NEERAJ SHARMA

 Fiscal Policy influences growth in economy in two

ways:
 Resource Mobilization (receipts) and Resources
Allocation (Allocation or expenditure)
 Since Receipts < Expenditure this has lead to deficit
financing
 Main aspects of resources are
 Indirect taxes – Customs and Excise duty – central,
sales tax – State, now being replaced by VAT
 Direct Taxes : Income tax, corporate Tax etc.
 Service Tax – Introduced in 1994-95.
 1. Interest on loans given to state governments,
NGO’s, PSE, Railways.
 2. Dividends and interests earned on equity by
banks & RBI, + PSE’s – 16000 Crores (2001-02)
 Provident Fund
 Public borrowings
 Civil Expenditure
 Defence
 Interests on loan
 Investment in PSE
 Subsidies (unjustified)
 Social Sector & infrastructure building
expenditure
 Fiscal Deficit (TR – TE - PB)
 Total Receipts (Capital receipts + Revenue receipts) – Total
Expenditure ( Capital Expenditure + Revenue Expenditure) -
Public borrowings)
 2001-2002 116, 314 crores , estimated was 4.7%, actual was 5.7% of
GDP
 Revenue Deficit (RR – RE)
 Revenue receipts – Revenue Expenditure , 78.801 crores
 Primary Deficit
 Fiscal deficit – interest payments
 (CR + RR + Borrowings) – (CE + RE + Payment of interests)
 Budgetary Deficit
 Total Revenue – Total Expenditure
 To meet this deficit in financing we have to
 1. Pass on this deficit to RBI
 Deficit financing  Pass to RBI  more money supply
(due to more currency notes being printed by RBI) 
inflation
 1991 8.4% FD, inflation 16.7% of GDP
 Current account deficit was 3.3% of GDP
 2. Borrow from Public
 After 1997, government is borrowing form public, this
leads to Public Debt Interest, 1,12,300 Crores – 2000-01
 54% of borrowed loans are spent on revenue
expenditure.
 High and unsatisfactory expenditure (CDIS)
 Civil and government expenditure – this is quite high and
unproductive also includes allocation for social sector,
infrastructure development, 3,00,000 Crores approximately
 Defence Expenditure - This is 42,041 Crores includes payment of
salaries, one can not reduce it.
 Interest on loans and borrowings - 49% of revenue expenditure
 Subsidies – 29, 800 Crores.
 Weak Resource Mobilization
 Small contribution of direct taxes
 Poor performance of public sector enterprises, they are becoming
loss making units.
 Rise in Inflation
 (BOP) deficit in Balance of payment leads to
rise in general price level which makes export
good become expensive.
 Contain Revenue Expenditure
1. Civil & Government expenditure – These are about 3,00,000
crores have to be contained by layoffs (downsizing), VRS or golden
handshakes. Curbs expenses of offices, central government
expenses, police and pensions
2. Interest Payments - Raja Chellaih says government must find
ways to reduce interest payments, which is 1,16,000 Crores, 49% of
revenue expenditure. High interest rate borrowings should be
replaced by low interest rate borrowings - swaps.
3. Defence Expenditure - 42,000 Crores. It can not be reduced due to
strategic needs.
4. Subsidies - 29,800 Crores on fertilizers, food sugar, oil, diesel,
LPG are being reduced now
 Capital Receipts
Man Mohan Singh had given certain instructions for
tackling fiscal deficit.
1.Disinvestment and Privatization of Public Sector
Enterprises – There have been 240 PSE’s, profit making
125, Loss making 109, Neither loss or profit – 6.Money
acquired through disinvestment: 2000-01 – 10,000
Crores, 2001-02 – 12000, 1997-2002 - 54,300 Crores,
Actual 1868 (Balco included). Although this money will
not be used for containing deficit financing but for
social sector and infrastructure building, thus this will
lessen the Deficit.
2. Raise the level of Economic Growth –
estimated 2001-2002 – 7%, Real 2001-2002 5.4%
 As growth is high, tax receipts will also be high in
spite of high increasing rate of taxes.
 Custom and excise duty collection are also good.
 Import duty on non-oil import may be raised.
3. Interest rates are reduced - Finance minister
has reduced the rate of interest of public
borrowings.
4.(i) More people are to be brought under tax net -
 Compliance of tax collection should be increased.
 Deduction at source – by banks for FD’s of 1 Lakh
or more, but banks say that 1 lakh limit should be
increased., NBFC’s mutual funds
 (ii) Higher income people should be targeted -
People earning > 5 lakhs should file returns and give
tax of 1,200. Only 50,000 people have paid income tax
who are earning more than Rs 10 Lacs but actual
number is 1.8 Lakhs
(iii)One of Six Parameter – Car, Mobile, Phone, Foreign
trip, House, income is more have to file return,
increase these parameters so that people come
under ambit of taxes, but is not a sure shot strategy.
5. Service Tax - Bring more items under service tax, raise
the rate of service tax.
 This was introduced by Yashwant Sinha, it covered
5%, 10 more services included 8% proposed
 81 Items – Broadcasting services, decorators of pandals
of marriages, FAX services, insurance sector, photostat,
port services, service stations for 2 or 4 wheelers,
specified banking, Telex, Air Travel Agents, Brokers,
catering agents for outside parties, clearing agents,
engineering consultancy, goods transport by road, non
life insurance policies
1. Increase Personal Income tax – People think that it is already very
high, therefore can not be raised further
2. Corporate Tax – Can not be raised as profitability of companies is
decreasing due to economic slow down, 9/11 incident in America,
now this is reduced to 30% from 35%
3. Custom duties – This provide large amount of revenue, can not be
increased as
1. India has signed GATT (WTO) 1994, which advises for free
trade and lower tariff. 150% (1994) reduced to 30% to be
brought to 20% by FM who is under obligation of WTO
2. Also due to recession imports especially non –oil imports are
down.
4. Excise Duty – It is reduced.
1. Rural Sector and infrastructure fund to be
created by NABARD – 500 Crores. FDI
allowed to reduce and budgetary provisions
are not required for it now.
2. General expenses are reduced by 5%
3. Fiscal Responsibility and Budget Management
(FRBM) Act to be introduced soon.