BBA-MBA Integrated Programme

Semester – V

Indian Economy
Group Assignment I
Analysis of “India is a Growing Economy”
On the basis Key Deficit Indicators of Central Government

Submitted to
Prof. Dhyani Mehta

On
06/09/2018

Submitted by
Roll No. Name
167246 Ruchi Joshi
167247 Ruchika Rohitwal
167248 Sahjik Trambadia
167249 Saloni Lodha
167250 Sauransh Gupta
 Acknowledgement
We would like to offer our deepest gratitude to all those people who not only gave us this
wonderful opportunity but also helped and assisted us in completing this report. The completion
of the Indian Economy Group Assignment gives us much delight and satisfaction. We would
firstly like to extend our gratefulness to Prof. Dhyani Mehta (Faculty – Indian Economy subject)
for his constant assistance at all the levels of the assignment and his generosity in clarifying all
our doubts and concepts, which not only helped us in conceptual clarity of the respective topic
but also proved to be a great aid in completing our report. Moreover, his guidelines also served
as an unending support and provided a robust foundation to the completion of our report.

Further it becomes imperative to mention the crucial role of the other staff members as well of
the institute who not only attended us out of their valuable time but also provided us with all the
relevant information related to the topic. We would also like to thank the staff members of the
Institute of Management, Nirma University library which turned out to be a database and
storehouse of information.

We would also like to offer our deepest regards to all those people who have directly or
indirectly guided us in this project report and also gave us a zeal and deep inspiration in
continuously improving our assignment.
 Table of Contents

Serial No. Contents Page no.

1. Key Deficit Indicators of the Central 1

Government

2. Era of Pre-Liberalization, 1980-81 to 1990- 2

91
Era of Post Liberalization, 1990-91 till
3. 3
FRBM Act, 2002-03
Era of Post Fiscal Responsibility and Budget
4. 7
Management (FRBM) Act, 2003 till 2015-16

5. Is India a Growing Economy? 10

6. Conclusion 15

7. List of References 16

8. Undertaking 17

9. Annexures 18

Source: Handbook of Statistics on Indian Economy 2016-17 by RBI

 Key Deficit Indicators of the Central Government
A deficit can be defined as a value by which the total amount falls short of a reference amount.
In terms of economics, a deficit is an excess expenditure made by a body apart from the revenue
in a reference period.
There are many types of deficit in budgeting depending on the types of expenditure and receipts
we consider. The three main concepts of the deficit are as follows:

 Revenue Deficit
Revenue deficit is the excess of total revenue expenditure of the government over its total
revenue receipts. It is related to only revenue expenditure and revenue receipts of the
government. Alternatively, the shortfall of total revenue receipts compared to total revenue
expenditure is defined as revenue deficit.
It is an indicator of the fact that the government or the organization in consideration is not raising
enough money to meet its basic needs and the provisions of schemes and services extended by it.
Revenue deficit results in borrowing. For example, when government spends more than what it
collects by way of revenue, it incurs revenue deficit. Mind, revenue deficit includes only such
transactions which affect current income and expenditure of the government.

 Fiscal Deficit
The fiscal deficit is the excess of total budget expenditure over total budget receipts
excluding borrowings during a fiscal year. It is the amount of borrowing the government has
to resort to meet its expenses.
By expanding the term Total Expenditure as Revenue Expenditure and Capital Expenditure and
Total Receipts as Revenue and Capital Receipts, we can rewrite the above formula as:

Fiscal Deficit = (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Capital

Receipts other than borrowings) Now by rearranging the terms: Fiscal Deficit = (Revenue
Expenditure - Revenue Receipts) + Capital Expenditure - (Recoveries of loans + other Receipts)

It occurs when a large amount of borrowing is to be made by the government, in order to fulfill
its requirements. This is done when the available resources are scarce.

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  Primary Deficit
Primary deficit is defined as the fiscal deficit of current year minus interest payments on
previous borrowings.
The difference between fiscal deficit and primary deficit is that fiscal deficit indicates the
borrowing requirements include the interest amount whereas primary deficit excludes interest
payment amount. We have seen that borrowing requirement of the government includes not only
accumulated debt, but also interest payment on the debt. If we deduct ‘interest payment on debt’
from borrowing, the balance is called primary deficit.
Era of Pre-Liberalization, 1980-81 to 1990-91

While India is considered a mixed economy, until 1990-91 the balance of the economic structure
was titled more towards socialism. The vision of the policy makers had that post-independence
the country needed significant expenditure into key long term industries and projects which the
private sector may not undertake as these initiatives had long gestation period. Also in order to
be in control of economy the government policies restricted the private sector in engaging into
certain strategic sectors such as banking, civil aviation, mining etc. As a result of a protectionist
approach most of the capital expenditure was being funded by the government sector and it’s
funding for these put a lot of burden on the government to continue incurring capital expenditure
and thereby running high level of fiscal deficit.

From the period 1980-81 to 1990-91, the fiscal deficit of the Central Government rose sharply
from 5.55% of GDP in 1980-81 to 8.13% in 1986-87 and stood at 7.61% of GDP in 1990-91.
This period witnessed rapid deterioration of the fiscal balances largely attributable to unchecked
growth of non-planned revenue expenditure particularly on interest payments and subsidies rose
sharply during 1980s. With respect to the revenue deficit, as the higher interest payments led
revenue deficit as percentage of GDP to increase from 1.36% in 1980-81 to 2.48% in 1987-88 to
and to 3.17% in 1990-91.

During the period 1980-81 to 1990-91, the contribution of interest payments and subsidies as
percentage of the revenue expenditure rose from 18% and 14% in 1980-81 to 29% and 17% in
1990-91 respectively. For the same period, the contribution of defense and other revenue

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expenditure has declined from 23% and 45% in 1980-81 to 15% and 39% in 1990-91
respectively.

