India from quite a long time. Several arguments are offered in favour of taxation of agricultural income. But problems arise because of it are also well known. Keeping into active consideration of all these aspects, the issue of taxation on agricultural income has been deferred for the time being.

4. Expenditure Policy:

In India, after independence the tendency of increasing expansion of government activities has become quite intensive. The expenditure on defence tends to continuous increasing after independence. The expenditure on conduct of public services has also increased because of fast rising population resulted with crowed and offences. The amount of development expenditure is continuously increasing because of liberal expenditure policy.

Besides huge amount is continued to spent on social services. On the current prices, total amount of public expenditure was only Rs.900 crore in 1950-51, has increased to Rs.5,89,403 crore in 1999-2000. The ratio of public expenditure with gross domestic product was 9.1 per cent in

1950-51, has increased to 30.5 per cent in 1999-2000. The important change has been taken place in the tendency of public expenditure under which the share of developmental expenditure in total expenditure has increased enormously.

Between 1950-51 to 1970-71, the share of non- development expenditure in total expenditure was higher, but afterwards the share of developmental expenditure in total expenditure started increasing. No doubt it is one of the appreciable steps.

5. Debt Policy:

With a view to get available more and more resources in the economy, liberal public debt policy has been adopted. There has been continuous tendency of increasing quantum of public debt. Aggregate liabilities of public debt (which include internal debt and external debt) rose from Rs.6,565 crore at end-March 1961 to Rs.59,749 crore at end-March 1981 and further to the high figure of Rs.10,30,744 crore at end-March 2000. It is budgeted to increase to Rs.11,79,793 crore by end-March 2001.

6. Budgetary Policy:

Under fiscal policy, there has been tendency on preparing annual budget by the State and Central Government. The budget deficit is fulfilled by the Reserve Bank of India by issuing currency.

7. Critical Evaluation of India’s Fiscal Policy:

There are several obstacles in the successful implementation of fiscal policy in India in the presence of which it is difficult to achieve those target expected at the time of implementation of the policy. Because of these obstacles all the estimates of revenue collection of the government proved wrong and problem of budget deficit is becoming worsened.

The important obstacles in the successful implementation or the main criticisms against the fiscal policy are discussed below:

1. Increasing Budgetary Deficit:

In the absence of creation of sufficient internal resources, the policy of deficit financing is widely adopted. It has continuously increased the budgetary deficit of the nation. This situation is not appropriate for the national economy. The continuous rising of budget deficit is a sign of inefficiency in the national economy.

2. Fail to Control Inflation:

The government of the nation proved miserably failed to control problem of inflation and accordingly ever rising tendency of price rise. This tendency is also indicator of inefficiency in the national economy.

3. Heavy Increase in Administrative Expenses:

Every year huge amount being spend on the administrative expenditure in India. As observed by the then Finance Minister Dr. Manmohan Singh, even after taking several steps to cut down administrative expenses, unprecedented rise in public expenditure has been noticed.

4. Undesirable Aid and Subsidies:

The Government of India provided economic assistance to large number of areas of Indian economy. Economic assistance and subsidies provided to farmers in the form of distribution of food grains, supply of fertilisers to farmers at below the cost price, assistance for export of agricultural products, etc. Though it succeeded in bringing down stability in price of agricultural produce, but abruptly increased the problem of money supply in the country. There has been also noticed tendency of increase in administrative expenditure, corruption and unethical activities.

The fiscal policy adopted by the Government of India so far, after independence has not been said to be satisfactory. Despite serious efforts taken by the government, tax collection has not increased as anticipated. Public sector enterprises also proved failed miserably in generating sufficient resources. The government could not exercise effective control over expenditure policy. Its result is that the budget deficit of the government increased alarmingly.

8. Fiscal Policy Developments in Recent Years:

In recent years the budget of Central Government have been formulated in the background of falling industrial growth, falling revenue receipts, tense security environment and a slowdown in world economic growth. Keeping these constraints in view, the budget aimed at consolidating the gains of economic reforms and hastening this process further to the state level through a strategy of reforms linked to public funding.

The budget adopted a strategy of continuing the emphasis on agriculture and food economy reforms, enhancing public and private investment in infrastructure, strengthening the financial sector and capital markets, deepening structure reforms and rejuvenating industrial growth, providing social security to the poor and consolidating tax reforms and continuing fiscal adjustments both at the Central and State levels.

The following are some of the important fiscal policy developments taken place in recent years:

1. Revenue Receipts:

Revenue receipts (net to the Centre) in 2002-03 are budgeted to increase by 20.8 per cent to Rs.2,45,105 crore compared with 2001-02. Much of this increase is sought to be achieved by a higher growth of 29.8 per cent in tax revenue as compared with a negative growth in 2001-02.

2. Fiscal Deficit:

Fiscal deficit of the Central Government which was budgeted at 4.7 per cent of GDP (5.1 per cent as per revised estimates of GDP) shot up to 5.9 per cent in 2001-02 as per the provisional unaudited figures. The fiscal deficit budgeted for the year 2002-03 is Rs.1,35,524 crore constituting 5.3 per cent of GDP.

