HIMACHAL PRADESH NATIONAL LAW UNIVERSITY, SHIMLA

DISCIPLINE: FISCAL RESPONSIBILITY AND BUDGET

MANAGEMENT

REVENUE DEFICIT IN UNION BUDGET OF INDIA: AN ANALYSIS

Submitted By: Submitted To:

Abhishek Bisht Mr. Digvijay Katoch

B.B.A LLB (Hons) Assistant Professor of Management

4th Semester Himachal Pradesh National Law

1120202156 University, Shimla

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 ACKNOWLEDGEMENT

I Abhishek Bisht a second year law student would like to express my sincere gratitude
towards Mr. Digvijay Katoch Sir, Assistant professor of Management, who always stand for
us and helped me at every possible step of my assignment. And without whose guidance I
would not have completed my assignment successfully. I would also like to sincerely thank
Himachal Pradesh National Law University, Shimla and its faculty for guiding and
encouraging me at every step of my assignment.

I would also like to extend gratitude to my seniors and friends who played an important role
and assisted me with the insights they had. Last but not the least I bestow my heartfelt
gratitude towards my parents and family members whose instant motivations kept me going
throughout the assignment.

ABHISHEK BISHT

B.B.A. L.L.B (Hons)

4th SEMESTER

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 DECLARATION BY THE STUDENT

I, the undersigned solemnly declare that the present assignment on the topic “Revenue
Deficit in Union Budget of India: An Analysis” is purely based on my own work as it have
been carried out during my study under the esteemed guidance and supervision of Mr.
Digvijay Katoch, Assistant Professor of Management, at the Himachal Pradesh National
Law University,Shimla and also from the help of various online websites and research
papers. I would like to make clear that the whole assignment is typed by me on my own
words after taking the help from the mentioned sources. It is important to note that plagiarism
may be found as I haven’t done the assignment paraphrase. I further certify that:

1. The work contained in the assignment is not purely original but has been done by my
efforts and hard work.

2. The work is not submitted to any other organizations, journals, websites, etc.

3. I’ve followed the guidelines provided by the university in writing the assignment.

ABHISHEK BISHT

B.B.A. L.L.B (Hons)

4th SEMESTER

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 ABBREVIATIONS

FRBM Fiscal Responsibility and Budget

Management

Govt Government

i.e. That is

e.g. Example

FM Finance Minister

etc Et cetera

Ques Question

B/w Between

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 CONTENTS

1. Acknowledgement…………………………………………………………………..2

2. Declaration…………………………………………………………………………3

3. Abbreviations……………………………………………………………….……..4

4. Introduction………………………………………………………………………..6

5. What is Revenue Deficit…………………………………………………….…...6-10

6. Effective Revenue Deficit….……………………………………………...……..11-12

7. Revenue Deficit in Union Budget…………………………………...…………..12-15

8. Case Study 1………………………………………………………………….….15-16

9. Case Study 2……………………………………………………………………..17-23

10. Bibliography………………………………………………………………………..24

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 INTRODUCTION

WHAT IS REVENUE DEFICIT ?