Figure 1: GFD and GPD During the Era of Pre-Liberalisation

500.00
450.00
400.00
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
1978-79 1979-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91

Year

Gross primary deficit Linear ( Gross primary deficit)

Gross fiscal deficit Linear ( Gross fiscal deficit)

Data Source: Handbook of Statistics on Indian Economy 2016-17 by RBI

Fiscal deficit is also related to the revenue deficit through capital expenditure and capital
receipts. With government holding and taking the onus of building the capital intensive projects,
the gap between the fiscal and revenue deficit stood at 4.19 percentage points in 1980-81 and
rose to 4.44 percentage points in 1990-91.

Since the major rise in the deficits during the decade beginning 1981 was on account of debt
servicing, the primary deficit did not go up significantly. As a percentage of the GDP, primary
deficit changed from 3.81% in 1980-81 to 3.95% by 1990-91. In that period it spiked up to
5.28% in 1986-87

Era of Post Liberalization, 1990-91 till FRBM Act, 2002-03

By 1990-91 the Indian economy was quite weak; it was burdened with heavy debt rising interest
costs and deficits. India traditionally had a current account deficit with significant portion of the
imports being that of oil and petroleum products. The weak economic situation further worsened

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with the Gulf-war which led to rise in oil prices coupled with drying up of credit lines and
investors pulling out money. The country’s foreign exchange reserves had depleted significantly
and the level of reserves was only sufficient to finance imports of another three weeks. India had
to arrange for emergency funds from the IMF to avoid default on external obligations. In
response to the crisis the government headed by Prime Minister Narasimha Rao commenced on
the path of economic liberalization whereby the economy was opened up to foreign investment
and trade, the private sector was encouraged and the system of quotas and licenses were
dismantled. Fiscal policy was reoriented to cohere with these changes. In order to augment the
receipts the government undertook to reform both the direct and indirect taxes and for the first
time the country embarked on the policy of disinvestment. The measures proposed above to meet
the crisis are often referred to as the New Economic Policy of 1991. These measures could
broadly be classified under three heads viz. liberalization, privatization and globalization. Under
liberalization many industries were freed from the licensing requirement, the investment limit in
small scale industries was enhanced, free determination of interest rates by commercial banks
and abolition of restrictive trade practices. With privatization, the government invited the private
sector to own and manage part of Public Sector Enterprises. Among the measures for
globalization included reducing tariffs, partial convertibility of the currency and increasing limits
of foreign investment in India.

In addition to the above, the government also brought reform in the tax structure and reduced the
noncapital expenditure like subsidies. The reforms were calibrated to bring about revenue
neutrality in the short term and to enhance revenue productivity of the tax system in the medium
and long term. The overall thrust was to decrease the share of trade taxes in total tax revenue,
increase the share of domestic consumption taxes by transforming the domestic excises into a
VAT, and increase the relative contribution of direct taxes. The share of direct taxes as part of
total revenue receipts rose from 15% in 1991-92 to 20% in 1996-97 and to 26% in 2000-01,
correspondingly the share of indirect taxes fell from 61% in 1991-92 to 54% in 1996-97 and to
45% in 2000-01.

Correspondingly significant efforts were also made to reduce subsidies and cut down the non-
capital expenditure. However, given the large debt burden meant that the interest component
would not reduce significantly or at a rapid pace as desired. The proportion of interest to total

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revenue expenditure raised form 32% in 1991-92 to 37% in 1996-97 and stood at 36% in 2000-
01, over the same period share of subsidies fell from 15% in 1991-92 to 10% in 1996-97 and was
maintained at 10% in 2000-01.

Figure 2: GFD and GPD Post Liberalisation

1600.00

1400.00

1200.00

1000.00

800.00

600.00

400.00

200.00

0.00
1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

Year

Gross primary deficit Linear ( Gross primary deficit)

Gross fiscal deficit Linear ( Gross fiscal deficit)

Data Source: Handbook of Statistics on Indian Economy 2016-17 by RBI

The economic policy had fairly significant positive impacts on the revenue and primary deficits
as well. The new economic policy brought with itself a fresh approach; the government not only
liberalized the licensing it also began with the disinvestment of the public enterprises and its
holding. This had a twin effects; firstly, it lead to lowering the capital expenditure and secondly,
it increased the capital receipts. Thus post 1991 there was steady decline in the primary deficit as
percentage of GDP; it fell 3.95% in 1990-91 to 0.51% in 1996-97. However the interest burden
continued to mount and thus the difference between the fiscal and primary deficits rose from
3.66 percentage points in 1990-91 to 4.19 percentage points in 1996-97

The revenue deficit also experienced a positive impact courtesy the revised tax structure and
controlled subsidy expenditure. As percentage of GDP the revenue deficit fell from 3.17% in

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1990-91 to 2.3% in 1996-97. Falling capital requirements and rising capital flows caused the gap
between fiscal and revenue deficits to narrow down, it reduced from 4.44 percentage points in
1990-91 to 2.4 percentage points in 1996-97. As seen, from the high 7% in the latter end of
1980s the fiscal deficit measure reduced to 5.4% in 1991- 92 and the downward trend continued
up to 1996-97 when the fiscal deficit stood at 4.7% of GDP. Since 1997- 98, fiscal deficit had
again started increasing. It stood at 5.5% in 2000-01. The period from 1996-97 to 2002-03 was
characterized by large rise in public debt involving large interest payments year on year which
led to the diversion of resources from investment to debt servicing. Reviewing the Indian growth
scenario World Bank Study, 2004 concludes “Interest payments consumed less than 20% of total
revenues in the pre-crisis period, compared with over 30% during the Ninth Plan period (1997-
2002). Revenue deficits doubled from less than 3% in the second half of the 1980s to 6% during
the Ninth Plan period and beyond representing deterioration in the fiscal stance with spending on
social and physical infrastructure crowded out by rising interest and other current payments.”
Fall out of the Asian crisis of 1996-97 which gridlocked cheaper money from external sources,
the high and rising fiscal deficits during the period from 1996-97 to 2002-03 which resulted in
larger government borrowings from the market. The government incessantly tapped the markets
for borrowings and this left very little funds available for the private sector investment. This is
often referred to as the crowing-out effect and was one of the major reasons for slowdown in
economic growth. Now the economy was literally strapped for fresh investment, on one hand the
government vide its economic policy had taken the stance of reducing the role of public sector
and encourage private sector and on the other hand the private sector was not able to access the
resource pool as the government was utilizing most of resources for funding the revenue deficits.
Moreover, given the high deficits the government could not afford to undertake investments on
its own. The focus at that time was to reduce the fiscal deficit and not increase it. As the interest
burden raised the primary deficit as percentage of GDP fell from 1.48% in 1997-98 to 1.08% in
2002-03. The revenue deficit over the same period rose from 2.95% in 1997-98 to 4.25% in
2002-03. To summarize the fiscal deficit situation from 1980 to 2002; Indian economy faced
with the problem of large fiscal deficit and its monetization spilled over to external sector in the
late 1980s and early 1990s. The large borrowings of the government led to such a precarious
situation that government was unable to pay even for three weeks of imports resulting in
economic crisis of 1991. Consequently, Economic reforms were introduced in 1991 and fiscal

