Fiscal Policy in Indian Economy

Fiscal Policy in India Introduction:
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The most important instrument of government intervention in the country is that of Fiscal or Budgetary policy. Fiscal policy refers to the taxation, expenditure and borrowing by the government. The economists now hold the government intervention through Fiscal policy is essential in the matter of overcoming recession or inflation as well as of promoting and accelerating economic growth, which monetary policy will not hold alone. There is no doubt that the government budgetary or fiscal policy must be sound, keeping in view the needs and requirements of a developing economy. In short we can say that, it is a part of government policy, which is concerned with raising revenue through taxation and other means and deciding on the level and pattern of expenditure. The main problem faced by the capitalist economies instability prevailing in them. This instability is reflected in the periodic occurrence of trade cycles, which are a general phenomenon in the free market capitalist economies. During a recession or depression fiscal policy should help in increasing demand.
Meaning of Fiscal Policy:

The fiscal policy is concerned with the raising of government revenue and incurring of government expenditure. To generate revenue and to incur expenditure, the government frames a policy called budgetary policy or fiscal policy. So, the fiscal policy is concerned with government expenditure and government revenue. According to Arther Smithics, fiscal policy refers to a policy under which the government
uses its expenditure and revenue programmes to produce desirable effects and avoid undesirable effects on the national income, production and employment.Fiscal policy has to decide on the
size and pattern of flow of expenditure from the government to the economy and from the economy back to the government. So, in broad term fiscal policy refers to "that segment of national economy policy which is primarily concerned with the receipts and expenditure of central government." In other words, fiscal policy refers to the policy of the government with regard to taxation, public expenditure and public borrowings. The importance of fiscal policy is high in underdeveloped countries. The state has to play active and important role. In a democratic society direct methods are not approved. So, the government has to depend on indirect methods of regulations. In this way, fiscal policy is a powerful weapon in the hands of government by means of which it can achieve the objectives of development.
Fiscal Policy Overview:

Economic Reforms have yielded credible gains in the external and monetary sector since early 1990s. Inflation has climbed down from a peak of 17 per cent in August 1991 to about 5 per cent now. The economy has grown at an average of over 6 per cent p.a. In a major structural change in the economy, the share of the services sector continues to grow steadily. Tax reforms during this period have laid the foundation of a robust, expanding tax base. Out
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of our total external debt of nearly US $ 112 billion, only about 5 per cent is short-term debt. Gradual and cautious liberalization of the capital account has sought to control short-term capital inflows and keep the maturity profile, end-use etc. within prudential norms. These are very impressive achievements. Stability has been achieved in the external sector and the central bank can now conduct autonomous monetary policy. However, continued fiscal deficits are restraining the economy from realizing its full potential to grow and in providing quality infrastructure, both physical and social, that can meet the growing needs of a resurgent economy.
1. In order to minimise the impact of the global slowdown on the Indian economy, the
Government took a conscious decision to continue with the fiscal expansionary measures in the Budget 2009-10. The aim of the policy was to enhance public expenditure so as to boost demand and spur the process of development and economic revival. The above decision of the Government to increase public expenditure, even with lower revenue receipts, and stimulate the economy by creating demand was guided by the principle of insulating the vulnerable sections of society and sectors of economy from the impact of economic downturn and at the same time ensure revival of the economy with higher growth. These measures were expected to spur growth and restore revenue buoyancy in medium term and provide the required fiscal space to revert to the path of fiscal consolidation. The fiscal deficit of 6.8 per cent of GDP in BE 2009-10 may therefore be seen against this background. 2. The positive impact of these measures could be seen with Indian economy recording 7 per cent growth in real GDP in the first half of 2009-10 when most of the developed economies of the world were trying their best to stay afloat. Indian economy is estimated to grow at 7.2 per cent in 2009-10 as per the latest data, although there are possibilities that it may actually be slightly higher. 3. The measures taken by Government to counter the effects of the global meltdown on the Indian economy have resulted in shortfall in revenues and substantial increase in Government expenditures, leading to deviation from the fiscal consolidation path mandated under the FRBM Act. The gross tax to GDP ratio which increased to an all time high of 12 per cent in 2007-08, thanks to the economy riding on high growth trajectory, has steadily declined to 10.9 per cent in 2008-09 and 10.3 per cent in RE 2009-10 due to moderation in growth in economy and reduction in tax/duty rates. At the same time total expenditure as percentage of GDP has increased from 14.4 per cent in 2007-08 to 15.9 per cent in 2008-09 and 16.6 per cent in RE 2009-10. The fiscal expansion in the last 2 years has resulted in higher fiscal deficit of 6 per cent of GDP in 2008-09 and 6.7 per cent in RE 2009-10. Moreover, the revenue deficit as percentage of GDP has worsened to 4.5 per cent and 5.3 per cent in 200809 and RE 2009-10 respectively. The revenue deficit and fiscal deficit in RE 2009-2010 are higher than the targets set under the FRBM Act and Rules. The deviation from the mandate under FRBM Act and Rules was resorted to with the objective of keeping the economy on the higher growth trajectory amidst global slowdown by creating demand through increased public expenditure in identified sectors.
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4. It is however important to note that the fiscal deficit in RE 2009-10 is broadly in line with BE 2009-10. Furthermore, against fiscal deficit of 7.8 per cent of GDP in 2008-09 (inclusive of oil and fertiliser bonds), the comparable fiscal deficit including the impact of Rs.10,306 crore of oil bonds towards under recoveries of the previous financial year, is 6.9 per cent of GDP as per RE 2009-10. Both these deficit figures are based on the revised GDP numbers published by the Central Statistical Organisation. It clearly marks an improvement of about 1 per cent of GDP in fiscal deficit in 2009-10 compared to 2008-09. The Government has made a conscious effort to avoid issuing Government securities in lieu of cash subsidies to oil and fertiliser companies. The Government would like to maintain this trend of extending Government subsidy in cash rather than by way of bonds. This is a major step towards bringing all subsidy related liabilities into Governments fiscal accounting. 5. The medium term objective as enumerated in the Fiscal Policy Strategy Statement presented in July 2009 is to revert to the path of fiscal consolidation at the earliest with emphasis on structural fiscal reforms and prudent fiscal management with improvement in the economic situation. Without putting at risk the revival process, the Government is looking at exit strategies with improvement in economic conditions. 6. The Budget 2010-2011 is being presented in this backdrop with signs of recovery in the Indian economy along with a few other economies in the world. However, it is still early to predict complete revival in the world economy and the Government has to be cautious in its exit strategy. The growth rate of 7.9 per cent in GDP in the second quarter of 2009-10 compared to the average growth of 5.8 per cent during the second half of 2008-09 shows that the impact of fiscal stimuli has started showing results. Better than estimated direct tax receipts coupled with impressive growth data from manufacturing sector in recent months provide opportunities for the Government to revert back to the path of fiscal consolidation in a gradual manner staring from 2010-11. The 13th Finance Commission in its recommendations has also provided a roadmap for fiscal consolidation.
Objectives of Fiscal Policy in Developing Countries:

In developing countries, taxation, the government expenditure, taxation and borrowing have to play a very important role in accelerating economic development. Fiscal policy is a powerful instrument in the hands of the government by means of which it can achieve the objectives of development. There are several peculiar characteristics of a developing country, which necessitate the adoption of a specific fiscal policy, which ensures a rapid economic growth. There are vast and diverse resources human and material, which are lying underutilized. Such countries have weak infrastructure, i.e. they lack adequate means of transport and communications, road ports, highway, irrigation and power and technical knowhow. Their population increasing at an explosive rate, which necessitates rapid economic development to, met the requirements of the rapidly- growing population.
The principal objectives of fiscal policy in a developing economy are:

To mobilize resources for economic growth, especially for the public sector. To promote economic growth in the private sector by providing incentives to save and invest.
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To restrain inflationary forces in the economic in order to ensure price stability. To ensure equitable distribution of income and wealth so that fruits of economic growth are fairly distributed.
Main Objectives of Fiscal Policy In India:

