Changes in Trends of Fiscal Policy in India
Transcript of Changes in Trends of Fiscal Policy in India
7/25/2019 Changes in Trends of Fiscal Policy in India
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CHANGES IN TRENDS OFFISCAL POLICY IN INDIA
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Content
This presentation focus on
historical trens
!scal iscipline fra"e#or$s!scal responses to the %lo&al !nancial
crisis
su&se'uent return to a !scalconsoliation path
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()*+,()-+
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STARTING FROM BASICSeals #ith the ta.ation an e.peniture
ecisions of the %o/ern"ent
in the hans of %o/ern"ent
INCL0DES1
ta. polic23
e.peniture polic23
in/est"ent or isin/est"ent strate%ies ane&t or surplus "ana%e"ent
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IMPACT OF FISCAL POLICY fees into econo"ic trens an in4uences
"onetar2 polic2
De!nes &u%et surplus an &u%et e!cit5 To "eet the aitional e.penitures3%o/ern"ent nees to1
&orro# fro" o"estic or forei%n sources3
ra# upon its forei%n e.chan%e reser/es
or print an e'ui/alent a"ount of "one26 7sei%nora%e89
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IMPACT OF FISCAL POLICY(contd.)
e.cessi/e printin% of "one2 leasto in4ation5
&orro#in% too "uch fro" a&roa
leas to a e&t crisis5o#nin% on forei%n e.chan%e
reser/es3 "a2 cause a &alance of
pa2"ents crisisE.cessi/e o"estic &orro#in% "a2
lea to hi%her real interest rates
an 7cro#in% out8 of pri/ate
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Prudent fscal ol!c" #orde$elo!n% countr!es
not pruent for a %o/ern"ent to run anunul2 lar%e e!cit5
e/elopin% countries, the nee forinfrastructure an social in/est"ents
ar%ue that runnin% surpluses at the costof lon%,ter" %ro#th "i%ht also not #ise
challen%e to "eet infrastructure an socialnees in a #a2 that the e!cit or theaccu"ulatin% e&t &uren is not too %reat5
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Ind!a&s fscal ol!c"arc'!tecture
Feeral for" of %o/ern"ent5
There is also a thir tier of %o/ern"ent
at the local le/elFinance Co""ission 6FC9 6e/er2 !/e
2ears9, assi%n"ent an "eiu",ter"%uiance on !scal "atters
:u%et, a state"ent of its proposeta.in% an spenin% pro/isions forle%islati/e e&ate an appro/al5
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!$!s!on O# Poers BeteenCentre And State
Central %o/ern"ent is responsi&le for issues that usuall2concern the countr2 as a #hole3 li$e national efence3 forei%npolic23 rail#a2s3 national hi%h#a2s3 shippin%3 air#a2s3 postan tele%raphs3 forei%n trae3 an &an$in%5
The state %o/ern"ents are responsi&le for other ite"sincluin%3 la# an orer3 a%riculture3 !sheries3 #ater suppl2an irri%ation3 an pu&lic health
The ta.in% po#ers of the central %o/ern"ent enco"passta.es on inco"e 6e.cept a%ricultural inco"e93 e.cise on%oos prouce 6other than alcohol93 custo"s uties3 an
inter,state sale of %oos5
The state %o/ern"ents are /este #ith the po#er to ta.a%ricultural inco"e3 lan an &uilin%s3 sale of %oos 6otherthan inter,state93 an e.cise on alcohol5
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Plann!n% rocess
Since ()*+ Inia has follo#e a s2ste" of!/e,2ear plans for ensurin% lon%,ter"econo"ic o&;ecti/es
The "ain !scal i"pact of the plannin%process is the i/ision of e.penitures intoplan an non,plan co"ponents5
aroun <+++3 a ne# !scal isciplinefra"e#or$ #as institute , Parlia"entpasse the Fiscal Responsi&ilit2 an :u%et=ana%e"ent Act 6FR:=A9
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F!scal Pol!c" B*FOR* LIB*RALI+ATION
e"phasis on stren%thenin% pu&lic sector enterprises5a"inistrati/e controls on /arious inustries
, a s2ste" of licensin% an 'uotasfor pri/ate inustries5
=ain role of !scal polic2 #as to transfer pri/atesa/in%s to cater to the %ro#in% consu"ption anin/est"ent nees of the pu&lic sector5
Other %oals inclue the reuction of inco"e an #ealth ine'ualities throu%h
ta.es an transfers3 encoura%in% &alance re%ional e/elop"ent3
fosterin% s"all,scale inustries
so"eti"es in4uencin% the trens in econo"ic acti/ities
to#ars esire %oals
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Ta, ol!c" focuse on e.tractin% re/enues fro" the pri/ate sector to
fun the pu&lic sector an achie/e reistri&uti/e %oals
In ()*> %o/ern"ent then in/ite the :ritish econo"istNicholas ?alor to e.a"ine the possi&ilit2 of refor"in% theta. s2ste"5
the s2ste" ine@cient an ine'uita&le %i/en the inae'uatereportin% of propert2 inco"e an ta.ation5
the "a.i"u" "ar%inal inco"e ta. rate at )< percent to &etoo hi%h an su%%este it &e reuce to *
In ()B>,B3 the "a.i"u" rate ta$in% in to account the
surchar%e #as )B5* percent for personal inco"e a&o/e Rs5+5< "illion5
The s2ste" #as also co"ple. #ith as "an2 as ele/en ta.&rac$ets
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Ta, ol!c" (contd..)