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consolidation emerged as one of the key areas of reforms. After a good starting the early nineties,
the fiscal consolidation faltered after 1997-98. The fiscal deficit started rising after 1997-98. The
Government introduced Fiscal Responsibility and Budget Management (FRBM) Act, 2003 to
check the deteriorating fiscal situations.

Post Fiscal Responsibility and Budget Management (FRBM) Act, 2003 till
2015-16

Fiscal Responsibility and Budget Management (FRBM) bill was introduced in Parliament in
December 2000 in order to restore fiscal discipline. The bill was referred to the Parliamentary
Standing Committee on Finance, which suggested some changes in the original draft. On the
recommendation of the Standing Committee, necessary amendments were made in the FRBM
Bill April 2003 and after being passed by both the Houses of Parliament, it received the assent of
the President on August 26, 2003. The Fiscal Responsibility and Budget Management (FRBM)
Act, 2003, was brought into force on July 5, 2004. FRBM Act gave a medium term target for
balancing current revenues and expenditures and set overall limits to the fiscal deficit at 3% of
GDP to be achieved according to a phased deficit reduction roadmap. The FRBM Act enhanced
budgetary transparency by requiring the government to place before the Parliament on an annual
basis reports related to its economic assessments, taxation and expenditure strategy and three-
year rolling targets for the revenue and fiscal balance. It also required quarterly progress reviews
to be placed in Parliament. The Act aimed at reducing the gross fiscal deficit by 0.5% of GDP in
each financial year beginning on April 1, 2000. As a result of the efforts taken, fiscal deficit as a
proportion of GDP started declining.

During 2003-04, fiscal deficit was 4.34%, which declined to 3.32% and 2.54% in 2006-07 and
2007-08 respectively. Consequently the revenue deficit also declined 3.46% in 2003- 04 to
1.05% in 2007-08. The primary deficit remained negative over the same period. The sub-prime
crisis that emanated from the United States (US) led to liquidity and solvency problems all
around the world. While India, like other developing countries, did not have direct exposure to
the crisis, the effects have been felt through credit, exports, and exchange rate channels. India’s
engagement with the global economy has deepened since the 1990s, making it vulnerable to
global financial and economic crisis.

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The fiscal consolidation objectives of bringing down the share of interest expense in the revenue
expenditure did achieve the desired results, with interest outlay as share of revenue expenditure
reducing from 34% in 2003-04 to 29% in 2007-08 and further to 22% in 2010-11. The
substantial decrease in 2010-11 is also attributable to the rise in other revenue expenditure during
the subprime crisis. Between 2007 and 2009 the Central government had already scheduled to
launch a few expansionary schemes which would lead to increase in demand viz. rural farm loan
waiver scheme, the expansion of social security schemes under the National Rural Employment
Guarantee Act (NREGA) and the implementation of revised salaries and compensations for the
central public servants as per the recommendations of the Sixth Pay Commission and somewhat
the General elections in 2008 also had a positive impact on boosting demand. In addition to the
above as the crisis unfolded, “the government activated a series of stimulus packages central
excise duty cut of 4 percent, ramping up additional plan expenditure of about Rs. 200 billion,
further state government borrowings for planned expenditure amounting to around Rs. 300
billion, interest subsidies for export finance to support certain export oriented industries, a
further 2% reduction of central excise duties and service tax for export industries (that is a total
6% central excise reduction)”

Figure 3: GFD and GPD Post Fiscal Responsibility and Budget

Management (FRBM) Act, 2003
6000.00

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0.00
2003- 2004- 2005- 2006- 2007- 2008- 2009- 2010- 2011- 2012- 2013- 2014- 2015- 2016- 2017-
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
-1000.00

Year

Gross primary deficit Linear ( Gross primary deficit)

Gross fiscal deficit Linear ( Gross fiscal deficit)

Data Source: Handbook of Statistics on Indian Economy 2016-17 by RBI

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The series of tax reforms undertaken by the government towards increasing the share of direct
taxes have yielded results, the share of direct taxes in the total revenue expenditure has increased
from 29% in 2003- 04 to 43% in 2007-08 owing to the unanticipated non-tax revenue from
spectrum auction. The macroeconomic environment has been under stress since 2008-09 when
the global economic and financial crisis unfolded, necessitating rapid calibration of policies.
Fiscal expansion that followed in 2008-09 and 2009-10 did yield macroeconomic dividends in
the form of a sharp recovery in 2009-10. In course of 2010- 11 the non-tax revenues from
auction of telecom spectrum (3G and broadband) resulted in higher than anticipated receipts. The
continuance of the expansion well into 2010-11 had macroeconomic implications of higher
inflation, which necessitated a tightening of monetary policy and gradually led to a slowdown in
investments and GDP growth that resulted in a feedback loop to public finances through lower
revenues. The fiscal deficit of 4.91 percent in 2012-13 was achieved by counter balancing the
decline in tax revenue, mainly on account of economic slowdown, with higher expenditure
rationalization and compression. Outlining the roadmap for fiscal consolidation, Finance
Minister, Arun Jaitley said, “For the year 2015-16, the government would meet the fiscal deficit
of 3.9 percent of gross domestic product, and reduce it further to 3.5 percent in the next year
(2016-17)” (Budget, Indian Express, 2016).