The fiscal policy is designed to achieve certain objectives as follows :1. Development by effective Mobilisation of Resources The principal objective of fiscal policy is to ensure rapid economic growth and development. This objective of economic growth and development can be achieved by Mobilisation of Financial Resources. The central and the state governments in India have used fiscal policy to mobilise resources. The financial resources can be mobilised by :Taxation: Through effective fiscal policies, the government aims to mobilise resources by way of direct taxes as well as indirect taxes because most important source of resource mobilisation in India is taxation. Public Saving: The resources can be mobilised through public savings by reducing government expenditure and increasing surpluses of public sector enterprises. Private Saving: Through effective fiscal measures such as tax benefits, the government can raise resources from private sector and households. Resources can be mobilised through government borrowings by ways of treasury bills, issue of government bonds, etc., loans from domestic and foreign parties and by deficit financing. 2. Efficient allocation of Financial Resources The central and state governments have tried to make efficient allocation of financial resources. These resources are allocated for Development Activities which includes expenditure on railways, infrastructure, etc. While Non-development Activities includes expenditure on defence, interest payments, subsidies, etc. But generally the fiscal policy should ensure that the resources are allocated for generation of goods and services which are socially desirable. Therefore, India's fiscal policy is designed in such a manner so as to encourage production of desirable goods and discourage those goods which are socially undesirable. 3. Reduction in inequalities of Income and Wealth Fiscal policy aims at achieving equity or social justice by reducing income inequalities among different sections of the society. The direct taxes such as income tax are charged more on the rich people as compared to lower income groups. Indirect taxes are also more in the case of semi-luxury and luxury items, which are mostly consumed by the upper middle class and the upper class. The government invests a significant proportion of its tax revenue in the
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implementation of Poverty Alleviation Programmes to improve the conditions of poor people in society. 4. Price Stability and Control of Inflation One of the main objectives of fiscal policy is to control inflation and stabilize price. Therefore, the government always aims to control the inflation by reducing fiscal deficits, introducing tax savings schemes, Productive use of financial resources, etc. 5. Employment Generation The government is making every possible effort to increase employment in the country through effective fiscal measure. Investment in infrastructure has resulted in direct and indirect employment. Lower taxes and duties on small-scale industrial (SSI) units encourage more investment and consequently generate more employment. Various rural employment programmes have been undertaken by the Government of India to solve problems in rural areas. Similarly, self employment scheme is taken to provide employment to technically qualified persons in the urban areas. 6. Balanced Regional Development Another main objective of the fiscal policy is to bring about a balanced regional development. There are various incentives from the government for setting up projects in backward areas such as Cash subsidy, Concession in taxes and duties in the form of tax holidays, Finance at concessional interest rates, etc. 7. Reducing the Deficit in the Balance of Payment Fiscal policy attempts to encourage more exports by way of fiscal measures like exemption of income tax on export earnings, exemption of central excise duties and customs, exemption of sales tax and octroi, etc. The foreign exchange is also conserved by providing fiscal benefits to import substitute industries, imposing customs duties on imports, etc. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. In this way adverse balance of payment can be corrected either by imposing duties on imports or by giving subsidies to export. 8. Capital Formation The objective of fiscal policy in India is also to increase the rate of capital formation so as to accelerate the rate of economic growth. An underdeveloped country is trapped in vicious (danger) circle of poverty mainly on account of capital deficiency. In order to increase the rate of capital formation, the fiscal policy must be efficiently designed to encourage savings and discourage and reduce spending.

9. Increasing National Income
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The fiscal policy aims to increase the national income of a country. This is because fiscal policy facilitates the capital formation. This results in economic growth, which in turn increases the GDP, per capita income and national income of the country. 10. Development of Infrastructure Government has placed emphasis on the infrastructure development for the purpose of achieving economic growth. The fiscal policy measure such as taxation generates revenue to the government. A part of the government's revenue is invested in the infrastructure development. Due to this, all sectors of the economy get a boost. 11. Foreign Exchange Earnings Fiscal policy attempts to encourage more exports by way of Fiscal Measures like, exemption of income tax on export earnings, exemption of sales tax and octroi, etc. Foreign exchange provides fiscal benefits to import substitute industries. The foreign exchange earned by way of exports and saved by way of import substitutes helps to solve balance of payments problem. 12. Economic Growth: Less developed countries are caught in the vicious circle of poverty which is primarily caused by the deficiency of capital. Thus, the basic objective of fiscal policy in a less developed country is to promote an accelerated economic growth through capital formation . In the words of Meier and Baldwin: The overall concern of the governments fiscal policy should be
directed towards maximising savings, mobilising them for productive investment, and canalizing them into directions that will best serve the objectives of a balanced development program.
Stances of fiscal policy:

The three main stances of fiscal policy are neutral, expansionary and contractionary. Neutral stances - A neutral stances of fiscal policy implies a high economy. Expansionary stances - An expansionary stance of fiscal policy involves government spending exceeding tax revenue. Contractionary stances - A contractionary fiscal policy occurs when government spending is lower than tax Revenue.
Role of Fiscal Policy:

In recent weeks, a number of signs have appeared suggesting that the recovery of the U.S. economy from the recent recession is on a bumpy path. During the second quarter of 2002, real GDP grew at an anaemic annual rate of barely over 1%, well below market expectations. Unemployment, after rising throughout 2001, has levelled off but has yet to show signs of declining. Adding some gloom to the general outlook, the stock market continued to drop through most of July and has remained volatile. This sluggish economic performance comes
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despite substantial stimulus from both monetary and fiscal policy. Since January 2001, the Federal Reserve has reduced its benchmark policy interest rate, the federal funds rate, from 6.52% in September 2000 to a current level of 1.75%. Fiscal policy also has become more expansionary. The federal government budget has swung from a surplus of $236 billion in 2000 (2.5% of GDP) to a projected 2002 deficit of $157 billion (1.5% of GDP) as the government has increased expenditures and reduced taxes. This active use of fiscal policy during a recession is somewhat unusual. During the last U.S. recession, in 1990, then President George H.W. Bush resisted attempts to use fiscal policy to stimulate the economy. In fact, his Council of Economic Advisers, in their February 1992 report, argued that increases in fiscal expenditures or reductions in taxes might hamper the economys recovery. In contrast, during the current recession, both Congress and the President have supported increases in expenditures and tax cuts as ways to stimulate economic growth, culminating in the passage of the Economic Recovery Act in March 2002.The current recession and the 19901991 recession offer contrasting examples of the use of fiscal policy, and they also highlight some elements of the longstanding debate in economics over whether fiscal policy can play a useful role in combating business cycle downturns. This economic letter discusses some of the issues involved in using fiscal policy to help stabilize short-run fluctuations in the economy. In developing economies, the government has to play a very active role in promoting economic development and fiscal policy is the instrument that the state must see. Hence the great importance of public finance in underdeveloped countries desirous of rapid economic development. In a democratic society, there is an inherent dislike for direct control regulation by the state. The entrepreneur would not like to be ordered about to produce this or that, how much to produce or where to produce. Fiscal incentives in the form of tax concessions, rebates or subside are, therefore, preferable. Similarly, the consumers would not like to be told directly to curtail their consumptions or to consume this and not to consume that. Taxation of articles whose consumptions is to be discouraged is therefore preferable. Hence, a democratic state must rely on indirect methods of control and regulation and this is doing through fiscal and monetary policies. Thus in democratic countries, fiscal policy is a powerful and least undesirable weapon on which the states can rely for promoting economic development.
Drawbacks of Fiscal Policy:

1. InflationDeficit financing results in increase inmoney supply which results in fall of money and leads to rises in prices. 2. Defective tax structureIn India share of direct taxes is less than the share of indirect taxes. Such taxes are burden for poor. Indirect taxes such as excise duty, VAT etc. are charged on all sections of society. So it affects the poor section of society.

