Fiscal Reforms in India Since 1991-Group 5-Sec b | Government Budget Balance | Fiscal Policy

Fiscal Reforms in India since 1991

BY: Group 5, Section B Astha Singh Diptiman Guha Himanshu Arora Jyotirmoy Barman Nirmal Modh Prateek Chaturvedi 2010057 2010067 2010078 2010088 2010099 2010295

Why reforms were needed?
‡ Large fiscal deficits and automatic monetization of deficits leading to high inflation and high interest rates and crowding out private investment. ‡ High and irrational tax rates, high tariff walls led to industrial inefficiency ‡ Complicated tax structure, legal laws, rules and procedures ‡ Change in the role of the government from operator to regulator, supplier of goods and services to facilitator ‡ Liberalization of trade, industry, investment ‡ Globalization and Regionalization of economic activities.

Characteristics of Reforms
‡ Gradual and Step by Step Approach ‡ Democratic and political constraint ‡ Least sacrifice made by people ‡ No write-off or rescheduling of external debt ‡ Agency constraint and No backtracking ‡ Nationality constraint ‡ Ownership of reforms

Revenue pattern of Central Government after reforms
1990-95 Gross tax revenue Direct taxes Corporate Income Indirect taxes Customs Excise Service tax 10.3 2.4 1.2 1.1 7.5 3.3 4.3 1995-00 9.0 2.9 1.4 1.2 6.1 2.7 3.2 0.1 2000-04 8.8 3.4 1.9 1.5 5.4 1.9 3.3 0.2 2004-07 10.4 4.7 3.0 1.6 5.8 1.9 3.0 0.7 2007-08 12.5 6.5 4.0 2.5 6.0 2.1 2.7 1.1

Tax Reforms
‡Direct Taxes: ‡included rationalization of tax rates, minimization of exemptions and concessions, revamping of tax administration and computerization
1992-93 Personal income tax rates slabs of 20, 30 and 40 per cent In 1997-98 10, 20 and 30 per cent

1993-94 corporate income tax 40 per cent

In 1997-98 35 per cent

2005-06 30 per cent

Tax Reforms
‡ Direct Taxes
± a new dividend distribution tax was introduced and levied on firms. ± a minimum alternative tax (MAT) was introduced in 1997-98. ± other direct taxes have been introduced such as the levy of fringe benefit tax on companies

Tax Reforms
‡ Indirect Taxes
± In 1999-2000, almost 11 tax rates were merged into three ± These were further merged into a single rate in 2000-01 to be called a Central VAT (CenVAT).
1991-92 Custom duties 150% 1995-96 50% 1997-98 40% 2002-03 30% 2003-04 25% 2005-06 15

± Quantitative restrictions on imports have virtually been done away with. ± the service tax was introduced in 1994-95, aim to eventually unify the tax rates on goods and services in the form of a full scale Value Added Tax (VAT).

Expenditure Pattern and Policy
1990-95 Total expenditure (plan + nonplan) Revenue expenditure Capital expenditure 1995-2000 2000-04 2004-07 2007-08

17.9 13.3 4.6

16.1 12.8 3.4

16.3 13.4 3.0

14.7 12.3 2.4

15.1 12.5 2.6

Total expenditure declined the share of capital expenditure in total expenditure declined sharply from 25.7 per cent in 1990-98 to 17.0 per cent in 2004-07, though this happened partly because of the cessation of loans from the central government to states, which were classified as capital expenditures.

Non discretionary expenditure
1990-95 Interest payment Grants to state and UTs Loans and advances to states and Uts** Defence Food subsidy Other subsidy Police Pensions 4.4 1995-2000 4.6 2000-04 4.7 2004-07 3.8 2007-08 3.7

0.5

0.4

0.6

0.7

0.8

1.0 2.6 0.5 1.3 0.3 0.4

0.9 2.4 0.5 0.7 0.3 0.5

0.8 2.3 0.8 0.1 0.3 0.6

0.6 2.2 0.7 0.1 0.3 0.6

Stopped since 2005-06
2.0 0.7 0.1 0.3 0.5

Broad View on the Outcome of Fiscal Reforms
‡ Deficit indicators
‡ While there was some reduction in fiscal deficit in the first half of the 1990s, progress was reversed in the late 1990s mainly due to the impact of implementation of the Fifth Pay Commission¶s awards. ‡ fiscal consolidation underway has been some qualitative progress, as reflected in the reduction in the proportion of revenue deficit to gross fiscal deficit.