When realised net income falls short of expected net income, a revenue deficit results. This
occurs when actual revenue and/or actual expenditures do not match projected revenue and
expenditures. This is the polar opposite of a revenue surplus, which occurs when actual net
income surpasses predicted net income. The difference between the planned and actual
quantity of income is measured by a revenue deficit, which is not to be confused with a fiscal
deficit. A revenue deficit means that a company's or government's income is insufficient to
pay its basic operations. When this happens, it may borrow money or sell existing assets to
make up for the revenue shortfall.To close a revenue gap, a government might either raise
taxes or cut spending. Similarly, a company with a revenue shortfall might increase its
profitability by reducing variable expenditures like materials and labour. Because most fixed
costs are determined by contracts, such as a building lease, they are more difficult to modify.
A revenue deficit occurs when the government's entire revenue expenditure exceeds its total
revenue receipts, implying that the net income is less than the net expenditure. The actual
amount of revenue or spending does not match the anticipated amount of revenue or
expenditure, resulting in a deficit. The inverse of a revenue deficit is a revenue surplus, which
occurs when net income exceeds net expenditure.When a government or a firm has a revenue
deficit, it signifies that their income is insufficient to keep them running properly. In such a
case, the government or firm will have to borrow money by loaning it or sell assets they own
to get money. In the event of a revenue shortfall, the corporation can save money by
decreasing expenditures at several levels. This entails lowering labour and machinery costs.
The government can make up for the revenue shortfall by boosting taxes.It has to be kept in
mind that a revenue deficit is not the same as a budgetary deficit the two are very
different.While a revenue deficit occurs when total income falls short of total spending, a
fiscal deficit occurs when actual income falls short of the budgeted income.A deficit happens
when a country's expenditure exceeds its revenue at the end of a fiscal year. Many
economists have been examining and researching the causes of the deficit, as well as possible
solutions. A revenue deficit is a shortfall in government funds for day-to-day operations.
When total revenue expenditures exceed total revenue receipts, this occurs. As a result, it
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denotes a distinction between net income and spending. It is, however, distinct from the fiscal
deficit, which is defined as the gap between actual and budgeted income.In the government's
revenue budget, the revenue deficit is the difference between expenditure and receipts. To
fully comprehend the significance of the revenue deficit, it is necessary to have a thorough
understanding of the revenue budget's numerous categories. The revenue budget includes the
receipts and payments generated by the government's day-to-day operations. Don't get me
wrong: the Revenue budget is intended to describe the government's revenue-generating
activities. The revenue budget, on the other hand, is directly tied to the government's day-to-
day operations. The revenue budget is either recurrent or current.Revenue spending is
actually regarded unproductive because it is mostly utilised to keep the government apparatus
working. The revenue budget is technically current in nature, which means it includes items
that are relevant to the government's day-to-day operations. Expenditure is required to fund
government tasks such as defence; typical revenue expenditures include social services,
administration, and so on.Similarly, when the government performs its day-to-day tasks, it
will generate a significant amount of revenue. Revenue receipts are the term for these
earnings. The two main sources of revenue are tax revenues and non-tax revenues. Revenues
from currency coinage and minting, as well as earnings from Public Sector Enterprises, are
examples of non-tax revenue.Interest payments (for previous borrowing), defence (almost
70% of defence expenditure is revenue expenditure), subsidies (subsidies are not a productive
item for the government because they provide no return), salaries, and so on are all examples
of revenue expenditure.Tax revenues, such as corporate and personal income taxes, customs
charges, and service taxes, are important revenue sources, as are non-tax revenues, such as
money from the mint and earnings from Public Sector Enterprises. The objectives of FRBMA
were elimination of revenue deficit by 2008-09 and reduction of fiscal deficit to no more than
3 per cent of GDP at the end of 2008-09. However, global financial crisis led the government
to infuse resources in economy as fiscal stimulus in 2008 and therefore fiscal targets had to
be postponed temporarily in view of the global crisis. Later, the Budget for 2012-13
introduced amendments to FRBM Act. The Central Government introduced a medium-term
fiscal adjustment road map on March 16, 2012 to improve fiscal situation at federal level.The
concept of effective revenue deficit was introduced, which excluded grants to states for
creation of capital assets from conventional revenue deficit.4 The second important feature
was the introduction of provision for 'Medium Term Expenditure Framework Statement’ in
the FRBMA. This medium-term framework provides for rolling targets The implementation
of FRBM Act has been stalled four times since its enactment in 2003. With more than a

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decade of experience, including regular pauses, there was a critical need to evaluate the
implementation of provisions of FRBMA. Since FRBMA enactment in 2003, its role has
been discussed continuously in controlling fiscal and revenue deficit.for expenditure,
imparting greater certainty, and encourages prioritization of expenditure.In 1963, when
Milton Friedman visited India, he advised sustainable deficit financing as a means of
powering economic growth without inflation (Centre for Civil Society, 2000). The fiscal
situation started deteriorating from 1979-80 onwards when revenue deficit was recorded for
the first time in the Union Budget. India witnessed a severe fiscal deterioration by 1991 when
balance of payments crisis forced India to take a loan from the IMF to finance imports. The
reforms led to a review of the monetary-fiscal situation.16 In light of these developments,
India’s introduction of a kind of fiscal rule dates back to September 1994 when ad-hoc
Treasury bills that were automatically monetising budget deficit were phased out by the
RBI.The term ‘effective revenue deficit’ was also introduced into FRBMA through Finance
Bill of 2012. The government then revised the FRBMA further in the Finance Bill of 2015 by
amending Section 4 to change deadline of March 31, 2015 to March 31, 2018, to grant the
newly formed Government in May 2014, some more fiscal space to achieve deficit
targets.Revenue expenditure exceeds the total revenue receipts. Revenue deficit includes
those transactions that have a direct impact on a government’s current income and
expenditure. This represents that the government’s own earnings are not sufficient to meet the
day-to-day operations of its departments. Revenue deficit turns into borrowings when the
government spends more than what it earns and has to resort to the external borrowings.