3. Poor tax administrationPoor tax administration leads to tax evasion. It failed to check black money. 4. Inequality of incomeIt failed to check inequality of income. 5. Failure of public sector-
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Various sectors are running at losses. They failed to generate adequate return on investment. 6. Increase in non-development incomeGovt spend huge amount on non development expenses such as defence, election, subsidies. The policy failed to control these expenses. 7. Increasing interest burdenUnder this policy Govt has taken huge public debt both from external and internal resources. This results in on due burden on Govt. 8. Failure in eradicating poverty and employmentFiscal policy fails in eradication of poverty and unemployment problem successfully. 9. Failed to check regional disparitiesMeans unequal development of different region sand states. Failed in reducing regional disparities.
Reforms For Fiscal Policy :

1) Reduction in non Developmental expenditure.
2) Agricultural taxation 3) Increase in profitability of sector enterprises. 4) Wide scope of taxes. 5 ) More direct taxes. 6 ) Reduction in tax evasion. 7) Progressive tax structure. 8) Disinvestment of loss making PSUs. 9) Reducing the problem of overstaffing in government department. 10) Reduction in subsidies.

11) Encouragement to savings and investments
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Instruments of Fiscal Policy for 2010-11:

1. The fiscal policy of 2010-11 is being guided by the principles of gradual adjustment from the fiscal expansion undertaken during 2008-09 and 2009-10. The adjustment path is being so calibrated that it would not affect the revival process and at the same time stabilize the debt to GDP ratio of the Government in the medium term. In the Medium Term Fiscal Policy Statement of 2009-10, he Government had enumerated the roadmap for fiscal consolidation during 2010-11 and 2011-12. The Government is adhering to these commitments made in July 2009 and has also benefitted from the recommendations of the 13th Finance Commission on fiscal consolidation. Accordingly fiscal deficit in BE 2010-11 has been reduced to 5.5 per cent of GDP. This correction of fiscal deficit is attributed to reduction in total expenditure by 0.6 per cent of GDP (from 16.6 per cent in BE 2009-10 to 16.0 per cent in BE 2010-11), increase in gross tax revenue by 0.4 per cent of GDP (from 10.4 per cent in BE 2009-10 to 10.8 per cent in BE 2010-11) and increase in non debt capital receipt by 0.6 per cent of GDP (from 0.1 per cent in BE 2009-10 to 0.7 per cent in BE 2010-11). All the above numbers are with reference to the revised GDP numbers. 2. Total expenditure of the Government has shown compounded average annual growth rate of 19.6 per cent during the fiscal expansion period of 2008-2010. This level of growth in expenditure is not sustainable. In the fiscal policy strategy for ensuing financial year and the next two years, the Government has made efforts to moderate the growth rate of expenditure in order to bring down the deficit. Accordingly, non-plan expenditure as percentage of GDP has been reduced from 11.3 per cent in BE 2009-10 to 10.6 per cent in BE 2010-11. At the same time, adequate resources for plan expenditure have been provided at 5.4 per cent of GDP in BE 2010-11 as against 5.3 per cent in BE 2009-10. Total expenditure as percentage of GDP for the year 2011-12 and 2012-13 would be further brought down to 15.2 per cent and 14.6 per cent respectively. This would result in correction to the extent of 2 per cent of GDP from the level of 16.6 per cent in BE 200910. This adjustment in expenditure would be primarily on non-plan account and after factoring in adequate allocations for flagship schemes, Bharat Nirman programme and infrastructure sector. The correction in composition of expenditure would translate into deployment of borrowed resources largely for plan expenditure (97.8 per cent in BE 2010-11). This is further estimated to go upto 122.9 per cent in 2012-13 against only 81.1 per cent in BE 2009-10. 3. Intent of the Government to bring the fiscal deficit under control with institutional reform measures encompassing all aspects of fiscal management such as subsidies, taxes, disinvestment and other expenditures were indicated in the Budget 2009-10. The decision of the Government to move towards nutrient based subsidy (NBS) regime in fertiliser subsidy along with increase in the MRP of urea is one of the steps in order to translate the above intentions into concrete action. Under the NBS regime, the subsidy on subsidized nutrients will remain fixed and the retail prices of subsidized fertilisers at farmgate level will be decided by the manufacturers/importers. The government in consultation with the fertilizer industry will make interventions in such a manner that the farmgate prices of non-urea
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fertilizers are as far as possible near the current prices so that farmers are not adversely affected. It is also expected to promote balanced use of fertilizer with increase in agricultural productivity. Unshackling of fertilizer industry is also expected to attract fresh investments into this sector. 4. With respect to rationalization of petroleum subsidy, the report of the Parikh Committee on the above subject is under consideration of the Government. In a departure from past practice, the Government has agreed to provide petroleum subsidy in cash instead of securities in the year 2009-10. Government would like to continue to pay compensation for under recoveries, if any, to oil marketing companies in cash only. 5. It is estimated that subsidy expenditure as percentage of GDP would decline from 2.1 per cent in RE 2009-10 to 1.7 per cent in BE 2010-11 and further to 1.6 per cent and 1.4 per cent respectively in 2011-12 and 2012-13.
BUDGET:Keeping budget in balance, in surplus or deficit, is in itself a fiscal instrument. When the government keeps its total expenditure equal to its revenue, as a matter of policy, it means it has adopted a balanced budget policy. When the government spends more than its expected revenue, as a matter of policy, it is pursuing a deficit-budget policy. And when the government follows a policy of keeping its expenditure substantially below its current revenue, it is following a surplus budget policy. Provisions of FRBMA The 2004-05 Budget is claimed to have adequate provisions to achieve fiscal correction mandated in the Fiscal Responsibility and Budget Management Act 2003 (FRBM) through enhancement of revenue and reduction of revenue expenditure. The main provisions of the FRBM Act in its original form were: Revenue deficit as a ratio of GDP should be brought down by 0.5 per cent every year and eliminated by 2007-08; The fiscal deficit as a ratio of GDP should be reduced by 0.3 per cent every year and brought down to 3 per cent by 2007-08; The total liabilities of the Union Government should not rise by more than 9 per cent a year; The Union Government shall not give guarantee to loans raised by PSUs and State governments for more than 0.5 per cent of GDP in the aggregate. Further, the Union Government should place three documents along with the budget, namely, The Macroeconomic Framework Statement, the Medium Term Fiscal Policy Statement and The Fiscal Policy Strategy Statement. In addition, the Finance Minister will have to make a statement at the end of the second quarter on the trend of fiscal indicators and corrective measures if they deviate from the budget estimates beyond the extent stipulated in the FRBM. Revenue Deficit and Fiscal Responsibility and Budget Management Act (FRBMA)
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Revenue deficit is the difference between the revenue expenditure and the revenue receipts (the recurring income for the government). When a country runs a revenue deficit it means that the government is unable to meet its running expenses from its recurring income. The FRBMA was notified on July 2, 2004 and came into force on July 5, 2004. This Act requires the reduction of fiscal deficit and elimination of revenue deficit by March 31, 2009. The idea seems to be that deficit, if any, should be used to finance capital expenditure that leads to asset formation and not on revenue expenditure, the benefits of which do not go beyond that particular year. For the year 2005-06, Finance Minister P. Chidambaram has chosen to overlook the requirements of FRBMA. The fiscal deficit for the year has been budgeted at 4.5 per cent of the estimated GDP, this will be 0.1 per cent less than the required reduction. The revenue deficit target for the year 2005-06, if FRBMA requirements were followed, it had to be at 1.8 per cent of the GDP. But it has been budgeted at 2.7 per cent of the GDP. Given the strong growth experienced by the Indian economy better progress could have been made on this front. One reason for ignoring FRBMA for this year is the fact that the Government has increased grants to the states in line with the recommendations of the 12th Finance Commission. The government might miss its revenue deficit target of 2.7 per cent of the GDP in the coming year on account of a likely undershooting of tax revenue collections, as highly optimistic assumptions of tax revenue growth have been made. This would lead to the budgeted fiscal deficit also shooting up.
Incremental Net Liabilities of the Central Government