Centre

States*

Table 6: Deficit Indicators of Centre, States and Combined finances (Per cent of GDP) 1990-95 1995-00 2000-04 2004-07 Item 2007-08 RE (Avg.) (Avg.) (Avg.) (Avg.) 1 4 5 6 7 8 RD 3 3.1 4.1 2.3 1.4 GFD 6.3 5.5 5.5 3.9 3.1 PD 2.2 1.1 0.9 0.1 -0.6 MD 0.8 0.6 -1 -0.4 RD 0.7 1.6 2.4 0.5 -0.3 GFD 2.8 3.4 4.3 2.9 2.3 PD 1.1 1.4 1.5 0.4 0.1 RD 2.9 2.5 6.5 2.9 1.3 GFD PD 7.8 3.7 7.7 4.7 9.4 3.1 6.8 1.1 5.5 0.1

Combined

*: State Governments' data for the year 2006-07 and 2007-08 relate to revised estimates and budget estimates, respectively.

RD: Revenue Deficit GFD: Gross Fiscal Deficit PD: Primary Deficit MD: Monetised Deficit Avg.: Average RE: Revised Estimate Source: Handbook of Statistics on Indian Economy, 2006-7, RBI.

Broad View on the Outcome of Fiscal Reforms..contd
‡ Outstanding Liabilities
‡ The high level of fiscal deficits both at the Centre and the States led to debt accumulation over the period resulting in a rise in the debt to GDP ratio. ‡ Contingent liabilities witnessed some decline in the recent years ‡ under the FRBM Act, the annual increase in the stock of contingent liabilities of the Central Government is limited to a ceiling of 0.5 per cent of GDP.

Item

Table 7: Outstanding Liabilities of Centre and States (Per cent of GDP) 1990-95 1995-00 2000-04 2004-06 2006-07 2007-08 (Avg.) (Avg.) (Avg.) (Avg.) RE BE 1 2 3 4 5 6 7 61.2 58.5

Central 54.2 50.8 60.5 63.2 Government State Government 22.1 22.5 30.9 32.6 s Combined 64.1 63.2 77.2 80.9 Avg.: Average RE: Revised Estimate BE: Budget Estimate Source: 1. Handbook of Statistics on Indian Economy, 2006-07, RBI. 2. State Finances - A Study of Budgets of 2007-08, RBI.

30.6 77.1

29.3 73.8

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003
‡ Targeting long term development by achieving sufficient revenue surplus and removing fiscal impediments ‡ ³The central government should take appropriate measures to reduce the fiscal deficit and revenue deficit so as to eliminate revenue deficit by 31st of March, 2008 and thereafter build up adequate revenue surplus´ ‡ The revenue deficit as a ratio of GDP should be brought down by 0.5 per cent every year and eliminated by 2007-08; ‡ The fiscal deficit as a ratio of GDP should be reduced by 0.3 per cent every year and brought down to 3 per cent by 2007-08; ‡ The Union Government shall not give guarantee to loans raised by PSUs and State governments for more than 0.5 per cent of GDP in the aggregate; ‡ The Union Government should place three documents along with the budget, namely, the Macroeconomic Framework Statement, the Medium Term Fiscal Policy Statement and the Fiscal Policy Strategy Statement

Recent Trends in Fiscal Development (Since FRBM act)

Broad View on the Outcome of Fiscal Reforms
‡ Deficit and Growth
± A high level of fiscal deficit tends to have a negative impact on real GDP growth through µcrowding out¶ effects and/or rise in interest rates in the economy. ± Low fiscal deficits also enable more effective monetary policy.

Deficit and growth

Broad View on the Outcome of Fiscal Reforms
‡ Tax-GDP Ratio
± Decline in the gross tax-GDP ratio of the Central Govt from 10.3 per cent in 1991-92 to 9.4 per cent in 199697 and further to a low of 8.2 per cent in 2001-02, attributed to the initial effects of the reduction in tax rates. ± The distorting impact of high and varied indirect taxes on overall resource allocation has been reduced considerably, enabling increased economy wide economic efficiency ± Improved corporate results during years have led to significant rise in collection of corporate income tax.

Broad View on the Outcome of Fiscal Reforms
‡ Fiscal Deficit and Public Sector Savings
± The reduction in fiscal deficits has helped in turning around savings and investments in recent years. ± Implementation of rule-based fiscal reforms has helped in enabling the turnaround in the public sector savings, in turn, gross domestic savings along with the substantial increase in private corporate sector savings

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