Implications by Revenue Deficit

The term "revenue deficit" refers to the government's inability to fund its day-to-day
spending, or "current expenditure," using traditional revenue sources such as taxes. If the
government has a revenue deficit (in its revenue budget), it must also have a capital budget
surplus. Expenditures in the capital budget are mostly for government investment operations.
These activities are deemed productive because they may provide a future return to the
government. To achieve a capital budget surplus, capital budget expenditures should be kept
lower than capital budget receipts. Borrowings are the largest source of revenue in the capital
budget.This indicates that in the capital budget, productive investment expenditures should be

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reduced but borrowing that creates future debt should be increased. This is how a capital
excess is formed. This capital surplus is used to cover the revenue gap that resulted from the
revenue budget's unproductive expenses. Until 1977, India's central government budget was
in excess. However, for the first time in 1978, a revenue deficit developed in the budget.
Since then, every year has seen a revenue deficit, and the government has had to borrow to
cover the gap. Borrowing this year to cover a revenue shortfall will result in future interest
payments (which is revenue expenditure).The vicious loop of debt for the government is
explained by increasing borrowing – interest payments – revenue deficit – borrowing. By
1990, interest payments had become the government's greatest expenditure item. The purpose
of the Fiscal Responsibility and Budget Management Act of 2003 (FRBM 2003) is to
eliminate the revenue deficit. The budget estimates a revenue deficit of Rs 394472 crores for
2015-16, which will be covered by borrowing from the capital budget. According to the
budget, the borrowing or fiscal deficit is Rs 555649 crores. This demonstrates that India's
income deficit is the underlying cause of the country's fiscal deficit.

Formula for Revenue Deficit :

Revenue Deficit: Total revenue receipts – Total revenue expenditure.

Revenue Deficit deals only with the government’s revenue receipts and revenue
expenditures. (Revenue receipts are receipts which neither create liability nor lead to a
reduction in assets.) It is further divided into two heads:

● Receipt from Tax (Direct Tax, Indirect Tax)

● Receipts from Non-Tax Revenue Revenue

Expenditure is referred to as the expenditure that does not result in the creation of assets
reduction of liabilities. It is further divided into two types:

● Plan revenue expenditure

● Non-plan revenue expenditure

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How Revenue Deficit is met ?

To overcome such a financial situation, the government can take these measures:

● Through the borrowings or sale of existing assets, the deficit could be met from the capital
receipts.

● The government can increase its non-tax or tax receipts.

● The government could try to reduce unnecessary expenditures.

What does Revenue Deficit indicate ?

Revenue Deficit is shown as a reference indicator in the Medium-term Fiscal Policy

Statement (MTFP). The Revenue Deficit of the government has several implications, such as,
it has to be met from the capital receipts, because of which a government either borrows or
sells its existing assets. This brings in a reduction in assets.Also, to meet its consumption
expenditure, since the government uses capital receipts, it leads to an inflationary situation in
the economy.With more and more such borrowings, along with interest, the burden to repay
the liability also increases which, in the future, results in huge revenue deficits. The
Keynesian view, as repeatedly espoused by Rakshit (2000, 2001) and Mulji (2004),
emphasizes the demand stimulus from a higher fiscal deficit. It claims that under current
conditions in India, demand stimulus is desirable, and hence a high, or higher fiscal deficit, is
desirable. The Keynesian position is that crowding out effects from the fiscal deficit are
either negligible or can be alleviated by monetization of the deficit and related measures.1One
of the most sought after details in any Union Budget is the level of fiscal deficit. It is
essentially the gap between what the central government spends and what it earns. In other
words, it is the level of borrowings by the Union government. This number is the most
important metric to understand the financial health of any government’s finances. As such, it
is keenly watched by rating agencies — both inside and outside the country. That is why
most governments want to restrict their fiscal deficit to a respectable number.

1
Vivek Moorthy, Capital Illusions about India’s Revenue Deficit, 10.2139/ssrn.2153718, last visited:
17/06/2022, 10:00Am.

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Effective Revenue Deficit:

Effective Revenue Deficit is the difference between revenue deficit and grants for creation of
capital assets.The concept of effective revenue deficit has been suggested by the Rengarajan
Committee on Public Expenditure. It is aimed to deduct the money used out of borrowing to
finance capital expenditure. The concept has been introduced to ascertain the actual deficit in
the revenue account after adjusting for expenditure of capital nature. Focusing on this will
help in reducing the consumptive component of revenue deficit and create space for increased
capital spending. Revenue deficit is “the difference between revenue expenditure and revenue
receipts which indicates increase in liabilities of the Central Government without increase in
the assets of that Government”(emphasis added). An additional fiscal indicator, namely,
effective revenue deficit, has been prescribed by an amendment to the FRBM Act by the
Finance Act, 2012.

Effective revenue deficit has been defined as the difference between “the revenue deficit and
the grants for creation of capital assets”.Grants for creation of capital assets are defined as
“the grants-in-aid given by the Central Government to the State Governments, constitutional
authorities or bodies, autonomous bodies and other scheme implementing agencies for
creation of capital assets which are owned by the said entities”. The amendment confers a
statutory status on the concept of effective revenue deficit which had already featured in the
Central Budget 2011-12. Against the FRBM Act target of elimination of revenue deficit by
March 2009, the proposed amendment seeks to eliminate effective revenue deficit by 2015.