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 Is India a Growing Economy?
The relationship between fiscal deficit and economic growth is much controversial issue in the
Indian context. Indian Economy has continuously faced fiscal deficit since past few decades. Its
current fiscal deficit is among the highest in world and more than 90 percent of the budgets
presented in the parliament were fiscal deficit budgets. Moreover, every year the government
exceeds its own estimates of fiscal deficit. Therefore, given India’s long history of running huge
fiscal deficits, the sharp increase in fiscal deficit over the last few years is a major concern for
both academicians and policy makers in India. In India where in the last some years since 1996,
a good deal of industrial capacity has been lying idle due to lack of aggregate demand, and there
has been enough stocks of food grains, it was asserted that fiscal deficit would stimulate demand
and thereby ensure rapid economic growth. In the prevailing economic situation especially from
1996 to 2004 the Indian economy was a demand-constrained economy and therefore the increase
in aggregate demand through larger fiscal deficit did not generate inflationary pressures in the
economy. If the increase in public expenditure made possible by large fiscal deficit is used for
productive investment, especially for investment in infrastructure and rural development, it will
boost production and help increase employment opportunities in the economy.

In fact, increase in public investment in infrastructure such as irrigation, roads, highways, is

doubly beneficial from the viewpoint of accelerating economic growth. It helps in increasing
aggregate demand on the one hand and helps to reduce supply constraints on economic growth
on the other. So the focus should not be so much on reducing fiscal deficit but on reducing
revenue deficit.

From the beginning of the nineties since economic reforms have been initiated, there has been
large revenue deficits so that a large part of borrowings by the government has been used to
bridge the revenue deficit. As a result, capital expenditure on investment in infrastructure and
rural development as a percent of GDP declined which has adversely affected economic growth.
However, from the above it should not be understood that any amount of fiscal deficit or
government borrowing is good for economic growth and employment generation. Higher fiscal
deficit, that is, borrowing by the government involves payment of interest and raises the burden
of public debt.

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The large increase in public debt involving large interest payments year after year will not only
make the process unsustainable but adversely affect economic growth through reducing
investible resources for spending on infrastructure and social sectors. Reviewing the Indian
growth scenario World Bank Study made in 2004 concludes, “Interest payments consumed less
than 20% of total revenues in the pre-crisis period, compared with over 30% during the Ninth
Plan period (1997-2002). Revenue deficits doubled from less than 3% in the second half of the
1980s to 6% during the Ninth Plan period and beyond representing deterioration in the fiscal
stance with spending on social and physical infrastructure crowded out by rising interest and
other current payments”.

After the mid-nineties, fiscal deficit and revenue deficit increased which caused the decline in
gross domestic saving and investment and thereby contributed to slowdown in economic growth.
The high and rising fiscal deficits during the period from 1997 to 2003 which resulted in larger
government borrowings from the market preempted the needed resources for investment by the
private sector. This had an adverse effect on private investment and was mainly responsible for
slowdown in economic growth.

As a consequence public saving turned positive (1% of GDP) and rate of economic growth rose
to 7.8 per cent per annum during this period. Thus in our view both supply-side and demand-side
factors play a role in determining economic growth. The growth experience of a country cannot
be explained by one type of factors alone.

The fall in growth rate during the period from 1997 to 2002 was largely due to demand
recession in the economy caused by:

(1) Reduction in the capital expenditure by Government as a matter of new economic policy
initiated since 1991,

(2) Sluggish performance in agriculture during the period, and

(3) World-wide recession during the period.

Thus demand recession caused a slowdown in the Ninth Plan period (1999-2002). As a result,
gross saving and investment rate and GDP growth slowed down. Capital expenditure of

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government increased substantially in 2003-04 and 2005-06 and with multiplier effects led to the
increase in aggregate demand.

This increase in demand also caused increase in private investment and the two together ensured
a higher rate of economic growth. In the two years (2005-07) even when Government’s capital
expenditure as per cent of GDP fell, under pressure of rise in aggregate demand it was made up
by increase in private investment in the two years 2005-06 and 2006-07 which kept the
momentum of higher economic growth.

Thus both supply-side and demand-side factors play a role in determining economic growth. The
growth experience of a country cannot be explained by supply-side factors alone. In fact, in 2008
and 2009 as a result of global financial crisis there was economic slowdown in India which
caused huge job losses. To prevent the situation from worsening further the Government came
out with three fiscal stimulus packages to keep the growth momentum.

In these stimulus packages Government raised its expenditure, especially on infrastructure on the
one hand and cut taxes on the other to stimulate aggregate demand. To increase its expenditure
Government borrowed from the market about Rs. 300,000 crore in 2008-09 Rs. 400, 000 crore in
2009-10. As a result, its fiscal deficit went up from 2.7 per cent of GDP in 2007-08 to 6.0 per
cent in 2008-09 and 6.4% of GDP in 2009-10. But this did not produce bad results for the private
sector investment, nor did it result in higher rate of interest.

RBI reduced cash reserve ratio to increase liquidity in the banking system and lowered its repo
rate to enable banks to lower the lending rates of interest. As a matter of fact, increased
borrowing and expenditure by the Government in 2008-09 and 2009-10 led to the increase in
demand for the products of private sector.

Therefore, from May 2009 onward there were signs of revival of the Indian manufacturing
sector. Manufacturing sector output grew at 9.6% in Sept. 2009 year-on-year basis and this
growth further picked up to 17.6% year-on-year basis in Dec. 2009

Manufacturing sector registered growth of 13.5 per cent in March 2010, 16.5% in April, 2010
and 11.1% in May 2010 year-on-year basis. This shows despite 6.0 per cent fiscal deficit in

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2008-09 and 6.4 % in 2009-10 and consequently heavy borrowing by the government in these
two years manufacturing output recorded high growth.

Besides, it is because of the fiscal stimulus packages and increase in government expenditure
made possible by heavy borrowing and fiscal deficit that India could achieve 6.8 per cent rate of
economic growth in 2008-09 and 8.6% in 2009-10,9.3 % in 2010-11 which is quite high,
especially when there were recessionary conditions in the US and Europe.

