G.E.

PUBLIC
FINANCE
ASSIGNMEN
T

SUBMITTED BY:
Hrishi Raj Thakur
Roll No- 3012
B.A. (H) GEOGRAPHY 4th Semester
G.E. Economics Sec-G
Q1. Comment on the Fiscal Situation of India for the last 5 years.
Analyse the fiscal deficit and debt to GDP ratio and comment on
the reasons for fiscal slippage as per the FRBM Act.
Answer: Fiscal Deficit refers to the difference between the total
income of the government (total taxes and non-debt capital receipts)
and its total expenditure. This difference is calculated both in
absolute terms and also as a percentage of the Gross Domestic
Product (GDP) of the country.
The following table shows India’s Fiscal Deficit in the last 5 years:
Table1 : Central Government’s Fiscal Parameters in the last 5 years(in Rs Lakh Crore: figures
in parenthesis are as a % of GDP)

2016-17 5.36 (3.5)

2017-18 5.91 (3.5)
2018-19 6.49 (3.4)
2019-20 9.36 (4.6)
2020-21 7.96 (3.5) BE
2020-21 18.48 (9.5) RE

The Central Government’s finances gives an overview of the fiscal

position of the Government sector as a whole. The general
government liabilities as a proportion of GDP exhibit an increasing
trend over the last five years. It zoomed from 4.6% of GDP in 2019-20
to 9.5% in 2020-21. A high fiscal deficit of 9.5% of GDP announced in
the revised budget estimates(RE) of 2020-21 is against the pegged
deficit of 3.5% in budget estimates (BE)2020-21. It is due to higher
spendings to stimulate the economy amid the COVID-19 Pandemic.
The FRBM Act enacted in 2003 sets the target for the government to
bring down fiscal deficit. It requires the government to limit the fiscal
deficit to 3% of GDP by 31st March 2021 and central government
debt to 40% of GDP by 2024-25. However due to the global
pandemic India has breached the target.
 As indicated by the enhanced borrowing provisions for both the
Centre and the States for 2020- 21, the liabilities of the General
Government are expected to increase. This deviation from the path
of fiscal consolidation may however be transient as the fiscal
indicators may rebound with the recovery in the economy. The
medium and long term trajectory of Government debt will depend
on the debt sustainability calculations. A more negative interest-rate
growth differential lays the foundation for lower General
Government debt as a proportion of GDP.

The year 2020-21 has been a difficult year from the fiscal
perspective. The fiscal policy response of the Government has been a
combination of demand and supply side policies under the ambit of
‘Atma Nirbhar Bharat’ to cushion against the pandemic shock, and
subsequently fuel the economic recovery. Going forward, in order to
sustain the recovery in aggregate demand, it is expected that the
Government may have to continue with an expansionary fiscal
stance. The expenditure support along with the various key reforms
introduced during the year are likely to impart the required
momentum to medium-term growth. The calibrated approach
adopted by India allows space for maintaining a fiscal impulse the
coming year. The growth recovery would facilitate buoyant revenue
collections in the medium term, and thereby enable a sustainable
fiscal path
For the 2021-22 fiscal, the deficit has been pegged at 6.8% of GDP,
which will be further lowered to 4.5% by 2025-26.

FISCAL DEFICIT AND DEBT TO GDP RATIO:

The Debt-to-GDP ratio is the ratio between a country’s government
debt and its gross domestic product(GDP).
The FRBM Review Committee suggested using debt as the primary
target for fiscal policy. A debt to GDP ratio of 60% should be targeted
with a 40% limit for the centre and 20% limit for the states. It noted
that majority of the countries that have adopted fiscal rules have
targeted a debt to GDP ratio of 60%. It suggested that the targeted
debt to GDP ratio should be achieved by 2023.
However, India’s high fiscal deficit would pose a challenge in
lowering the debt to GDP ratio, which is expected to remain above
90% in the next five years according to Fitch Ratings.
India’s current debt-to-GDP ratio stands at about 85%. It had held
steady at about 68% for the previous ten years, but lead to a sharp
rise when the economy shrank and the fiscal deficit soared due to
the pandemic. This debt to GDP ratio of 85% is a sound target for
India for the next decade. Many G20 nations, including the US,
Japan, Britain, and Brazil have debt-to-GDP ratios at, or above this
threshold.