2005-06 Target as per FRBM Rules (as per cent of GDP) Actual ( ` crore) Actual as per cent of GDP 8 265723 7.2 2006-07 7 278451 6.5 2007-08 6 298829 6 2008-09 5 321753 5.8 2009-10 (RE) 4 356728 5.4 2010-11 (BE) 3 428692 5.4
Tax Policy:
Direct Taxes 6. The last decade has witnessed a substantial growth in direct taxes. The direct tax to GDP ratio has gone up from 2.97% in 1999-2000 to 6.36% in 2008-09. The contribution of direct taxes to the total taxes collected by the Centre has increased from 33.8% to 55.5% during the same period. 7. The following policy measures have driven this increase in direct tax contributions:
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(i) Distortions within the tax structure have been minimised by expanding the tax base and by maintaining moderate tax rates; (ii) Tax administration has been geared up to provide better taxpayer services and also to enhance deterrence levels. Both these objectives reinforce each other and have promoted voluntary compliance. (iii) Business Processes in the Income-tax Department have been re-engineered through extensive use of information technology, viz., electronic reporting of tax collections, e-filing of returns, issue of refunds through ECS and refund bankers, computer assisted selection of returns for scrutiny, electronic reporting of foreign remittances liable to tax, online reporting and e-mailing of tax deduction at source details to taxpayers, etc. These measures have modernized the Department and enhanced its functional efficiency. 8. The Union Budget for 2009-10 announced that a draft Direct Taxes Code would be released within 45 days. The draft Code along with a Discussion Paper was released in August, 2009 inviting comments from the public. The proposed Direct Taxes Code is a new legislation which will replace the current Income-tax and Wealth Tax Acts. It is written in direct and simple language and is based on the philosophy of a wide tax base, moderate tax rates and an effective enforcement strategy. The Code proposes to minimise exemptions and deductions to widen the tax base. It also proposes to do away with profit linked deductions and introduce investment linked deductions for priority areas. At the same time, it advocates moderate tax rates with broad slabs. These measures will help to reduce litigation and free up the tax administration to provide better taxpayer services and focus on tackling tax evasion. The draft Code and Discussion Paper have generated healthy debate and a number of suggestions. After analysing the inputs received, the draft legislation will be finalised and introduced in Parliament. 9. The major policy proposals in the Union Budget 2010-11 intended to consolidate and carry forward the past achievements are: (i) Rationalisation of the Personal Income Tax (PIT) rate structure for individuals by broadening the income slabs. This will reduce the tax liability of a majority of individual taxpayers. (ii) Reducing the surcharge on Corporate Income Tax (CIT) from 10 per cent to 7.5 per cent. This is part of the initiative to phase out surcharges. Surcharge on PIT has already been removed last year. (iii) Increasing the rate of Minimum Alternate Tax (MAT) on companies to 18 per cent from the existing level of 15 per cent. This will enhance the inter se equity in taxation of companies and will also raise the effective tax rate which is currently around 22% as against the nominal rate of 33.99%. (iv) Raising the threshold limits on a number of transactions which are subject to Tax Deduction at Source (TDS). This will reduce the compliance burden for deductors as well as deductees and enable the tax administration to efficiently process claims for TDS credit.
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(v) Reducing the compliance burden on small taxpayers by increasing the threshold level of turnover beyond which accounts of the business are to be compulsorily audited from Rs. 40 lakh to Rs. 60 lakh. The compliance burden of small taxpayers is being further reduced by providing a presumptive rate of taxation of 8 per cent of turnover and allowing the tax liability to be paid as self assessment tax instead of several advance tax instalments. (vi) Enabling small companies to reduce their regulatory and compliance burden by converting to Limited Liability Partnerships (LLPs) by proposing that such conversion shall not attract capital gains tax liability under the Income-tax Act. (vii) Expediting the resolution of major tax disputes by widening the scope of cases which can be admitted by the Income Tax Settlement Commission to also include assessment proceedings relating to search proceedings. 10. The use of information technology for providing better taxpayer services has been a cornerstone of direct tax policy. The mass processing of income tax returns is a key recommendation of the business process reengineering study conducted by the Income-tax Department. A Centralised Processing Centre (CPC) has been set up at Bengaluru for processing all e-filed income-tax returns as well as paper returns filed in the State of Karnataka. The CPC has commenced operations during this year and is currently processing 20,000 returns daily. Two more CPCs are proposed to be rolled out in the coming year. This initiative will help provide better tax payer service through faster processing of returns and issue of refunds. Indirect Taxes 11. The medium term objective of the policy for indirect taxes in recent years has been to achieve fiscal consolidation through an improvement in the tax-GDP ratio. This is sought to be achieved through the widening of tax base and removal of exemptions coupled with moderation in the rates of tax. It is expected that these measures would foster voluntary compliance. There is an equally strong emphasis on procedural simplification and the adoption by tax departments of internal business processes leveraged on Information Technology so as to minimize day-to-day physical interface between the tax payer and tax administration. 12. In specific terms, the declared goal is to move to a comprehensive Goods and Services Tax (GST) both at the Centre and in the States. By addressing the problems of cascading and double taxation, this key reform in the realm of indirect taxation is expected to contribute significantly to efficiency and growth in the economy which, in turn, would augment the buoyancy of tax collections. The current fiscal year 2009-10 has seen considerable movement in the discussions on finalization of the model for the proposed GST. The Empowered Committee of State Finance Ministers released its First Discussion Paper on the model and roadmap for GST in November, 2009. Further work on the refinement of this model based on the feedback received from trade, industry and other stakeholders is underway.
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13. The global financial crisis in September, 2008 and the resultant collapse of export markets triggered off an economic slowdown in India. Faced with the threat of a deepening crisis, the Government had to inject three rounds of fiscal stimulus packages to boost aggregate demand. An important element of these packages was the sharp, across the board reduction in the rates of Central Excise duty for non-petroleum products and the reduction in the rate of Service Tax from 12% to 10%. 14. Prior to the onset of the financial crisis, the surge in international prices of crude petroleum and other commodities posed a serious macro-economic challenge. Consequently, in June 2008, the import duty on crude petroleum and refined petroleum products was reduced by 5 percentage points each and the excise duty rates on motor spirit and diesel were also dropped significantly. Indirect Tax Reforms 1. 2. 3. 4. Reducing peak rate of custom duties. Rectifying anomalies like inverted duty structure. Rationalising excise duties with a movement towards a median CENVAT Introduction of state level VAT for achieving a non-cascading, self-enforcing & harmonized commodity taxation regime. 5. Introducing innovative financing mechanism like creation of a special purpose vehicle for infrastructure projects. 6. Widening of service tax base and increase in compliance continues to show high buoyancy in service tax revenue collection during 2006-07 also. 15. All these measures, taken together, strongly impacted revenue collections from indirect taxes in 2008-09. Their continuation in the current fiscal year has meant that revenue collections from customs, central excise and service tax continued to be under stress during 2009-10. The objective of fiscal consolidation, therefore, had to be temporarily suspended in the interest of economic recovery and maintenance of growth momentum. These measures have had a very positive impact in turning around the economy, particularly the manufacturing sector. As such, the Government seeks to return to the path of fiscal correction or consolidation in a gradual manner so as not to affect recovery and growth adversely. Some of the proposals contained in the Budget for 2010-11 aim to subserve this purpose. The important ones in this direction are as under: Central Excise Duty After two successive reductions in December, 2008 and February, 2009, the standard rate of excise duty (Cenvat) of 8% has been increased to 10%. Duty on petrol and diesel has been increased by Re. l per litre. Duty has been increased on cigarettes and other tobacco products. Ad-valorem component of excise duty on large cars, Multi Utility Vehicles and Sports Utility Vehicles has been increased from 20% to 22%. The specific component of duty remains unchanged.
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Cement, at present attracting 8% duty, would now suffer a higher incidence of 10%. In cases where cement attracts specific rates of duty, the same have also been hiked proportionately. Full or partial excise duty exemptions/concessions available to many items have been withdrawn and duty imposed on them @ 4% or 10%. Customs Duty No change has been made in the peak rate of customs duty on non-agricultural items, which remains at 10%. Customs duty on serially numbered gold bars (other than tola bars) and gold coins has been increased from Rs.200 per 10 gram to Rs.300 per 10 gram. On other forms of gold the duty has gone up from Rs.500 per 10 gram to Rs.750 per 10 gram. In case of silver, the duty has been increased from Rs.1000 per kg to Rs.1500 per kg. Platinum would now attract customs duty of Rs.300 per 10 gram as compared to earlier rate of Rs.200 per 10 gram. In the petroleum sector, customs duty has been increased on: crude petroleum from Nil to 5%; petrol and diesel from 2.5% to 7.5%; and other specified petroleum products from 5% to 10%. Service Tax The rate of service tax of 10% applicable since 24.02.2009 has been continued. Eight new services are being brought under the service tax net. Scope of many existing services has been modified to plug the loopholes and check evasion of tax.
Service Tax-A Growing Revenue Source

Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(P) 2010-11 (AprilDecember) No. of services* Tax rate in per cent 75 78 93 100 106 12*** 109 117 10 10 12 12 10 10 Revenue ( in Growth (in crore) %)** 14200 80 23055 62.4 37598 63.1 51301 36.4 60941 18.8 58454 -4.1 44081 19.2
Source : Receipts Budget and Controller General of Accounts. * Based on new entries added each year. ** Growth for 2010-11 (April-December) is over corresponding period previous year. *** Reduced to 10 per cent w.e.f. 24-2-2009. And P : Provisional actuals (unaudited)
15

Contingent and other Liabilities
2010 - 11
16. The FRBM Act mandates the Central Government to specify the annual target for assuming contingent liabilities in the form of guarantees. Accordingly the FRBM Rules prescribe a cap of 0.5 per cent of GDP in any financial year on the quantum of guarantees that the Central Government can assume in the particular financial year. The Central Government extends guarantees primarily on loans from multilateral/bilateral agencies, bond issues and other loans raised by various Public Sector Undertakings/Public Sector Financial Institutions. The stock of contingent liabilities in the form of guarantees given by the Government has increased from Rs.1,07,957 crore at the beginning of the FRBM Act regime in 2004-05 to Rs.1,13,335 crore at the end of 2008-09. As a percentage of GDP, it has reduced from 3.3 per cent in 2004-05 to 2.0 per cent in 2008-09. The disclosure statement on outstanding Guarantees as prescribed in the FRBM Rules, 2004 is appended in the Receipts Budget . 17. Assumption of contingent liability in the form of guarantee by the sovereign helps to leverage private sector participation in areas of national priorities. In the current situation, wherein several infrastructure projects are being cleared for implementation under the Public Private Partnership (PPP) mode, difficulties are being faced in reaching financial closure due to the current uncertainties in the global financial market. Within the given fiscal constraints and with a view to supporting financing of above mentioned PPP projects, the India Infrastructure Financing Company Limited (IIFCL) has raised Rs.10,000 crore through Government guaranteed tax free bonds in the previous financial year 2008-09. The IIFCL would raise additional amounts on the same basis as per requirement in the coming years. The capital so raised will be used by IIFCL to refinance bank lending of longer maturity to eligible infrastructure projects. 18. The assumption of contingent liability in the form of guarantee for 2009-10 upto January 2010 is Rs.38,778 crore which is 0.6 per cent of GDP during 2009-10, higher than the target of 0.5 per cent of GDP set under the FRBM Rules. This deviation has been necessitated in the larger interest of re-invigorating the economy in the background of the economic slowdown, to stimulate demand and increase investment in infrastructure sector projects with assistance from multilateral agencies. In the medium term while this may not have a potential budgetary impact, the additional investment will help restore the economy to its higher growth path and contribute to higher revenue buoyancy.
16

Sources of Tax Revenue
2010 - 11
200506 200607 200720082009-10 2009-10 201008 09 (BE) (P) 11(BE) in Crore 219724 295938 319859 370000 367415 422500 75093 144318 241538 86327 117613 37598 102644 192911 279031 104119 123611 51301 106046 213395 269433 99879 108613 60941 112850 256725 269477 98000 106477 65000 122280 244630 247357 84244 104659 58454 120566 301331 315000 115000 132000 68000
Direct (a) Personal Income Tax Corporation Tax Indirect(b) Customs Excise Service Tax Gross Tax Revenue * Direct (a) Peronal Income Tax Corporation Tax Indirect(b) Customs Excise Service Tax Direct(a) Personal Income Tax Corporation Tax Indirect(b) Customs Excise Service Tax Gross Tax Revenue *
157557 55985 101277 199348 65067 111226 23055 366151 43 15.3 27.7 54.4 17.8 30.4 6.3 4.3 1.5 2.7 5.4 1.8 3 0.6 9.9
473512 593147 605298 641079 626916 746651 Tax Revenue as a Percentage of Gross Tax Revenue 46.4 49.9 52.8 57.7 58.6 56.6 15.9 17.3 17.5 17.6 19.5 16.1 30.5 32.5 35.3 40 39 40.4 51 47 44.5 42 39.5 42.2 18.2 17.6 16.5 15.3 13.4 15.4 24.8 20.8 17.9 16.6 16.7 17.7 7.9 8.6 10.1 10.1 9.3 9.1 Tax Revenue as a Percentage of Gross Domestic Product 5.1 5.9 5.7 6.3 5.6 5.4 1.7 3.4 5.6 2 2.7 0.9 11 2.1 3.9 5.6 2.1 2.5 1 11.9 1.9 3.8 4.8 1.8 1.9 1.1 10.8 1.9 4.4 4.6 1.7 1.8 1.1 10.9 1.9 3.7 3.8 1.3 1.6 0.9 9.6 1.5 3.8 4 1.5 1.7 0.9 9.5
Source: Union Budget documents. BE-Budget estimates P: Provisional actuals (unaudited) * includes Taxes referred to in (a) & (b) and Taxes of Union Territories and other Taxes. Note: 1. Direct Taxes also include Taxes pertaining to expenditure, interest, wealth, gift, and estate duty. 2. The ratios to GDP at current market prices are based on the CSOs National Accounts 200405 series.
17
2010 - 11 Composition of gross tax revenue
50 45 40 35 30 25 20 15 10 5 0
Per cent of GDP
Excise Custom Corporate tax Personal Income tax Service tax
Year
Government Borrowings, Lending and Investments:

Government borrowing is another fiscal Method by which savings of the community may be mobilized for economic development. In developing economies, the government resort to borrowing in order to finances schemes of economic development. Government or what is also called public borrowing becomes necessary because taxation alone cannot provide sufficient funds for economic development. Besides, too heavy taxation has an adverse effect on private saving and investment. Government borrowing takes 2 forms: (a) market loans and (b) small savings. In case of market borrowing the government sells to the public, negotiable government securities of varying terms and duration and treasury bills for financing capital project long-term government bonds are floated in the capital market. This form of public borrowing is more important for mobilizing resources for development. The treasury bills, which represent short-term, borrowing, are intended to meet only the current government expenditure. New bonds may be issued for meeting old maturing bonds. The small saving represented public borrowing which are not negotiable and are bought and sold in the capital market. For mobilizing small savings, various types of saving certificates are issued, e.g., National Savings certificates, national Developments certificates, Rural development Bonds, Postal certificates and Postal Accounts, Compulsory Deposits, etc. A widespread campaign is necessary to attract small saving. Borrowing is the quickest Mode of raising funds: -Tax finance is not so expeditious because passing of tax laws, assessment of taxes based on those laws and their collections involves considerable delay. Besides, public debt does not involve any burden if it is devoted productive works. The subscribers to Government loans are able to find remunerative investment whereas the government can pay the principal and interest out of the income
18
2010 - 11
yielded by investment finance from loans. Thus public borrowing is not only necessary but also desirable. 19. The Government policy towards borrowings to finance its deficit continues to remain anchored on the following principles, namely (i) greater reliance on domestic borrowings over external debt, (ii) preference for market borrowings over instruments carrying administered interest rates, (iii) consolidation of the debt portfolio and (iv) development of a deep and wide market for Government securities to improve liquidity in secondary market. For better cash management, a new instrument namely cash management bill has been introduced during the year. The tenure of this instrument will be less than 91 days. 20. In order to finance high level of fiscal deficit during 2009-10, market borrowings for the Government increased significantly. However, raising of indicated resources as per the published calendar for the current financial year has been completed without disrupting the market. The gross and net market borrowings (including dated securities and 364- day Treasury Bills) of the Central Government during 2009-10 upto 19th February amounted to Rs.4,78,383 crore and Rs.3,89,627 crore respectively as against Rs.3,18,550 crore and Rs. 2,42,317 crore during 2008-09. The weighted average maturity of dated securities issued during 2009-10 is 11.2 years as compared to 13.8 years during 2008-09. The weighted average yield of dated securities issued during 2009-10 is 7.23 per cent and is lower than 7.69 per cent during 2008-09. 21. The gross and net market borrowings (dated securities) of the Central Government during 2010-11 is estimated at Rs.4,57,143 crore and Rs.3,45,010 crore (4.98 per cent of GDP) respectively as against Rs.4,51,000 crore and Rs.3,98,411 crore (6.46 per cent of GDP) during 2009-10. 22. During the year 2010-11, the financing of fiscal deficit is estimated to be done without taking recourse to short-term borrowings through Treasury Bills or cash draw down. The share of market borrowings, external debt and NSSF in the financing of deficit for 2010-11 is estimated at 90.5 per cent, 5.9 per cent and 3.5 per cent respectively. However, to take care of temporary mismatch between receipts and expenditure, the Government may have to take recourse to ways and means advances from RBI. 23. The outstanding balance under Market Stabilization Scheme (MSS) on 1st April, 2009 was Rs.88,773 crore. The outstanding balance under the MSS is estimated to decline to Rs.2,737 crore at the end of 2009-10. As part of the Government decision to de-sequester Rs.45,000 crore from MSS for using it in financing increased fiscal deficit during 2008-09 and 2009-10, Rs.12,000 crore was de-sequestered during 2008-09. Of the balance Rs.33,000 crore, the option of de-sequestering MSS to the tune of Rs. 28,000 crore was exercised (up to February, 2010) during 2009-10. New accretion in MSS to the tune of Rs.50,000 crore is estimated for BE 2010-11 and with redemption of existing securities of Rs.2,737 crore during 2010-11, the closing balance is also estimated at Rs.50,000 crore. 24. In order to have prudent management of debt and greater focus on carrying cost as well as meeting secondary market liquidity, the government has set up a Middle Office which in due
19
2010 - 11
course will transit into the proposed Debt Management Office. The Middle Office is now being strengthened appropriately.
Initiatives in Public Expenditure Management