So, fiscal deficit of more than 3% in a year is not always bad. All depends on the economic
situation in the country and the purposes for which borrowed funds are spent. If there is
recession or slowdown in the economy, the fiscal deficit of 6 to 7 per cent of GDP is necessary to
lift the economy out of recession or to prevent sharp slowdown in the growth of the economy. If
borrowed funds are spent by the Government for investment or building durable assets, it will
lead to the expansion in productive capacity and therefore ensure sustained economic growth.

It is evident from above that larger fiscal deficit at the time of recession or economic slowdown
far from reducing private saving and investment is helpful for fighting recession or keeping
growth momentum of the economy. In fact, the present economic thinking is that even 3 per cent
of fiscal deficit should be treated as cyclically adjusted number, that is, the fiscal deficit should
go up at times of recession or economic slowdown and should come down in normal or boom
period.

Thus, in order to ensure economic growth of 9 percent per annum on a sustained basis, focus
should be shifted to reducing revenue, deficit. To reduce revenue deficit, steps should be taken to
raise tax-GDP ratio and curtail unproductive consumption expenditure of the government so as
to eliminate revenue deficit.

The borrowings in the capital account should be used for financing public investment in physical
infrastructure and social sectors. This will ensure sustained economic growth at the rate of 8 per
cent per annum – the objective fixed under the Twelfth Year Plan (2012-17).

Here it may be recalled the Golden Rule of Public Finance, namely, borrowing by the govern-
ment should be used only for investment purposes and not to meet excess current consumption

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expenditure except during times of recession. In times of recession even government
consumption expenditure will promote GDP growth.

Thus, the focus on merely reducing fiscal deficit at all times and treating it as fetish is not right.
In fact, in a demand-constrained economy, a moderate doze of fiscal stimulus is needed. Fiscal
responsibility should not be conceived in ritualistic terms of reducing fiscal deficit alone
regardless of its effect on the public investment and the economy. In fact, the increase in public
investment in infrastructure will also stimulate private investment.

The question of containing Government consumption expenditure, except during periods of

recession or economic slowdown, is important but reduction in fiscal deficit should not be
elevated to a dogma. A moderate amount of fiscal deficit and associated borrowing is good as
long as it is used for increasing public investment in physical infrastructure, education and health
of the people. Even foreign investment depends on our success in improving infrastructure.

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 Conclusion
In India the concept of fiscal deficit was first introduced in 1991 and was defined as the sum of
revenue deficit, capital expenditure less recovery of loans and other receipts. Since then fiscal
deficit has been a closely tracked parameter to measure the health of the Indian economy. This
study traced the major changes in the India’s fiscal policy since 1980-81 through the country’s
balance of payments crisis of 1991, the post economic liberalization and high growth period, the
introduction of FRBM Act in 2003, adjustment to the global financial crisis of 2008 and the
recent post-crisis changes to return to a path of fiscal consolidation. The period to 1991 saw large
fiscal deficit and its monetization spill over to the external sector, pushed by the Gulf-war the
balance of payments situation turned precarious and led to the introduction of new economic
policy. Post 1991 period had private sector share the burden of long term development and
contribute to capital receipts in the form of disinvestment. This coupled with tax reforms had the
fiscal deficit in control until 1996-97. Later, the Asian crisis of 1996-97 led it to move higher and
fiscal deficit reached unjustified levels by 2003. As a pragmatic solution to the problem FRBM
Act of 2003 was introduced which set out a phased reduction roadmap, this put the Indian
economy on the right track however was faced with a hiccup in the form of 2008 global credit
crisis. India weathered the storm of the credit crisis well and then resumed the task of lowering
the fiscal deficit through tax reforms and fiscal consolidation. These efforts bore fruits and have
ensured fiscal deficit reach more comfortable levels. Overall, during 1980-81 to 2002-03 it was
seen that the periods of crisis led to the burgeoning of the deficit to unsustainable levels and
prompted the government to introduce and adopt economic reforms to ensure that the deficit
stood at more reasonable levels. However since 2003-04 the government has been more
proactive and has undertaken fiscal policy reforms to ensure a steady reduction in fiscal deficit as
a percentage of GDP leading to a more resilient economy.

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 List of References
Fiscal Deficit. (2010, June). Economy Watch.

Narayan, S. (2006). Documenting Reforms: Case Studies from India. New Delhi: Macmillan
India Ltd.

RBI (2017).Key Deficit Indicators of the Central Government, (As percentage of GDP),
Handbook of Statistics on Indian Economy 2016-17, Reserve Bank of India.

RBI (2017). Major Heads of Expenditure of the Central Government, Handbook of Statistics on
Indian Economy, 2016-17, Reserve Bank of India.

RBI (2017) Central Government Receipts -Major Components, Handbook of Statistics on Indian
Economy, 2016-17, Reserve Bank of India.

Budget 2016: Fiscal Deficit – Range Instead of Number. (2016).Indian Express. Retrieved from

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 UNDERTAKING

[INDIAN ECONOMY GROUP ASSIGNMENT-1]

We, Ruchi Joshi, Ruchika Rohitwal, Sahjik Trambadia, Saloni Lodha and Sauransh Gupta bearing
Nirma ID 167246, 167247, 167248, 167249 and 167250, students of BBA-MBA Integrated
Programme, Institute of Management, Nirma University, hereby declare and undertake that that the
Group Assignment for the course Indian Economy, is our authentic and original work and has not been
plagiarized from any source and all the references that we have made for the articles are duly cited as
per the prescribed format.