Effective revenue deficit is intended to cure the distortions caused by large-scale transfers to
other entities for the creation of capital assets (which must necessarily be classified as
revenue expenditure in the Central budget and accounts, since the ownership of such assets
does not vest in the Central Government).That grants to other entities for the creation of
capital assets was unequivocally recognised by way of the explicit reference to the ownership
of the assets in the definition of revenue deficit in the FRBM Act. Nevertheless, the
additional indicator has been justified on grounds of the strong federal structure of the
country and the increased policy thrust on social sector spending, involving larger transfers to
other entities, which supposedly have a significant component for creation of capital assets.
This reasoning raises several concerns.

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REVENUE DEFICIT IN UNION BUDGET OF INDIA:

Revenue deficit is targeted at 3.8% of GDP, and fiscal deficit is targeted at 6.4% of GDP in
2022-23. The target for primary deficit (which is fiscal deficit excluding interest payments) in
2021-22 is 2.8% of GDP.

The ratio of the revenue deficit to the gross fiscal deficit (RDGFD)2 – another indicator of the
quality of expenditure is set to decline for the second consecutive year to 59.6 per cent in

2
This indicator shows how much borrowed funds are going towards revenue account and capital account. Since
investment in long-term assets gives a higher return which can be used to repay the borrowed funds, this ratio
has an important implication for debt sustainability.

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2022-23 (BE), as against the average of 70.1 per cent during 2010-11 to 2019-2014. Central
finances are, thus, moving towards a growth promoting expenditure mix.

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 requires the central
government to progressively reduce its outstanding debt, revenue deficit and fiscal deficit.
The central government gives three year rolling targets for these indicators when it presents
the Union Budget each year.The Medium Term Fiscal Policy Statement in both 2021-22 and
2022-23 did not provide rolling targets for budget deficits. In the Budget speech, the finance
minister noted that the government aims to reduce fiscal deficit to below 4.5% of GDP by
2025-26.Revenue deficit is the excess of revenue expenditure over revenue receipts. Such a
deficit implies the government’s need to borrow funds to meet expenses which may not
provide future returns. The estimated revenue deficit for 2022-23 is 3.8% of GDP. In 2021-
22, the government had set a budget estimate of 6.8% of GDP for fiscal deficit, and 5.1% of
GDP for revenue deficit. As per the revised estimates, the fiscal deficit is expected to
marginally exceed the budget estimate to 6.9% while revenue deficit is estimated to be lower
at 4.7%.

FRBM targets for deficits (as % of GDP):

Actuals Revised Budgeted

2020-2021 2021-2022 2022-2023

Fiscal Deficit 9.2% 6.9% 6.4%

Revenue Deficit 7.3% 4.7% 3.8%

Primary Deficit 5.8% 3.3% 2.8%

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To close a revenue gap, the government can either raise taxes or cut spending. A revenue
imbalance, if not addressed, can have a negative impact on the government's credit rating.
Because there aren't enough money to pay the expense of a revenue gap, the government's
anticipated expenditures may be jeopardised. The government should make every effort to
cut costs and eliminate wasteful spending. The government can avert a revenue shortfall by
identifying and implementing cost-cutting initiatives. Because the government must make up
the uncovered shortfall by drawing on capital receipts, either through borrowing or the sale of
its assets, a revenue deficit shows dissaving on the government account.

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CASE STUDY- 13

Pathy is working as a DISHA program unit that has pioneered budget work at the state level
in India since the 1990s. DISHA was the first organization in India to attempt to understand
the financial resources of the country in relation to the fulfillment of basic rights such as
food, shelter, work, clothing, education,health, etc.Budget analysis, according to Pathey, is a
continual process oriented task, since the state has been providing the budget to manage the
affairs of government constantly, hence budget analysis and advocacy demand ongoing
labour. Every year, the state government proposes a new budget with increased funding for
the state's governance and the provision of specific services to people. Following the
presentation of the budget and the Finance Minister's speech, the budget books are placed on
the table for distribution to the elected members. Pathey obtains these budget books from
MLAs who are familiar with Pathey's work. It examines budgets with key thee objectives,
first, whether the Finance Minister's budget address cites pro-poor initiatives, and if so,
whether they are matched with appropriate resources. Second, if enough budgetary
allocations have been provided for existing pro-poor development programmes. Finally, the
goal is to determine how the budget connects to the socioeconomic realities of Gujarat's poor.
The day after the budget is presented in Gujarat, the Pathey team briefs the press on the
highlights of the replies to the above-mentioned guiding questions. When the budget
discussion begins, the team also presents sectoral briefs to Members of the Legislative
Assembly (MLAs) from all parties, including financial analyses and indications of political
repercussions. Similar notes are soon shared with other non-governmental organisations,
government officials, academics, and the media. The Budget Brief issued by Pathey assists
the layperson in better understanding the state's budgetary circumstances at the macro level.
It also includes financial factors such as state revenue resources from various sources and
state expenditure for various services. The study includes a comparison of data with past
years to provide trends in a broader context. It also provides macrolevel social and human
development indicators to indicate the condition of development. The macro level analysis is
distributed to elected officials and press journalists so 3 Panda, Gyana. (2012). Civil Society
Interface with Budgetary Processes in India: Practices and Challanges.