25. The focus has shifted from financial outlays to outcomes for ensuring that the budgetary provisions are not merely spent within the financial year but do result in intended outcomes. The Government had outlined in the Presidents address to the joint session of Parliament in June 2009 that an area of major focus would be reform of governance for effective delivery of public services. The following initiatives are being taken by the Government to achieve the above mentioned objective: Establishing mechanisms for performance monitoring and performance evaluation in Government on a regular basis; At the beginning of the financial year with the approval of the Minister concerned, each Department will prepare a Result-Framework (RF) document; To achieve results commensurate with the priorities listed in the RF document, the Minister incharge will approve the proposed schemes and activities of the Department; The Minister incharge will also approve the corresponding success indicators (Key Performance Indicators-KPIs or Key Result Areas-KRAs) and time bound targets to measure progress in achieving these objectives; RF will be drawn up in such manner that quarterly monitoring becomes possible; During the year, the RF as well as the achievements against the KPIs will be reviewed by a Committee on Government Performance and the report of such review may be submitted to the Prime Minister through the concerned Minister for further action as deemed necessary; At the end of the year, all Ministries/Departments will review and prepare a report listing the achievements against the agreed goals (KPIs); and These results will be placed before the Cabinet for information by 1st June of each year. Strengthening public accountability of flagship programmes by the creation of Evaluation Office which will concurrently evaluate the impact of these programmes and place it in public domain; Putting up a public data policy to place all information covering non-strategic areas in the public domain which will help citizens to access the data and engage directly in governance reform. All Ministries/Departments have been directed to make their Citizens Charter more effective and mandatory adoption of the Seven Step Model for Citizen Centricity. 26. Necessary monitoring mechanisms have been put in place with the help of the office of the Controller General of Accounts (CGA) to avoid parking of funds and to track expenditure.
20
2010 - 11
27. A central monitoring, evaluation and accounting system for centrally sponsored schemes and central sector schemes of the Government has been instituted under the Central Plan Schemes Monitoring System. All sanctions issued by the Central Ministries under these schemes are now identified with a unique sanction ID that enables the tracking of release as per their accounting and budget heads across the different implementing agencies. This central system is hosted on the e-lekha portal of the CGA. 28. Expenditure data of all Ministries/Departments are being uploaded on a daily basis by the Pay and Accounts Offices on e-lekha. This is a significant step towards faster and accurate compilation of the accounts for the Government of India and will lead to the development of a core accounting solution. The monthly and annual Finance and Appropriation Accounts are regularly updated on the CGA.
Policy Evaluation:
29. The process of fiscal consolidation is being restarted in 2010-11 after the deviations experienced during 2008-09 and 2009-10. Though the revenue base has not yet increased to the level of 2007-08, still, by doing expenditure reforms and with the help of disinvestment proceeds, the Government is able to bring down the fiscal deficit to earlier estimated level of 5.5 per cent of GDP in 2010-11. With the introduction of the Direct Tax Code in 2011-12 and also the likely introduction of GST in 2011-12, it is expected that the fiscal deficit would be brought down in 2011-12 and 2012-13 in line with the recommendations of the Thirteenth Finance Commission. This level of deficit would reduce the debt to GDP ratio from 51.1 per cent in RE 2009-10 to 48.2 per cent in 2012-13. However, the mandated correction under the FRBM Act and Rules can be achieved once the revenue buoyancy is restored to the earlier level of 2007-08. 30. There are however difficulties in achieving revenue surplus. This has to be seen in the context of present composition of expenditure. Revenue expenditure of the Central Government also includes releases made to States and other implementing agencies for implementation of Government schemes and programmes. The outcomes of many of these schemes are not in the nature of the outcomes related to revenue expenditure. In most of the cases these schemes are primarily in the nature of creating durable assets but these assets are not owned by the Central Government. Therefore, in technical classification of revenue and capital account, the Central Government is not able to show expenditure on these schemes as capital expenditure. Examples of such schemes are Rajiv Gandhi Grameen Vidyutikaran Yojana, Jawaharlal Nehru National Urban Renewal Mission, Pradhan Mantri Gram Sadak Yojana, Accelerated Irrigation Benefit Programme etc. Over the years, the number of such schemes funded by the Central Government and implemented by States/autonomous bodies has increased significantly. This has resulted in significant increase in funds transfer from Centre to States/autonomous bodies resulting in higher revenue expenditure. However, these revenue expenditures cannot be treated as unproductive in nature. On the contrary, they contribute to growth in economy.
21
2010 - 11
31. At the same time in the current classification of expenditure, any release to a sick PSU in the form of loan is treated as capital expenditure. Similarly, defence capital expenditure constitutes bulk of the total capital expenditure of the Government. Presently, most of the infrastructure related expenditure is not directly funded from the capital account of the Central Government. 32. With the projected deficit targets the Government would be able to meet the targets set in by the 13th Finance Commission for debt to GDP ratio. However, the challenge remains for translating the outlays into outcomes. DEFICIT FINANCING: Deficit financing refers to created money, i.e., creation of additions purchasing power in the form of currency notes. According to the Indian planning commission, deficit financing is equal to the net increase in the purchasing power of the economy arising out of the operations of the government. Deficit financing is said to have been practiced whenever government expenditure exceeds the government receipts from the public, etc. such an excess of expenditure is financed by borrowing from the Central Bank. When Government borrows from central bank which is a note-issuing authority, the Central bank simply issues more notes and gives them to the Government against Government securities. Thus in the last analysis deficit financing means the creation of new currency. It may be noted that in India Net Bank Credit from RBI by the central Government is called Deficit Financing. In fact when central government borrows from RBI and the latter issues new currency it is called monetization of government debt. It is the monetization of debt that lead to the expansion in money supply due to Governments fiscal deficit that was earlier called deficit financing. However, in the modern terminology it is now called monetization of fiscal deficit. Need for Deficit Financing The developing countries keen to promote rapid economic growth, the resources required for development far exceeds the amount which can be raised by normal means of resource mobilization, viz., taxation, borrowing, surpluses from public enterprises, etc. the uncovered gap is made up by deficit financing. Rapid economic development can be achieved only by setting up the rats of investment. But wherefrom are the developing countries to raise the additional resources? In the absence of sufficient foreign aid forthcoming from friendly countries and international organizations, the additional funds must come from domestic resources. For this purpose voluntary savings must be stepped up. These savings are then mopped up through national small savings schemes to add to resources available to the government.
22