Date: 06/09/2018

(Group No. 9)

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 Annexures
TABLE 1: KEY DEFICIT INDICATORS OF THE CENTRAL GOVERNMENT (₹ Billion)

Gross Net Gross Net Primary Drawdow

Revenu Net RBI
Year fiscal fiscal primary primary revenue n of cash
e deficit credit
deficit deficit deficit deficit deficit balances
1 2 3 4 5 6 7 8 9
1978-
57.10 21.26 37.26 15.69 -2.92 -22.76 15.06 21.91
79
1979-
63.92 31.33 41.00 22.01 6.94 -15.98 24.33 26.50
80
1980-
82.99 51.10 56.95 43.01 20.37 -5.67 24.77 35.51
81
1981-
86.66 45.91 54.71 36.11 3.92 -28.03 14.00 32.07
82
1982-
106.27 59.73 66.89 48.87 13.08 -26.30 16.56 33.68
83
1983-
130.30 77.70 82.35 56.43 25.40 -22.55 14.17 39.49
84
1984-
174.16 109.72 114.42 89.61 42.25 -17.49 37.45 60.55
85
1985-
218.58 135.44 143.46 106.27 58.89 -16.23 53.16 61.90
86
1986-
263.42 170.36 170.96 131.43 77.77 -14.69 82.61 70.91
87
1987-
270.44 184.31 157.93 129.35 91.37 -21.14 58.16 65.59
88
1988-
309.23 207.70 166.45 134.73 105.15 -37.63 56.42 65.03
89
1989-
356.32 237.22 178.75 144.39 119.14 -58.43 105.92 138.13
90
1990-
446.32 306.92 231.34 179.24 185.62 -29.36 113.47 147.46
91
1991-
363.25 246.22 97.29 89.61 162.61 -103.35 68.55 55.08
92
1992-
401.73 302.32 90.98 116.44 185.74 -125.01 123.12 42.57
93
1993-
602.57 459.94 235.16 243.31 327.16 -40.25 109.60 2.60
94
1994-
577.03 403.13 136.44 120.50 310.29 -130.31 9.61 21.30
95
1995-
602.43 424.32 101.98 108.06 297.31 -203.14 98.07 198.55
96
1996-
667.33 463.94 72.55 90.22 326.54 -268.24 131.84 19.34
97
1997-
889.37 630.62 233.00 227.48 464.49 -191.88 -9.10 129.14
98
1998-
1133.49 799.44 354.66 321.38 669.76 -109.06 -2.09 118.00
99
1999- 1047.16 899.10 144.67 335.56 675.96 -226.53 8.64 -55.88

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00
2000-
1188.16 1078.54 195.02 413.51 852.34 -140.80 -11.97 67.05
01
2001-
1409.55 1230.74 334.95 511.52 1001.62 -72.98 -14.96 -51.50
02
2002-
1450.72 1338.29 272.68 536.47 1078.79 -99.25 18.83 -283.99
03
2003-
1232.73 1155.58 -8.15 300.08 982.61 -258.27 -39.42 -760.65
04
2004-
1257.94 1262.52 -11.40 317.05 783.38 -485.96 -14.61 -601.77
05
2005-
1464.35 1457.43 138.05 351.45 923.00 -403.31 -208.88 284.17
06
2006-
1425.73 1512.45 -76.99 234.97 802.22 -700.50 45.17 -30.24
07
2007-
1269.12 1207.14 -441.18 -292.56 525.69 -1184.61 -271.71 -1156.32
08
2008-
3369.92 3290.24 1447.88 1575.37 2535.39 613.35 438.34 1747.89
09
2009-
4184.82 4114.48 2053.89 2201.39 3389.98 1259.05 -13.86 1500.06
10
2010-
3735.91 3610.26 1395.69 1467.38 2522.52 182.30 64.30 1849.69
11
2011-
5159.90 5141.03 2428.40 2612.05 3943.48 1211.98 -159.90 1391.83
12
2012-
4901.90 4844.50 1770.20 1920.41 3642.82 511.12 -510.12 548.40
13
2013-
5028.58 4961.57 1286.04 1437.71 3570.48 -172.06 -191.71 1081.30
14
2014-
5108.17 4952.45 1082.81 1166.05 3655.19 -369.25 777.52 -3341.85
15
2015-
5327.91 5272.89 911.32 1110.09 3427.36 -989.23 131.70 604.72
16
2016-
5342.74 5074.38 512.05 425.18 3109.98 -1720.71 402.27 1958.16
17
2017-
5465.32 5184.71 234.54 144.14 3211.63 -2019.15 128.44 -
18
Source: Handbook of Statistics on Indian Economy 2016-17 by RBI

TABLE 2: CENTRAL GOVERNMENT RECEIPTS - MAJOR COMPONENTS (₹ Billion)

Perso Excis Cus Reve Total

Tax Corp Non- Inter Capi
Direct nal Indir e tom nue recei
reve orati tax est tal
Year tax inco ect dutie s recei pts
nue on reve recei recei
(net) me tax s duti pts (11+1
(net) tax nue pts pts
tax (net) es (2+9) 2)
1 2 3 4 5 6 7 8 9 10 11 12 13
1972 26.9 10.8 24.6
34.43 7.52 1.37 5.58 17.57 8.57 7.13 45.23 69.87
-73 1 0 4
1973 30.5 11.1 28.7
39.00 8.48 2.13 5.83 19.71 9.96 7.36 50.14 78.90
-74 2 4 6
1974 50.97 11.42 3.62 7.09 39.5 25.28 13.3 13.4 7.76 64.42 27.7 92.16