3
Panda, Gyana. (2012). Civil Society Interface with Budgetary Processes in India: Practices and Challanges.
10.13140/RG.2.1.5131.9927.

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10.13140/RG.2.1.5131.9927. that they may augment their write-ups and reports with Pathey's
expertise.In Gujarat, the General Discussion is followed by the Discussion on Demands and
Appropriation for each department in the Assembly House. Pathey also prepares a brief
note/write-up on each department's appropriation needs for the following year, as well as
actual expenditure for the preceding year. The analytical writings also incorporate patterns
from the previous four to five years. Pathey especially focus on concerns of tribal peoples and
area development under the TASP's (Tribal Area Special Plan), Scheduled Caste Special
Component Plan, the condition of children, women, water, and medical conditions during the
budget session.Pathey supplied statistics on TASP expenditures over the previous twenty
years (from 1991 to 2010) last year, as well as the backward regions of the state analysed and
graded by several govt committees. Similarly, Pathey concentrated on expenditure under the
Special Component Plan for Schedule Caste persons under SCP and the level of execution of
provisions of the Planning Commission of India's guidelines. Every year, the Pathey team
targets individual MLAs (elected representatives), regardless of party membership, because
they represent constituents, castes, and communities. There is a subset of Dalit and tribal
MLAs who may be interested in bringing concerns to the government as an elected member
and representing their socioeconomic class. During the enactment phase, Pathey is sending
Legislative Assembly Questions (LAQs) to elected members who follow their work on a
regular basis and are interested in debating and submitting such questions in accordance with
their regulations and protocols. This form of participation is limited to opposing benches.
Every year, the Pathey team targets specific MLAs (elected members), regardless of party
membership, because they represent the constituency, caste, and community members. There
are certain Dalit and tribal MLAs who may be interested in raising problems with the govt as
an elected member and representing their socioeconomic class. During the enactment phase,
Pathey is offering Legislative Assembly Questions (LAQs) to elected members who monitor
their work on a regular basis, are interested in discussion, and submit such questions in
accordance with their regulations and methods. This form of interaction is limited to
opposition benches.

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CASE STUDY- 2

MAHARASHTRA BUDGET 2002-2003 (Part-3)

Dangerous Proposal

The proposal to grant five-year extraordinary leave to a government servant, during which he
will be free to take any outside job, is open to serious questions of propriety and advisability.
This may result in state government servants taking up jobs in industry and trade and, on
return from deputation, working as liaison officers in the government. This is likely to further
erode the standards of ethics, morality and integrity which have seen such sharp erosion over
the recent years. It is hoped that sufficient pressure will be brought on the government by
civil society institutions to give up this proposal. It is also necessary to note that any such
relaxation in service rules is unlikely to lead to any significant relief to the state budget.
There is therefore no reason to adopt a policy which will undermine the very foundations of
the civil services in the state. A reference may be invited to yet another worrisome feature of
the budget. This pertains to the introduction of an entry tax on some items and the
expectation that its implementation will be ensured through physical checks at the state
boundaries. The finance minister’s observations in this regard are significant. He has stated,
“Many of the adjoining states have introduced an entry tax on selected commodities. There
has been a demand from local units that a similar levy be introduced in Maharashtra for the
protection of local industry. The demand is consistent and widespread. In certain instances,
because of the differentials in tax rates, goods are imported from other states. In other
instances, goods are sold directly from another state to consumers in Maharashtra” (emphasis
added). These are dangerous arguments and are meant to further compartmentalise the
markets. Indian industry has continued to press for protection whether from producers in
other states in India or from those abroad. The question is whether the state and central
governments should accede to such demands for continued protection for Indian industry year
after year. Tamil Nadu too has announced, in its budget for 2002-03, widening of the entry
tax band to include motor spirit, lubricating oils, bitumen, aluminium, asbestos cement
sheets, HDPE granules and PVC resins and pipes, HDPE/PP woven fabrics, marbles,
granites, ceramic tiles, potassium chlorate, LAB, soda ash, caustic soda and chlorine, sanitary
wares, newsprint, paper, paper boards, wheat products, iron and steel, compressors and other
parts of air conditioners and refrigerators, and tobacco and tobacco products excluding
beedies (The Economic Times, March 28, 2002). The list of products covered under the entry