REASONS FOR FISCAL SLIPPAGE AS PER FRBM ACT:

As per the FRBM Act, the government can allow fiscal slippage or
deviate from the targets in case of-a national calamity, national
security issue or other exceptional circumstances notified by it
The FRBM review committee suggested that grounds in which the
government can deviate from the targets should be clearly specified,
and the government should not be allowed to notify other
circumstances.
Further, the government may be allowed to deviate from the
specified targets upon the advice of the Fiscal council in the following
circumstances:
a) Considerations of national security, war, national calamities
and collapse of agriculture affecting output and incomes
b) Structural reforms in the economy resulting in fiscal
implications
c) Decline in real output growth at least 3% below the average of
the previous four quarters.
These deviations cannot be more than 0.5% of GDP in a year.
Q2. What are the measures taken to empower local bodies
(municipalities and panchayats)? Comment on the
recommendations given by the 14th and 15th Finance Commission.
What are the diversion in the recommendations of 15th Financial
Commission as compared to the 14th Financial Commission?

Answer: Local Bodies- panchayats in rural areas and municipalities in

urban areas- are the closest organisations to the people at the
grassroot level. They provide civic amenities such as roads, water and
sanitation, and primary education and health.
In order to empower local bodies, the 15th Finance Commission has
taken the following measures:
 It has recommended grants of Rs 4,36,361 crore from the union
Government to the local governments for 2021-26. This is an
increase of 52% over the grant provided by the 14th Finance
Commission in 2015-20
 Given the pandemic, in the total grants of Rs 4,36,361 crore,
the FFC has recommended Rs 70,051 crore for plugging the
critical gaps in primary health care.
 It has also recommended Rs 8000 crore as performance based
grants for incubation of new cities.
 It has recommended Rs 450 crore for shared Municipal
services.
 The urban distribution of remaining Rs 3,57,860 crore is to be
gradually increased in case of the urban local bodies (ULBs)
from 67:33 in 2021-22 to 65:35 by 2025-26. This is done to
support India’s rapid urbanization.
 For Panchayats, the FFC allocations cover all the tree tiers-
village block and districts-as well as the Fifth and Sixth Schedule
areas and cantonment boards.
  The FFC has called for a focus on urban agglomerations. It has
emphasized the need to focus on the complex challenges of air
quality, drinking water supply, sanitation and solid waste
management in the million plus UAs and cities. Thus, for 2021-
2026, there is a million plus challenge fund of Rs 38,196 crore
which can be accessed by million plus cities only through
improvements in the above mentioned sectors.
 For ULBs other than million plus category, the total grants are
Rs 82,859 crore
 The grants to local bodies, both rural and urban contain a mix
of basic, tied and performance grants. 40% of total grants are
basic or untied grants, 30% of grants is earmarked for drinking
water, rainwater harvesting and water recycling and remaining
30% of grants is performance.

The recommendations given by the 14th Finance Commission for local

bodies are mentioned below:

 The FC-XIV had recommended grants of Rs 2,87,436 crore for

the 2015-20 period.
 The FC-XIV in the case of rural bodies had recommended grants
to only gram panchayats and not the other tiers at the district
and block levels.
 The FC-XIV, in the case of urban local bodies, had made no
distinction among different sizes of municipalities
 These grants were distributed between the rural and urban
local bodies in the ratio of 70:30
 The grants recommended by it were in two parts- a basic grant
(unconditional) and a performance grant (conditional) in the
proportion of 90:10 for duly constituted gram panchayats and
80:20 for municipalities.
The recommendations given by the 15th Finance Commission for local
bodies for the year 2020-21 are mentioned below:

 The total size of the grant for local bodies in twenty-eight

States shall be Rs. 90,000 crore. This is equivalent to 4.31
per cent of the divisible pool estimated by the
Commission for the first year of the award period.
 The inter se distribution of grants for local bodies among
the States may be based on population and area in the
ratio of 90:10 with special emphasis on areas with higher
concentration of scheduled castes and scheduled tribes
populations.
 The proportion of grants between rural and urban local
bodies recommended by FC -XV is in the ratio of
67.5:32.5.
 All the tiers in the panchayats – village, block and district
– shall receive the grants. The inter se distribution among
the panchayati raj tiers by the States should be done on
the basis of the accepted recommendations of the latest
State Finance Commissions (SFC) and in conformity with
the following bands of 70 %-85% for village panchayats,
10%-25% for block panchayats and 5%-15% for district
panchayats.
 The intra-tier distribution among the relevant entities
across the State should be on the basis of population and
area in the ratio of 90:10 or as per the accepted
recommendations of the latest SFC.
 The grants for rural local bodies and for Fifth and Sixth
Schedule areas shall be distributed as basic and tied
grants in the ratio of 50:50.
 For differential treatment of cities, the Finance
Commission has divided the urban local bodies into two
 categories: (a) fifty Million-Plus urban
agglomerations/cities, excluding Delhi and Srinagar, and
(b) all other cities and towns with less than one million
population.
 The States should make allotment of grants on population
basis for the Cantonment Boards within their territories.
For urban local bodies other than Million-Plus cities, the
grants should be distributed to each urban local body on
the basis of accepted recommendations of the latest SFC
suitably modified to accommodate the Cantonment
Boards
 For the Million-Plus cities, it is recommended that the
Ministry of Environment, Forest and Climate Change
(MoEF&CC), in consultation with the State Governments,
develop city-wise and year-wise targets on ambient air
quality based on annual average concentrations of PM10
and PM2.5, monitor and evaluate the improvement and
recommend disbursal of grants to such cities.
 It is recommended that the Union Government constitute
a high power committee, consisting of the ministries of
Finance, Environment, Forest and Climate Change and
Agriculture and Farmer Welfare, the Governments of
Haryana, Punjab and Uttar Pradesh, to devise, implement
and monitor a time-bound action plan for pollution
mitigation under the National Clean Air Programme.