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-75 6 3 5 4
1975 45.3 14.1 18.5 41.4 120.1
60.10 14.80 4.80 8.62 29.88 9.34 78.64
-76 0 9 4 9 3
1976 48.9 15.5 19.8 11.0 49.5 135.2
65.81 16.86 5.42 9.84 31.93 85.68
-77 5 4 7 5 8 6
1977 53.1 18.2 24.7 14.4 50.3 145.7
70.60 17.42 3.27 12.21 33.35 95.38
-78 9 4 8 1 5 3
1978 67.2 24.2 24.0 14.2 109.7 62.8 172.5
85.68 18.42 4.71 12.56 41.28
-79 6 4 6 7 4 5 9
1979 66.1 29.2 25.4 13.6 111.0 54.2 165.2
85.67 19.50 4.75 13.92 34.81
-80 7 4 2 0 9 0 9
1980 74.6 34.0 30.1 17.9 123.7 79.1 202.9
93.58 18.93 4.38 13.11 37.23
-81 5 9 5 5 3 8 1
1981 115.4 90.2 43.0 34.8 22.1 150.2 88.4 238.7
25.18 4.59 19.70 41.81
-82 2 4 0 2 5 4 9 3
1982 130.1 102. 51.1 44.1 28.5 174.3 117. 291.3
27.23 4.38 21.85 45.67
-83 7 94 9 7 2 4 01 5
1983 154.4 123. 55.8 42.7 26.6 197.1 144. 341.1
31.31 5.27 24.93 61.65
-84 1 10 3 0 8 1 06 7
1984 176.5 142. 70.4 58.1 39.6 234.6 164. 398.8
33.75 6.97 25.56 66.25
-85 1 76 1 5 3 6 21 7
1985 211.4 174. 95.2 68.9 45.9 280.3 193. 473.5
36.98 6.65 28.65 73.31
-86 0 42 6 5 5 5 15 0
1986 243.1 202. 114. 87.6 53.5 330.8 215. 546.5
40.23 7.19 31.60 81.64
-87 9 96 75 4 3 3 72 5
1987 280.1 239. 137. 90.2 57.5 370.3 254. 624.4
41.00 6.03 34.33 94.23
-88 5 15 02 2 5 7 08 5
1988 337.5 277. 109.2 158. 98.4 69.8 435.9 298. 734.6
60.21 14.92 44.07
-89 1 30 2 05 0 1 1 78 9
1989 383.4 323. 130.9 180. 139. 84.7 522.9 300. 823.1
60.28 10.88 47.29
-90 9 21 6 36 47 4 6 20 6
1990 429.7 360. 141.0 206. 119. 87.3 549.5 389. 939.5
69.03 12.50 53.35
-91 8 75 0 44 76 0 4 97 1
1991 500.6 101.0 399. 160.1 222. 159. 109. 660.3 385. 1045.
16.27 78.53
-92 9 3 66 7 57 61 33 0 28 58
1992 540.4 120.7 419. 163.6 237. 200. 124. 741.2 361. 1103.
18.31 88.99
-93 4 5 69 7 76 84 87 8 78 06
1993 534.4 125.2 100.6 409. 172.2 221. 220. 150. 754.5 554. 1308.
13.55
-94 9 2 0 27 4 93 04 78 3 40 93
1994 674.5 184.0 138.2 490. 210.6 267. 236. 157. 910.8 686. 1597.
34.68
-95 4 9 2 45 4 89 29 97 3 95 78
1995 819.3 222.8 164.8 596. 221.7 357. 281. 184. 1101. 583. 1684.
43.18
-96 9 7 7 52 6 57 91 19 30 38 68
1996 937.0 253.7 185.6 683. 234.6 428. 325. 221. 1262. 615. 1878.
47.15
-97 1 4 7 26 3 51 78 06 79 44 23
1997 956.7 271.7 200.1 685. 255.1 401. 382. 253. 1338. 990. 2329.
35.89
-98 2 2 6 00 6 93 14 23 86 77 63
1998 1046. 321.2 245.2 725. 285.8 406. 448. 300. 1494. 1300 2795.
57.60
-99 52 0 9 32 1 68 33 76 85 .64 49
1999 1282. 414.3 306.9 868. 349.4 484. 532. 338. 1814. 1157 2971.
91.31
-00 71 6 2 36 4 19 11 95 82 .07 89
2000 1366. 496.5 237.6 251.7 870. 497.5 341. 559. 328. 1926. 1341 3267.
-01 58 1 6 7 07 8 63 47 11 05 .84 89

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2001 1335. 477.0 221.0 251.3 858. 544.6 283. 677. 355. 2013. 1625 3638.
-02 32 3 6 3 28 9 40 74 38 06 .00 06
2002 1585. 616.1 277.7 338.9 969. 623.8 318. 722. 376. 2308. 1805 4113.
-03 44 2 9 3 32 8 98 90 22 34 .31 65
2003 1869. 765.9 307.6 457.0 1103 702.4 345. 768. 385. 2638. 2113 4751.
-04 82 0 5 6 .92 5 86 31 38 13 .33 46
2004 2247. 959.4 354.4 602.8 1288 772.4 418. 811. 323. 3059. 2003 5063.
-05 98 4 3 9 .54 1 11 93 87 91 .91 82
2005 2702. 1206. 452.3 751.8 1495 866.4 466. 768. 220. 3470. 1795 5266.
-06 64 92 8 7 .72 2 45 13 32 77 .49 26
2006 3511. 1697. 627.0 1067. 1814 926.5 628. 832. 225. 4343. 1444 5788.
-07 82 38 7 01 .44 1 19 05 24 87 .82 69
2007 4395. 2315. 865.6 1446. 2079 961.7 753. 1023 210. 5418. 1979 7398.
-08 47 74 3 60 .72 8 82 .17 60 64 .78 42
2008 4433. 2481. 869.8 1607. 1951 818.7 692. 969. 207. 5402. 2998 8401.
-09 19 52 5 97 .69 2 17 40 17 59 .63 22
2009 4565. 2716. 945.3 1767. 1849 843.8 602. 1162 217. 5728. 4530 1025
-10 36 23 2 97 .13 3 23 .75 84 11 .63 8.74
2010 5698. 3135. 1024. 2091. 2563 1102. 975. 2186 197. 7884. 4024 1190
-11 68 01 41 15 .67 22 98 .02 34 71 .28 8.99
2011 6297. 3433. 1182. 2274. 2864 1162. 105 1216 202. 7514. 5689 1320
-12 64 10 24 11 .54 26 6.14 .72 52 37 .18 3.55
2012 7418. 3965. 1404. 2555. 3452 1412. 115 1373 207. 8792. 5821 1461
-13 77 85 38 70 .92 45 8.90 .54 61 32 .52 3.83
2013 8158. 4558. 1694. 2857. 3600 1379. 121 1988 218. 1014 5638 1578
-14 54 29 08 42 .25 75 0.59 .70 68 7.24 .94 6.18
2014 9036. 5005. 1883. 3114. 4030 1537. 127 1977 237. 1101 4844 1585
-15 15 31 36 53 .85 09 9.94 .66 34 3.81 .48 8.29
2015 9437. 4492. 1727. 2759. 4944 2204. 128 2512 253. 1195 5825 1777
-16 65 96 48 17 .70 73 8.29 .60 78 0.25 .79 6.04
2016 1088 5261. 2150. 3111. 5626 2938. 132 3347 181. 1423 5506 1974
-17 7.93 53 16 31 .39 24 9.33 .70 49 5.63 .17 1.80
2017 1227 6062. 2669. 3393. 6207 3074. 149 2887 190. 1515 6181 2133
-18 0.14 98 37 55 .16 23 8.32 .57 21 7.71 .20 8.91
Source: Handbook of Statistics on Indian Economy 2016-17 by RBI