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tax in Tamil Nadu has been deliberately re- produced to show the range of products covered
under this obnoxious tax. Such a move by large and so-called progressive states runs counter
to the objective of doing away with the restrictions on interstate trade and commerce and to
work for establishing a common market for the whole country. It is time this issue is
discussed in a conference of state finance ministers and the National Development Council to
formulate a national policy on the subject. It is equally disturbing to find that in spite of the
agreement at the national level, the states are refusing to comply with the uniform floor rates
on commodities. The finance minister of Maharashtra has brought out in his budget speech
that both Gujarat and Rajasthan have levied a much lower rate of tax on bullion and gold
jewellery than the floor rate agreed upon which has resulted in large diversion of trade in
these items from Maharashtra. This has led to reduction in the rates of tax on these items in
Maharashtra. It is a travesty that, due to such intransigence of states, while luxury goods such
as bullion and gold jewellery have to be taxed at a lower rate, even items of necessities for
the common person have to bear much higher rates of tax. Such policies bring the entire
process of economic liberalisation and development strategies into disrepute. The same is the
situation in respect of union territories. The finance minister has stated that “in certain high
cost commode- ties and articles, there has been very considerable diversion of trade because
of the very low tax rates available under the central sales tax in some union territories. I pro-
pose to provide a 4 per cent rate of sales tax for automated teller machines, auto- mated cash
dispensers, automated MICR cheque readers and sorters. These goods will be exempted from
turnover tax.” This problem has been continuing for decades, in spite of repeated discussions
in inter- state forums, and has led to forgoing of large revenues by several states. The central
government has failed to take any action in this behalf even though the union territories come
under its administrative control.

Implications of Oil Price Decontrol

The Administered Price Mechanism (APM) for petroleum products is being abolished from
April 1, 2002. There can be two opinions about the advisability of this move in the Indian
context at this stage. But the basic objective is to make available petroleum products to Indian
consumers at international prices. As a step in this direction, the union finance minister, in his
budget speech, announced a reduction in the prices of petrol and diesel by Re 1 per litre.
Soon thereafter has come the Maharashtra budget in which a surcharge of an equivalent
amount has been levied on petrol and diesel. This raises the larger question of whether the
objective underlying the dismantling of APM will be subserved by dual taxation of petroleum

18
products by the centre and the states. On the one hand, the centre is examining the calibration
of central tax rates to take care of large swings in the prices of these products. On the other
hand, the states will continue to look merely at safeguarding their own revenue interests.
Thus, particularly when decline in inter- national oil prices is expected to lead to lower prices
of petroleum products in the country, the states will find that their revenues will be adversely
affected and this will lead to their stepping up taxes on these products. These issues do not
seem to have been taken into account in projecting the scenario after the dismantling of APM.
The Maharashtra budget has increased the electricity duty on certain categories of consumers
as the Maharashtra Electricity Regulatory Commission, while revising electricity tariff from
January 1, 2002, has excluded the ‘transmission and distribution loss charge’ from the levy of
elec tricity duty. This has led to reduction in the revenue accruing from the levy of electricity
duty. The time has come to examine whether the states should be permitted to continue to
levy electricity duty even after the establishment of electricity regulatory commissions
(ERCs). Levy of such duty has led to pre-emption of the resources of the SEBs, particularly
when their finances are in disarray. This has also led to reducing the scope for rationalisation
of tariffs by the ERCs. It is imperative that this matter is reviewed during the scrutiny of the
provisions of the electricity bill by the standing committee of parliament on the power
ministry. Attention may be invited to a few of the other taxation proposals contained in the
budget. First, in their pursuit of larger revenues, the states have continued to tax beer at a rate
even higher than Indian made foreign liquor (IMFL) and country liquor. It is time this policy
is reviewed. The objective of state policy must be to dis- courage consumption of hard liquor
and instead to divert the consumer to wine and beer. Maharashtra needs to reorient its policy
in this behalf. Second, in successive budgets the state government has levied a higher rate of
tax on branded products under the mistaken notion that these are consumed by the better-off
sections of society. This premise itself is open to question. It will be wrong to assume, as the
Maharashtra budget seems to do, that branded bread is consumed only by the better-off
sections of society. Further, it is necessary that agro-processing, packaging and marketing
activities are encouraged to give better returns to the farmer. If this is to be achieved, the
fallacious notions of the socialist era must be given up as soon as possible. Third, the
proposal in the budget to exempt from tax the very cheap varieties of tobacco and those
which are exclusively used by the poorer sections of society is highly questionable. There is
enough medical evidence to show the deleterious effects of consumption of tobacco. It is
wrong to encourage its use, particularly by the poorer sections of society, who can least
afford the expenditure on health and medical care. To the extent to which such sections rely

19
on government hospitals and primary health centres, the government’s own expenditure is
bound to increase in the process. Fourth, the proposal to levy a tax for non- utilisation of land
situated within the limits of municipal corporations and ‘A’ class municipal councils has been
revived after 13 years. It was first announced in the budget in 1989 but was withdrawn by the
government due to the pressures of vested interests. It is hoped this eminently suit- able and
long overdue measure will receive support from all sections of the legislature.