Trends In Deficit of Central Government
Year Revenue Deficit Fiscal Deficit Primary Deficit
2010 - 11
Revenue Deficit As % of Fiscal Deficit
(As per cent of GDP) Enactment of FRMB Act 2005-06 2.5 2006-07 1.9 2007-08 1.1 2008-09 4.5 2009-10(P) 5.1 2010-11(BE) 3.5 4.0 3.3 2.5 6.0 6.3 4.8 0.4 -0.2 -0.9 2.6 3.1 1.7 63.0 56.3 41.4 75.2 80.7 72.5
Trends In Deficit of Central Government

7 6 5 Per cent of GDP 4 3 2 1 0 -1 -2 Year Revenue Deficit fiscal deficit Primary Deficit
Sustainability of high growth enabling conditions

Growth is expected to moderate to the trend level of about 8 per cent in 2011-12. If global conditions worsen, downside bias to this projection may arise. This raises concern about sustainability of the high growth over the medium to long-term. The Planning Commission in its paper on Issues for the Approach to the Twelfth Plan (2012-17) proposed a growth target of 9.0-9.5 per cent. A pre-requisite for high growth is upfront removal of structural constraints with close attention on legal and institutional framework, as also execution and governance. In the short run, growth will have to contend with risks from low agricultural productivity, poor infrastructure, high global commodity prices, quality of corporate governance and low productivity enhancement in the manufacturing sector. Furthermore, the substantial increase in oil prices in 2010-11 and 2011-12 so far, has raised concerns about the near-term growth .
23
2010 - 11
Calculations suggest that aggregate saving and investment rates need to be stepped up from 33.7 per cent and 36.5 per cent of GDP in 2009-10, in order to achieve GDP growth of 9.5 per cent, envisaged for the Twelfth Five Year Plan. An investment rate of around 38-39 per cent with an ICOR of around 4.1 (as was envisaged for the Eleventh Five Year Plan) would be required. Thus, the investment rate needs to be stepped up by 2.5-3.0 percentage points. The gross domestic saving rate needs to be augmented to 37 per cent or more. This underscores the importance of at least attaining the high levels of private corporate and public sector savings reached in the past. Furthermore, there is a need for stepping up of household savings, which have stagnated in recent years, largely reflecting the reallocation of savings between financial and physical assets as well as the near synchronous movement of changes in financial assets and financial liabilities.
Receipts and expenditure of the Central Government

16 14 12 10 8 6 4 2 0 Per cent of GDP
Revenue Expenditure Revenue receipts Capital receipts Capital expenditure
Year
Budgetary developments in 2010-11 3.5 The key driver of the rapid fiscal consolidation after the notification of the FRBM Rules in July 2004 was the buoyancy in tax revenues. As a proportion of the GDP, gross tax revenue rose from a level of 9.2 per cent in 2003-04 to reach a peak level of 11.9 per cent in
24
2010 - 11
2007-08; after falling to 10.8 per cent and 9.6 in 2008-09 and 2009-10 respectively, it was estimated to recover to 10.8 per cent in 201011 (BE) as per the then estimated levels of GDP. However, as a proportion of the GDP as per the advance estimates of the CSO, it is at 9.5 per cent. Two significant developments in the recent past in terms of the composition of taxes have been the growth in direct tax revenues, particularly corporate income tax, and in service tax revenues. Union excise duties that have traditionally been the single largest revenue earner ceded place to corporate income tax in 2006-07. In 2009-10, owing to the fiscal stimulus package which envisaged significant reduction in duties and a demand slowdown, union excise duties declined substantially. In 2010-11, with partial restoration in rates and surge in demand, union excise duties have done exceedingly well. With continuance of high growth in corporate income tax and a higher than budgeted outcome in personal income tax in the current year, the prospects of revenue-led medium-term consolidation appears bright. 3.6 While tax revenues provided the anchor for deepening of the fiscal consolidation process in the post FRBM period (2004-05 to 2007-08), there was also some compression in the expenditure to GDP ratio (Table 3.2 and Figure 3.3). Average annual growth in expenditure in the four-year period was 11.2 per cent, below the 16 per cent growth in the nominal GDP. Besides, there were significant reform initiatives in expenditure. First, below-the-line issuance of bonds for financing under-recoveries of petroleum oil companies (as also other such bonds) was discontinued and all such funds were brought into the Budget as subventions booked as cash expenditure. Second, the nutrient-based subsidy policy for fertilizers was put in place. Third, given the elevated levels of prices of international crude petroleum, it was proposed that the level of administered prices for domestic petroleum products would be calibrated to international prices. 3.7 Against the backdrop of the fast-paced recovery of the economy in 2009-10 and the elevated levels of food inflation as well as the recommendations of the Thirteenth Finance Commission (ThFC), the budget for 2010-11 resumed the path of fiscal consolidation to make economic growth more broad based and ensure that supply-demand imbalances are managed better. Acting on the ThFC recommendation for limiting the combined public debt to GDP ratio to 68 per cent by 2014-15, the Union Budget for 2010-11 came up with a promise to analyse the issues in a Status Paper, which would also unveil the roadmap for reduction. 3.8 The Budget for 2010-11 indicated that effective management of public expenditure by bringing it in line with the Governments objectives, particularly through proper targeting of subsidies, was a key factor in fiscal management. The Budget for 201011 also announced the operationalization of the Nutrient Based Subsidy Policy for fertilizers effective 1 April 2010 and indicated that the recommendations of the Expert Group on a Viable and Sustainable System of Pricing of Petroleum Products would also be operational zed in due course.
25

Receipts and Expenditure of the Central Government
2007-08 1.Revenue receipts(a+b) (a) Tax Revenue( net of states'shares (b) Non-Tax revenue 2. Revenue Expenditure (a) Interest Payments (b) Major Subsidies C) Defence Expenditure 3. Revenue Deficit (2-1) 4. Capital receipts a. recovery of Loans b. Other receipts (mainly PSU disinvestment c. borrowings and Other Liab. 5. capital Expenditure 6. Total Expenditure[2+5=6(a)+6(b)] a. Plan Expenditure b. Non- Plan Expenditure 7. Fiscal Deficit[6-1-4(a)-4(b)] 8. Primary Deficit[7-2(a)] 1. Revenue Receipts (a+b) a.Tax Revenue b. Non- Tax Revenue 2.Revenue Expenditure a. Interest Payments b. Major subsidies c. Defence Expenditure 3. Revenue Deficit (2-1) 4.capital Receipts a. recovery of Loans b. Other Receipts c. Borrowing and Other liab. 5. capital Expenditure 6. Total Expenditure[2+5=6(a)+6(b)] a. Plan Expenditure b. Non- Plan Expenditure 7. Fiscal Deficit[6-1-4(a)-4(b)] 8. Primary Deficit[7-2(a)] 541864 439547 102317 594433 171030 67498 54219 52569 170807 5100 38795 126912 118238 712671 205082 507589 126912 -44118 10.9 8.8 2.1 11.9 3.4 1.4 1.1 1.1 3.4 0.1 0.8 2.5 2.4 14.3 4.1 10.2 2.5 -0.9 2008-09
2010 - 11
200910(BE) 200910(P) 2010-11BE) In Crore(Rs.) 540259 614497 575458 682212 443319 96940 793798 192204 123581 73305 253539 343697 6139 566 336992 90158 883956 275235 608721 336992 144788 474218 140279 897232 225511 106004 86879 282735 406341 4225 1120 400996 123606 459444 116014 908011 211643 123396 90668 332553 443068 6204 24557 412307 110515 534094 148118 958724 248664 109092 87344 276512 426537 5129 40000 381408 150025 1108749 373092 735657 381408 132744 8.7 6.8 1.9 12.2 3.2 1.4 1.1 3.5 5.4 0.1 0.5 4.8 1.9 14.1 4.7 9.3 4.8 1.7
1020838 1018526 325149 302199 695689 716327 400996 412307 175485 200664 Per cent of GDP 9.7 10.5 8.8 7.9 8.1 7 1.7 2.4 1.8 14.2 15.3 13.9 3.4 3.9 3.2 2.2 1.8 1.9 1.3 1.5 1.4 4.5 4.8 5.1 6.2 6.9 6.8 0.1 0.1 0.1 0 0 0.4 6 6.8 6.3 1.6 2.1 1.7 15.8 4.9 10.9 6 2.6 17.4 5.6 11.9 6.8 3 15.5 4.6 10.9 6.3 3.1
26