The diversions in the recommendations of the 15th Financial

Commission as compared to the 14th Financial Commission are as
follows:
 The FC-XV has recommended grants to all tiers of the
Panchayati Raj so as to enable pooling of resources across
villages and blocks to create durable community assets and
improve their functional viability. The FC-XIV recommended
grants to only gram panchayats and not to the other tiers at the
district and block levels.
 Unlike the FC-XIV, the FC-XV has decided to give grants to the
Fifth and Sixth Schedule areas and Cantonment Boards.
 The FC-XV has provided for grants to the critical sectors of
sanitation and drinking water in order to ensure additional
funds to the local bodies over and above the funds allocated for
these purposes under Centrally Sponsored Schemes (CSS),
Swacch Bharat and Jal Jeevan Missions.
 FC-XV has recommended that the share of urban local bodies
grant should be increased to 40% over the medium term.
Earlier it was 30% in the FC-XIV.
 The FC-XV believes that larger cities will have a tendency to
grow faster with the agglomeration effect. As such it has
recommended differentiated treatment with special emphasis
on meeting the challenges of bad ambient air quality, ground
water depletion and sanitation in those areas.
Q3. Elaborate the reasons why it is difficult to bring POL products
( petroleum, oil and lubricants) under the GST taxation in India.

Answer: GST (Goods and Services Tax), which came into effect from
1st July 2017, is an indirect tax levied on the supply of goods and
services in the country. GST has subsumed several indirect taxes such
as excise duty, VAT, services tax etc.
However, one of the biggest exclusions under the GST taxation in
India is POL products. Currently, the centre levies excise duty while
the states levy VAT at different rates on POL products, leading to
different rates of petroleum products in different parts of the
country.
The reasons why it is difficult to bring POL products under GST are
described below:
 Currently taxes on POL products are levied by both the
Centre and the states. While the Centre levies excise duty,
states levy Value Added Tax (VAT). By being able to levy
VAT on these products, the states have control over their
revenues. If POL products are brought under GST, both
the taxes would be merged and there would be a uniform
price for these products across the country. It would
mean that the states would lose their control over their
revenues since it is the Centre who is in charge of fixing
the rate of GST.
 Another issue is that the rate of VAT on POL products
varies widely amongst the states. While Maharasthra
charges up to 40% on petrol while Andaman and Nicobar
charges just 6% ad valorem. Levying a standard rate of
GST on petrol would mean that the prices would sharply
rise in Andaman and Nicobar while on the other hand,
they would fall in Maharasthra if the GST rate is lower
 than the current rate. This leads to 2 issues- a) common
man would have to pay more for POL products in those
states where the VAT rate was initially lower than the GST
rate b) The states which were charging a higher VAT rate
prior to GST would lose a huge amount of revenue.
 One of the laws in the GST is the Central Governments
assurance of bearing the revenue loss incurred by states
due to implementation of GST. Revenue earned from POL
products constistutes a huge fraction of the total revenue
earned by the states. By bringing them under GST, states
would lose a huge chunk of revenue which needs to be
compensated by the Centre. However, in the current
fiscal deficit situation of the country paying such a
compensation to the states is not practical as it would
worsen the economic woes of the country.
 The Central and State Governments earn a lot of revenue
from POL products. In 2019-20, government had earned
around Rs 4.24 trillion by taxing petroleum products. If
these products are brought under GST, the GST Council
has to make sure that the governments continue to earn
the kind of revenue through POL products that they have
been in the past. Under GST, the most used tax slabs are
12%, 18% and 28%. However, at these rates the
government won’t even earn a fraction of the taxes that
they are earning now. In order to replicate the revenue
earned prior to GST implementation, the GST rate has to
be set above 100%. No Government will be willing to
come up with an indirect tax that is higher than 100% as it
will be political suicide.