Unsatisfactory Tax Effort

The tax effort in the state continues to be much less as compared to many other states. In
view of this, the steps taken to mobilise additional resources during the year are inadequate.
The finance minister has also not indicated the break-up of the additional revenue expected to
be raised by each one of the proposed measures which would enable examination of whether
levy of a new tax or increase in the rate of tax is cost-effective and justified. Tax expenditures
continue to be high in Maharashtra. Keeping this in view, abolition of just 17 notifications for
the levy of tax at a concessional rate or tax exemption can hardly be called a sizeable effort.
Declaration of amnesty schemes from time to time has been a bane of sales tax administration
and has created a cli- mate for not paying taxes. Against this background, declaration of yet
another amnesty scheme regarding interest payment under the works contract Act is hardly
justified. Even though the state is faced with severe shortage of resources, the finance
minister has not thought it fit to levy an agricultural income tax. Time and again a claim is
made by the state government and political parties that the cooperative movement has
brought about prosperity to rural areas and has changed the face of rural Maharashtra. Un-
fortunately, this is hardly reflected in the revenue mobilised from these areas. Looked at from
this perspective, the proposal in the budget to replace the ad valorem duty on purchase of
sugarcane by a specific duty is hardly justified. The budget indicates that the Tenth Five-
Year Plan of the state will be Rs 55,886.4 crore. The Annual Plan for the year 2002-03 is to
be Rs 11,135.37 crore. Of this, the budgetable Plan outlay is to be Rs 6,802.11 crore.
Practically the entire balance amount is to be made up by borrowing from the market. For
lack of resources, Rs 2,350 of the proposed budgetable outlay is yet to be provided for in the
budget. As seen from the series of announcements made by the finance minister, these
shrinking resources are to be spread thinly over all sectors due to political compulsions,
thereby reducing their impact as also efficiency. The budget brings out that the core Plan is to
be of only Rs 4,452 crore. Even out of this amount, provision of only Rs 3,739.96 crore has
been made in the budget. It is for the first time that the concept of core Plan has been

20
introduced in the state to keep up the pretence and facade of normalcy. But resources cannot
be generated by creative accounting such as making inadequate provisions for transfer to the
Employment Guarantee Fund as in 2001-02. As seen during the year 2001-02, the revised
estimates bear no relation to the original estimates insofar as major indicators of the financial
health of the state are concerned, namely, the revenue and fiscal deficits. This year too
resources seem to have been artificially overestimated and expenditures underplayed as seen,
for example, in respect of the provision for the EGS (Rs 434 crore) as compared with the
actual expenditure (Rs 900 crore) in 2001-02. The state governments have played this game
over and over again to get larger Plan outlays approved by the Planning Commission. It must
be stated that unrealistic assessment of the Plan resources of states by the Planning
Commission year after year has accentuated the problem of revenue and fiscal deficits of the
states. If Maharashtra’s resources are assessed rigorously, it will be found that the state ought
to declare a Plan holiday for 2002-03. The state government will find it politically difficult to
do so but at least the Planning Commission must bring this home to the state government. It
is necessary that the people know the real state of Maharashtra’s finances. Such a step will
increase the acceptability of various reforms proposed by the finance minister in his budget
speech. But to expect this to come about will mean living in a fool’s paradise. India has
proved again and again that you can fool all the people all the time!

Q1. Discuss why the proposal to grant five-year extraordinary leave to a government
servant, during which he will be free to take any outside job, is termed as dangerous?

Ans-1) Every government is required to follow a set of conduct guidelines. It is known as

Central Civil Services (Conduct) Rules, 1964 in the case of Central Government employees,
Railway Servants (Conduct) Rules in the case of Railway personnel, and comparable rules
made by respective State Governments in the case of State Government employees. These
regulations are comparable in certain ways. As a result, if the Conduct Rules state that a
government employee may not engage in private enterprise, only that government employee
will face penalties.The proposal to grant five-year extraordinary leave to a government
servant, during which he will be free to take any outside job, is open to serious questions of
propriety and advisability.This may result in state government servants taking up jobs in
industry and trade and, on return from deputation, working as liaison officers in the
government. This is likely to further erode the standards of ethics, morality and integrity

21
which have seen such sharp erosion over the recent years.It is also necessary to note that any
such relaxation in service rules is unlikely to lead to any significant relief to the state budget.
There is therefore no reason to adopt a policy which will undermine the very foundations of
the civil services in the state.