The Direct Ta.es En'uir2 Co""ittee of ()B(, hi%h ta. rates encoura%e ta. e/asion5
Follo#in% its reco""enations in ()B,B*the personal inco"e ta. rate #as &rou%hto#n to BB percent &ut the #ealth ta. rate#as increase5
In ()-*,- , the nu"&er of ta. &rac$ets #asreuce fro" ei%ht to four an the hi%hestinco"e ta. rate #as &rou%ht o#n to *+percent
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Ta, ol!c" (contd..)In inirect ta.es3 a "a;or co"ponent #as the
central e.cise ut2
&2 ()B*,B it #as e.tene to co/er all"anufacture %oos5
The e.cise ut2 structure at this ti"e #as alsoco"plicate 5
So"e co""oities ha speci!c uties #hileothers ha a /alore" rates5
The ta. also ha a "a;or 7cascain% eect8since it #as i"pose not ;ust on !nal consu"er%oos &ut also on inputs an capital %oos5
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Ta, ol!c" (contd..)
The Inirect Ta. En'uir2 Report of ()BBreco""ene to con/ert the cascain%"anufacturin% ta. into "anufacturin% /alue
ae ta. 6=ANAT9 The other "ain central inirect ta. is the
custo"s ut25
The taris #ere hi%h5 :2 ())+,)( the taristructure ha a ran%e of + to ++ percent#ith o/er (+ percent of i"ports su&;ecte totaris of (<+ percent or "ore5
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Co"position of central %o/ern"entre/enues 6()B+B(9
1970-71 Ê
16%
58%
26%
Direct Tax
Indirect Tax
Non-tax Revenue
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Result o# ol!c!es t!ll-/0&sInia8s e.peniture nor"s re"aine
conser/ati/e until the ()-+s5
Fro" ()B>B to ()B-B)3 the central%o/ern"ent continuousl2 ran re/enue
surpluses5 Its %ross !scal e!cit 6GFD9 alsosho#e a slo# %ro#th #ith certain episoesof o#n#ar "o/e"ents
Thereafter3 li"ite refor"s in speci!c areasincluin% trae li&eralisation3 e.portpro"otion an in/est"ent in "oerntechnolo%ies #ere acco"panie &2increase e.penitures !nance &2o"estic an forei%n &orro#in%
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the leaer #ho ushere in theliberalization in Indian econo"2 in1991
-10 ON2ARS..
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Increase in e.penitures
Inia8s e.peniture nor"s re"aineconser/ati/e until the ()-+s5
Fro" ()B>B to ()B-B)3 the central%o/ern"ent continuousl2 ran re/enue
surpluses5li"ite refor"s in speci!c areas incluin%
o trae li&eralisation3o e.port pro"otion
o in/est"ent in "oern technolo%ies #ere acco"panie &2 increase e.penitures5
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The central re/enue e!cit cli"&e fro"(5 percent of GDP in ()-+,-( to <5percent of GDP &2 ()-),)+5
%ross !scal e!cit 6GFD9 cli"&e fro" *5B(
percent to B5>( percent of GDP5
e.ternal lia&ilities of the centre fell fro"B5( in ()-<,-> to *5*> of GDP &2())+,)(
in a&solute ter"s the lia&ilities #ere lar%e5
total lia&ilities increase fro" *(5> to5B* of GDP5
Inia8s e.ternal e&t an e.peniture
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De!cits of the Central Go/ern"ent as percenta%e ofGDP 6()B+ to ())+9
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Co"position of central %o/ern"ent re/enues 6())+,)(9
1990-91 Ê
13%
65%
22%
Direct Tax
Indirect Tax
Non-tax Revenue
C t l t
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Central %o/ern"ent re/enuee.penitures 6()B+B(9
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Central %o/ern"ent re/enuee.penitures 6())+)(9
1990-91 Ê
15%
29%
17%
39%
Defence
Interet
!u"idie
#t$er Revenuex&enditure