3. Tax Measures:

The tax measures adopted were formulated against the backdrop of an economic slowdown. The proposals are intended to revive demand, promote investment, accelerate economic growth and enhance productivity. They also aim at widening the tax base, rationalisation and simplification of tax structure and encouraging voluntary compliance.

4. Service Tax:

Taxation of services in India was introduced in 1994-95 when it was levied on stock-brokers, general insurance and telephone services. Though there is no specific provision in the Constitution of India on the levy of tax on services. In the Budget for 2002-03, service tax was extended to ten new services.

A comparison of the collection of Direct and Indirect taxes during the financial year 2005-06 with that during the previous financial year is given below:

5. Government Debt:

The outstanding liabilities of the Central Government, comprising internal and external liabilities, which registered a declining trend as a proportion to GDP till 1998-99, have started rising thereafter. The outstanding liabilities—GDP ratio which declined from 55.3 per cent in 1990-91 to 51.2 per cent in 1998- 99 increased to 58.1 per cent in 2001-02 (RE).

The outstanding total liabilities are budgeted to increase to Rs.15,04,183 crore in 2002-03 reaching a level of 61.4 per cent of GDP. The increased witnessed after 1998-99 was mainly on account of increase in internal liabilities.

6. Savings and Capital Formation:

The economic and functional classification of the Central Government budget reveals a few disturbing trends. Gross capital formation out of the budgetary resources of the Central Government has been progressively declining. Another disturbing developing relates to the growing dis-savings of the Central Government.

The dis-savings of the Central Government increased from 1.8 per cent of GDP in 1990-91 to 3.2 per cent of GDP in 2001- 02. The dis-saving is estimated at 3.2 per cent of GDP in 2002- 03. The expenditure on wages, salaries and pensions as a proportion of the total government expenditure, which was 14.6 per cent in 2001-02 (RE) is budgeted at 13.9 per cent in 2002-03.

7. Collection Rates:

There was a conscious effort to reduce the peak customs tariff. The average collection rate declined from 47 per cent in 1990-91 to 21 per cent in 2000-01 which further declined to 16 per

cent in 2001-02. The collection rate for all major commodity groups barring food products and chemicals edged downwards in 2001-02 compared with 2000-01.

8. Buoyancy of Major Taxes:

Buoyancy of central tax revenue during the Eighth and Ninth Plan periods indicates a declining trend. This decline was more accentuated in the case of customs revenue. The reasons for this decline included scaling down of the tax rate, reduction in the number of slabs, etc., which were not necessarily aimed at raising revenue.

The thrust of the measures taken for indirect taxation has been efficiency in production and trade. Direct taxes remained more buoyant, which could be attributed to expansion in the tax base, extension of the base for tax deduction at source and improvement in direct tax administration. However, collection from direct taxes constituted only 37 per cent of gross tax revenue. Therefore, the relatively higher buoyancy of direct taxes has failed to raise the tax-GDP ratio.

9. Disinvestment & Strategic Sale of Public Sector Undertakings:

Disinvestment of government equity began in 1991-92. However, till 1999-2000 it was done primarily through the sale of minority shareholding in small lots. It is only from 1999-2000 that emphasis of disinvestment changed in favour of strategic sale.

The primary objective of disinvestment especially through the strategic sale route is that with the transfer of management control into private hands, private capital and management practices would be used effectively to increase the operational efficiency of the company. Evidence suggests that there has been an improvement in the efficiencies of PSUs after disinvestment.

10. Task Forces on Direct and Indirect Taxes:

In July 2002, it has been proposed setting up of two task forces to recommend measures for simplification and rationalization of direct and indirect taxes.

9. Value Added Tax:

At the Conference of State Finance Ministers held on January 23, 2002 a final decision was taken that all States and Union Territories would introduce VAT from April 2003. This position was reiterated by all States at the Conference of State Chief Ministers held on October 18, 2002. Empowered Committee of State Finance Ministers endorsed the suggestion that every State Legislation on VAT should have a minimum set of common features.

Accordingly, a model VAT Bill was circulated to all the States. Introduction of VAT is expected to increase revenue buoyancy, as the coverage expands to value addition at all stages of production and distribution chain. At a meeting of the Financing Ministers of all. States/Union Territories on January 17, 2003, States and Union Territories again reiterated their firm commitment to introduce VAT from April 1, 2003. It was decided that the VAT legislations of

all States and UTs would have common provisions in respect of all important matters and that a simple VAT legislation with maximum convergence would be implemented.

It was also agreed that along with the introduction of VAT, the origin based Central Sales Tax would be phased out. It was also agreed that the Additional Duties of Excise (Goods of Special Importance) Act would be suitably amended to empower States to levy sales tax/VAT on sugar, textiles and tobacco with a ceiling rate of 4 per cent. This would be done without affecting the existing levy of additional Duties of Excise on these items by the Union Government.

In view of the apprehensions expressed by a large number of States about possible revenue losses in the initial years of introduction of VAT, an assurance was given to the States that the Government of India would compensate the States to the extent of 100 per cent of revenue of the loss in the second year (2004-05) and 50 per cent of the loss in the third year (2005-06).