TABLE3: MAJOR HEADS OF EXPENDITURE OF THE CENTRAL GOVERNMENT (₹ Billion)

of which Loans of which

Revenu Capital Total
e Intere expendit Capit expendit
Year Defence and Defence
expendit st Subsid ure al ure
expendit advan expendit
ure payme ies (7+8) outla (2+6)
ure ces ure
nts y
1 2 3 4 5 6 7 8 9 10
1978-
106.82 26.14 19.84 14.75 80.84 56.66 24.18 2.54 187.66
79
1979-
118.03 30.94 22.92 18.21 71.59 47.20 24.39 2.62 189.62
80
1980-
144.10 32.78 26.04 20.28 83.58 52.85 30.73 3.26 227.68
81

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1981-
154.08 38.44 31.95 19.41 98.57 56.58 41.99 4.85 252.65
82
1982-
187.42 44.94 39.38 22.62 120.49 73.84 46.65 5.27 307.91
83
1983-
222.51 51.89 47.95 29.02 132.83 80.53 52.30 6.42 355.34
84
1984-
276.91 63.24 59.74 40.38 159.41 91.94 67.47 7.37 436.32
85
1985-
339.24 70.21 75.12 47.96 187.42 110.87 76.55 9.67 526.66
86
1986-
408.60 91.79 92.46 54.51 220.56 127.97 92.59 12.98 629.16
87
1987-
461.74 88.61 112.51 59.80 220.87 127.93 92.94 31.07 682.61
88
1988- 102.5
541.06 95.58 142.78 77.32 250.05 147.50 37.83 791.11
89 5
1989- 118.0
642.10 101.94 177.57 104.74 286.98 168.90 42.22 929.08
90 8
1990- 121.3
735.16 108.74 214.98 121.58 317.82 196.52 45.52 1052.98
91 0
1991- 110.4
822.92 114.42 265.96 122.53 291.22 177.23 49.05 1114.14
92 3
1992- 133.8
927.02 121.09 310.75 108.24 299.16 162.97 54.73 1226.18
93 5
1993- 130.8
1081.69 149.78 367.41 116.05 336.84 204.54 68.67 1418.53
94 9
1994- 148.9
1221.12 164.26 440.60 118.54 386.27 237.36 68.19 1607.39
95 1
1995- 140.9
1398.61 188.41 500.45 126.66 384.14 243.16 80.15 1782.75
96 9
1996- 141.9
1589.33 209.97 594.78 154.99 420.74 278.78 85.08 2010.07
97 6
1997- 175.2
1803.35 261.74 656.37 185.40 517.18 341.93 91.04 2320.53
98 6
1998- 188.4
2164.61 298.61 778.82 235.93 628.79 440.37 100.36 2793.40
99 1
1999- 240.3
2490.78 352.16 902.49 244.87 489.75 249.38 118.55 2980.53
00 7
2000- 247.4
2778.39 372.38 993.14 268.38 477.53 230.08 123.84 3255.92
01 5
2001- 1074.6 265.5
3014.68 380.59 312.10 608.42 342.84 162.07 3623.10
02 0 8
2002- 1178.0 291.0
3387.13 407.09 435.33 745.35 316.68 149.53 4132.48
03 4 1
2003- 1240.8 341.5
3620.74 432.03 443.23 1091.29 287.68 168.63 4712.03
04 8 0
2004- 1269.3 523.3
3843.29 438.62 459.57 1133.31 289.10 319.94 4982.52
05 4 8
2005- 1326.3 550.2
4393.76 482.11 475.22 663.62 113.37 323.38 5057.38
06 0 5
2006- 1502.7 602.5
5146.09 516.82 571.25 687.78 85.24 338.28 5833.87
07 2 4
2007- 5944.33 542.19 1710.3 709.26 1182.38 112.98 1069. 374.62 7126.71

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08 0 40
2008- 1922.0 1297.0 760.5
7937.98 733.05 901.58 141.07 409.18 8839.56
09 4 8 1
2009- 2130.9 1413.5 970.3 10244.8
9118.09 906.69 1126.78 156.47 511.12
10 3 1 1 7
2010- 10407.2 2340.2 1734.2 1316. 11973.2
920.61 1566.05 249.85 620.56
11 3 2 0 19 8
2011- 11457.8 2731.5 2179.4 1378. 13043.6
1030.11 1585.80 207.37 679.02
12 5 0 1 43 5
2012- 12435.1 3131.7 2570.7 1460. 14103.7
1112.77 1668.58 208.00 704.99
13 4 0 9 58 2
2013- 13717.7 3742.5 2546.3 1684. 15594.4
1243.74 1876.75 191.98 791.25
14 2 4 2 78 7
2014- 14669.9 4024.4 2582.5 1674. 16636.7
1368.07 1966.81 292.18 818.87
15 2 4 8 63 3
2015- 15377.6 4416.5 2641.0 2266. 17907.8
1459.37 2530.22 263.37 799.58
16 1 9 6 85 3
2016- 17345.6 4830.6 2604.8 2419. 20144.0
1686.35 2798.47 379.07 793.70
17 0 9 5 40 7
2017- 18369.3 5230.7 2722.7 2698. 21467.3
1758.61 3098.01 399.93 865.29
18 4 8 6 08 5
Source: Handbook of Statistics on Indian Economy 2016-17 by RBI

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