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Li&eralisation3 %ro#th3 an !scal consoliation6())(<++-9Econo"ic li&eralisation3 econo"2 #as opene
up to forei%n in/est"ent an trae3 the pri/atesector #as encoura%e an the s2ste" of'uotas an licences #as is"antle5
Ta. Refor"s Co""ittee pro/ie a &lueprint forrefor"in% &oth irect an inirect ta.es5 =ainstrate%2 #as to reuce the proportion of traeta.es in total ta. re/enue3 increase the share of
o"estic consu"ption ta.es &2 con/ertin% thee.cise into a AT an enhance the contri&utionof irect ta.es to total re/enue5
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Ta. Refor"sPersonal inco"e ta. reuce to <+5>+ an + percent
in ())<,)> an to (+3 <+3 an >+ percent in ())B,)-
=a.i"u" rate of #ealth ta. #as reuce to ( percent5
custo" uties &rou%ht o#n to (*+ in ())(,)<3+in ())B,)-3 >+ in <++<,+>3 <* in <++>,+3 an(*in <++*,+5
introuction of the ser/ice ta. in ()),)* an &eca"ea "a;or source of re/enue5
Introuction of AT in <++* ensures reportin% of inputs
an outputs resultin% in su&stantial reuction in ta.e/asion5
shift fro" inirect ta.es to#ars irect ta.es5
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Co"position of central %o/ern"ent re/enues 6())+,)(9
1990-91 Ê
13%
65%
22%
Direct Tax
Indirect Tax
Non-tax Revenue
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government revenues(1995-96)
1995-96 Ê
20%
5'%
26%
Direct Tax
Indirect Tax
Non-tax Revenue
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Composition of centralgovernment revenues (2000-01)
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Fiscal situation i"pro/es an falls
Risin% re/enues fro" ta. a"inistration refor"san e.peniture control resulte in the e!cits&ein% &rou%ht uner control5
The e&t to GDP ratio #ent o#n to 5> per
cent of GDP in ())*) an reache a furtherlo# point of <5)) per cent in ()))++5
Ho#e/er3 %o/ern"ent e&t an !scal isciplinea%ain see"e to %i/e #a2 in the earl2,<+++s5
Cli $ i t i t
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*NT*RING T3* 4-ST C*NT5RY
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FR:=A1
(5 Enacte fro" < Au%ust <++>
<5 FR:= &ill #as introuce &2 for"er !nance "inister =r5 Yash#ant Sinha in Dec5 <+++
>5 Gra"", Ru"an,Hollin%s :alance :u%et Act 60SA9an Sta&ilit2 an Gro#th pact 6European 0nion9 are the
precursor
Reasons1
(5 Total lia&ilities e'ui/alent to ti"es its annual re/enue &2the en of <+++ at central le/el
<5 Interest pa2"ents alone #ere consu"in% one,thirs of theta. re/enue
>5 Hi%h re/enue e!cit an !scal e!cit5
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FRBMA (contd..)
O&;ecti/es 1(5 Transparent !scal "ana%e"ent s2ste"s
<5 =ore e'uita&le an "ana%ea&le istri&ution of thecountr2s e&ts o/er the 2ears
>5 Fiscal sta&ilit2 for Inia in the lon% run
5 =ana%e the In4ation
Content of the Act1
(5 =eiu",ter" Fiscal Polic2 State"ent
<5 Fiscal Polic2 Strate%2 State"ent>5 =acro,econo"ic Fra"e#or$ State"ent
5 Annual Financial State"ent An De"ans For Grants
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FRBMA (contd..)
Tar%ets1(5 Re/enue e!cit
Date of eli"ination >( =arch <++) 6postpone fro" >(=arch <++-9
=ini"u" Annual reuction +5* of GDP
<5 Fiscal De!cit
Ceilin% > of the GDP &2 >( =ar <++-
=ini"u" Annual reuction +5> of GDP
>5 Total De&t ) of the GDP 6a tar%et increase fro" the
ori%inal re'uire"ent in <+++*9 Annual Reuction ( of GDP
5 R:I purchase of Go/ern"ent &ons to cease fro" ( April<++
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FRBMA (contd..)