Q2. Discuss the implications of oil price decontrol for the tax revenues of the state of
Maharashtra?

Ans-2) Oil Price decontrol essentially offers fuel retailers freedom to fix prices based on
calculations of their own cost and profits. Essentially, it is a factor of the price at which they
source their inputs from upstream oil companies, for whom the price benchmark is derived
from global crude prices. In theory, retail prices of petrol and diesel in India are linked to the
global crude prices. There is supposed to be complete decontrol of consumer-end prices of
auto fuels and others such as the aviation turbine fuel or ATF. Which means that if crude
prices fall, as has largely been the trend since February, retails prices should come down too,
and vice versa. Oil price decontrol is a one-way street in India — when global prices go up,
this is passed on to the consumer, who has to cough up more for every litre of fuel consumed.
But when the reverse happens and prices go down, the government — almost by default —
slaps fresh taxes and levies to ensure that it rakes in extra revenues, even as the consumer,
who should have ideally benefited by way of lower pump prices, is short changed and forced
to either pay what she’s already paying, or even more. The key beneficiary in this subversion
of price decontrol is the government. The consumer is a clear loser, alongside fuel retailing
companies as well. Price decontrol essentially offers fuel retailers such as Indian Oil, HPCL
or BPCL the freedom to fix prices of petrol or diesel based on calculations of their own cost
and profits — essentially a factor of the price at which the source their inputs from upstream
oil companies such as ONGC Ltd or OIL India Ltd, for whom the price benchmark is derived
from global crude prices. Fuel price decontrol has been a step-by-step exercise, with the
government freeing up prices of ATF in 2002, petrol in the year 2010 and diesel in October
2014. Prior to that, the Government used to intervene in fixing the price at which the fuel
retailers used to sell diesel or petrol. While fuels such as domestic LPG and kerosene still are
under price control, for other fuels such as petrol, diesel or ATF, the price is supposed to be
reflective of the price movements of the so-called Indian basket of crude oil (which
represents a derived basket comprising a variety — ‘sour grade’ (Oman and Dubai average)
and ‘sweet grade’ (Brent) — of crude oil processed in Indian refineries). Particularly when
decline in inter- national oil prices is expected to lead to lower prices of petroleum products

22
in the country, the states will find that their revenues will be adversely affected and this will
lead to their stepping up taxes on these products. These issues do not seem to have been taken
into account in projecting the scenario after the dismantling of APM.

Que-3) Discuss the effectiveness of tax efforts of the state of Maharashtra?

Ans-3) The tax effort in the state continues to be much less as compared to many other states.
In view of this, the steps taken to mobilise additional resources during the year are
inadequate. The finance minister has also not indicated the break-up of the additional revenue
expected to be raised by each one of the proposed measures which would enable examination
of whether levy of a new tax or increase in the rate of tax is cost-effective and justified. Tax
expenditures continue to be high in Maharashtra. Keeping this in view, abolition of just 17
notifications for the levy of tax at a concessional rate or tax exemption can hardly be called a
sizeable effort. Declaration of amnesty schemes from time to time has been a bane of sales
tax administration and has created a cli- mate for not paying taxes. Against this background,
declaration of yet another amnesty scheme regarding interest payment under the works
contract Act is hardly justified. Even though the state is faced with severe shortage of
resources, the finance minister has not thought it fit to levy an agricultural income tax. Time
and again a claim is made by the state government and political parties that the cooperative
movement has brought about prosperity to rural areas and has changed the face of rural
Maharashtra. Un- fortunately, this is hardly reflected in the revenue mobilised from these
areas. Looked at from this perspective, the proposal in the budget to replace the ad valorem
duty on purchase of sugarcane by a specific duty is hardly justified.

23
 BIBLIOGRAPHY

BOOKS:

 Richard Musgrave & Peggy Musgrave, (2017), Public Finance: Theory and Practice
— McGgraw Hill,5th edition.
 K.P.M. Sundaram,(2010), Public Finance — Theory and Practice , (16th Edition), S.
Chand & Co., New Delhi.
 S.K Singh, (2010) Public Finance in Theory & Practice, S. Chand & Company

WEBSITES:

https://economictimes.indiatimes.com/industry/energy/oil-gas/what-is-fuel-price-
decontrol-and-why-consumers-are-the-biggest-losers/breaking-it-
down/slideshow/76380764.cms
https://indianexpress.com/article/explained/india-fuel-prices-diesel-petrol-atf-
explained-6455735/
https://dea.gov.in/sites/default/files/FRBM%20Act%202003%20and%20FRBM
%20Rules%202004.pdf

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