Criticis"1
,Reuce social e.peniture necessar2 to create productiveassets an %eneral uplift"ent of rural poor of Inia
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De!cits Of The Central Go/ern"ent As Of GDP 6())+)( To <++)(+91
0
1
2
3
'
5
6
7
8
9
(ro )ica*
Deficit
Revenue Deficit
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De!cits Of The State Go/ern"ents As Of GDP 6())+)( To <++)(+91
-2
-1
0
1
2
3
'
5
(ro )ica* Deficit
Revenue Deficit
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ACHIEE=ENTS1
(5 In <++B+-3 the central %o/ern"ent8s re/enue e!citca"e o#n to (5+ of GDP #hile the GFD #as >5>> fro" an *5* respecti/el2 in <++>,<++5
<5 The state %o/ern"ents achie/e a re/enue surplus of+5*- of GDP an a GFD of (5-( of GDP &2 <+++B
fro" <5 re/enue e!cit an 5< !scal e!citrespecti/el2 in <++>,<++ 5
>5 This fe into other econo"ic /aria&les in a positi/e"anner5
5 The a%%re%ate is&urse"ents of the central an state
%o/ern"ents sho#e an increase in capital outla2s fro"((5-B in <++<+> to (-5*) in <++B,+-5
*5 In4ation #as "oerate an %ro#th #as &uo2ant at )5 in <+++B5
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Glo&al Financial Crisis1,RED
SEPTE=:ER
(5 The %lo&al !nancial crisis of <++- is the #orst of its $insince the Great Depression
<5 :e%an #ith failures of lar%e !nancial institutions in the0nite States =or%an Stanle23 Gol"an Sachs3 =errillL2nch3 Deutsche :an$ 3:arcla2s5
>5 Rapil2 e/ol/e into a %lo&al crisis resultin% in anu"&er of European &an$ failures
I t f GFC i
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I"pact of GFC inINDIA1
(5 STOC? =AR?ET DOJN<5 EFFECT ON EKCHANGE RATES INDIAN C0RRENCY AL0E
(M)5-)
>5 INFLATION RATE (<5
5 NEGATIE I=PACT ON EKPORTS
*5 GDP TOJARDS DOJN
5 CONTAGION RIS?S TO THE FINANCIAL SECTOR
Go t Jor$ To
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Go/t5 Jor$ ToReco/er1
O/erall central e.cise ut2 reuce &2 per cent Interest su&siies for e.port !nance
Further < per cent reuction of central e.cise anser/ice ta. for e.port inustries
Rural far" loan #ai/er sche"e
E.pansion of National Rural E"plo2"ent Guarantee Act6NREGA9
Parlia"entar2 elections of <++- also resulte in further%o/ern"ent e.penitures
Re/ise salaries for central pu&lic ser/ants as per thereco""enations of the Si.th Pa2 Co""ission5
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Reco$er"
(5 Fiscal e!cit for <+(+(( ecline to a &etter thantar%ete *5( per cent of GDP5
<5 :u%et of <+(+(( aopte a polic2 tar%etin% a !scale!cit of *5* per cent of GDP in <+(+(( fro" a le/el of5* per cent 6inclusi/e of &ons in lieu of securities9 in
<++)(+5>5 In <+(+(( the non,ta. re/enues fro" the auction of
teleco" spectru" 6>G an &roa&an9 resulte in hi%herthan anticipate receipts5 5
Pl i h
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Plannin% ahea
Polic2"a$ers ha/e co"e to accept strict
&u%etar2 constraints3 #hile atte"ptin% to"a.i"ise resources for e/elop"entalacti/ities5
Plannin% Co""ission in approach paper for the
(<th Fi/e Year Plan 6<+(<(B95
En/isa%es an a/era%e !scal e!cit of >5<* percent of GDP for the entire plan perio
Fiscal e!cit pro;ecte to co"e o#n fro" 5(per cent in <+(<(> to >5* per cent in <+(>(5
It is then e.pecte to re"ain at > per cent ofGDP for the ne.t three !nancial 2ears5
Pl i h
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Plannin% aheaGross &u%etar2 support for plan is pro;ecte to
increase fro" 5)< per cent of GDP in <+(((<to *5B* per cent &2 en of (<th Fi/e Year Plan5
Re/enue tar%ets are pro;ecte at conser/ati/ele/els5
Net ta. re/enue for the centre is e.pecte toincrease fro" B5 per cent of GDP in <+(((< to-5)( per cent in <+((B5
Gross ta. to GDP ratio is pro;ecte to &e (+5>
per cent of GDP in <+(((< risin% to (<5> percent &2 <+((B5
Pre/iousl2 pea$e at ((5) per cent in <++B+-5
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Future A'ead
The post,crisis reco/er2 of the Inianecono"2 is #itnessin% a correction of the!scal polic2 path to#ars a re%i"e ofpruence5
Rel2in% on ta. refor"s3 in particular theGST to eli/er re/enue &oost5
In the future3 the focus #oul pro&a&l2 &eon &rin%in% in ne# ta. refor"s an &ettertar%etin% of social e.penitures