Memorendum Items(In Rs. Crore) a. Interest Receipts b. Non-plan revenue Expenditure
2010 - 11
21060 420861
20717 559024
19174 618834
22018 654188
19253 643599
Source: Union Budget documents. BE-Budget estimates P: Provisional actuals (unaudited) Note: 1. The ratios to GDP at current market prices are based on the CSOs National Accounts 2004-05 series. 2. The figures may not add up to the total due to rounding/approximations
Calculation of Correlation between revenue receipt and capital receipt(% of GDP) Revenue Receipts (X) 10.9 9.7 10.5 8.8 8.7 48.6 capital Receipts(Y) 3.4 6.2 6.9 6.8 5.4 28.7
Year 2007-08 2008-09 2009-10(BE) 2009-10(P) 2010-119BE)
X^2 Y^2 XY 118.81 11.56 37.06 94.09 38.44 60.14 110.25 47.61 72.45 77.44 46.24 59.84 75.69 29.16 46.98 2 2 X Y XY =476.28 =173.01 =276.47
We have, Correlation(r) = NXY - (X)(Y) / Sqrt([NX2 - (X)2][NY2 - (Y)2]) =5*276.47-48.6*28.7/[5*476.28-(48.6)^2][5*173.01-(28.7)^2] = 1382.35- 1394.82/19.44*41.36 =-12.47/28.355 =-0.44 Hence, r is ve , so there is negative relation between revenue receipt and capital receipt. Means if revenue receipt is increase then capital receipt decreases and vice versa.
27
Fiscal Policy in India Fiscal Policy Can Be Divided In Two Types:
2010 - 11
FISCAL POLICY
Discretionary policy
Non-Discretionary Policy
To cure Recession
To Control Inflation
Personal Income taxes
Increase in Govt Expenditure
Raising Taxes to Control Inflation
Transfer Payments
Reduction of taxes
Disposing of Budget Surplus
Corporate Income taxes
Corporate Dividend policy
I. Discretionary Fiscal Policy for Stabilisation Fiscal policy is an important instrument to stabilise the economy, that is, to overcome recession and control inflation in the economy. By discretionary policy we mean deliberate change in the Government expenditure and taxes to influence the level of national output and prices. Fiscal policy generally aims at managing aggregate demand for goods and services. To cure recession expansionary fiscal policy and to control inflation contractionary fiscal policy is adopted. A) Fiscal Policy to cure recession: The recession occurs when aggregate demand decreases due to fall in private investment. Private investment may fall when businessmen become highly pessimistic about making profits in future, resulting in decline in marginal efficiency of investment. A fall in private investment expenditure, aggregate demand curve shifts down creating a deflationary or recessionary gap. There are two fiscal methods to get the economy out of recession. Increase in Government Expenditure. Reduction of taxes. i) Increase in Government Expenditure to Cure Recession:
28
2010 - 11
This is the important tool to cure depression. Government may increases expenditure by starting public works, such as buildings roads, dams, ports telecommunication links, irrigation works electrification of new areas etc. Government buys various types of goods and materials and employs workers. The effect of this increase in expenditure is both direct and indirect. The direct effect is the increase in incomes of those who sell materials and supply labour for these projects. The output of these public works also goes up together with the increase in incomes, and for those who get more income they spend further on consumer goods depending on their marginal propensity to consumer. This creates the multiplier. As during the period of recession there exists excess capacity in the consumer good industries, the increase in demand for them bring about expansion in their output which further generates employment and incomes for the unemployed workers and so the new income are spent and serpent further and the process of multiplier goes on working till it exhausts itself. How large should be the increase in expenditure so that equilibrium is established at full employment or potential level of output. This depends on magnitude of GNP gap caused by deflationary gap on the one hand and the size of multiplier depends on the marginal propensity to consume. The impact of increase in government expenditure in a recessionary condition is illustrated in the following figure. Suppose to begin with economy is operating at full-employment or potential level of output YF with aggregate demand curve C+I2+G2 intersecting 45o line at point E2 .Now due to some adverse happening (say due to the crash in the stock market), investors expectations of making profits form investment projects become dim causing a decline in investment. With the decline in investment, say equal to E2B, aggregate demand curve will shift down to new position C+I1+G1 that will bring the economy to the new equilibrium position at point E1 and thereby determine Y1 level of output or income. The fall in output will create involuntary unemployment of labour and also excess capacity (i.e. idle capacity stock) will come to exist in the economy.
45o
E X P E N S I T U R E Y1 YF 450
E2
C+I2+G2 C+I1+G1
E1
Deflationary Gap
Potential output
Y= G 1 ( 1MPC)
NATIONAL INCOME
Thus emergence of deflationary gap equal to E2B and the reverse working of the multiplier has brought about conditions of recession if the government increases its expenditure by E1H, the aggregate demand curve will shift upward to original position C+I2+G2 and as a result the
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2010 - 11
equilibrium level of income will increase to the full employment or potential level of output Yf and in this way the economy would be lifted out of depression. ii) Reduction in Taxes to Overcome Recession: The reduction in taxes increases the disposable income of the society and causes the increase in consumption spending by the people. If tax reduction of Rs.200 crores is made by the Finance Minister, it will lead to Rs.1520 crores in consumption, assuming marginal propensity t6o consume is 0.75 or . Thus reduction in taxes will cause an upward shift in the consumption function. It is worth nothing that reduction in taxes has only an indirect effect on expansion and output through causing a rise in consumption function. Like the increase in government expenditure, the increase in the consumption achieved through reduction in tax will have a multiple effect on increasing income, output and employment. Example: -There are some instances in history of capitalist world, especially USA when taxes were reduced to stimulate the economic. In 1964,the President Kennedy reduce personal and business tax by about $12 billion to give a boost to the American economy when there was high unemployment and lower capacity utilization in American economy. This tax cut was quiet successful in reducing unemployment substantially at expanding national Income through full utilization of excess capacity. Again, over the period 1981-84, President Reagan made a very large tax reduction to get out of recession and to achieve expansion in National Income to reduce unemployment. However, tax reduction by President Reagan play a significant role for bringing about the recovery. B) Fiscal Policy to Control inflation: When due to large increases in consumption demand by the households or investment expenditure by the entrepreneurs, or biggest budget deficit caused by too large an increase in Government Expenditure, aggregate demand increases beyond what the economy can potentially produce by fully employing its given resources, it gives rise to the situation of excess demand which results in inflationary pressures in the economy. This inflationary situation can also arise if too large an increase in money supply in the economy occurs. In these circumstances inflationary gap occurs which tend to bring about rise in prices. If to check the emergence of successful steps exceeds demands or close the inflationary gap are not taken, the economy will experience a period a period of inflation or rising prices. For the last few decades, both the developed and developing countries of the world have faced problems of demand-pull inflation. Both have faced an alternative way of looking at inflation is to view it from the angles of business cycles. After recovery from recession, when during upswing an economy finds itself in conditions of boom and become overheated prices start rising rapidly. Under such circumstances anti - cyclical fiscal policy calls for reduction in aggregate demand. Thus fiscal policy measures to control inflation are: 1) Reducing Government expenditure and; 2) Increasing taxes. If in the beginning the government is having balanced budget, then increasing taxes while keeping government expenditure constant will yield budget surplus. The creation of budget
30
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surplus will cause downward shift in aggregate demand curve and will therefore help in easing pressure on prices. If there is a balanced budget to begin with and the government reduces its expenditure, say on defence, subsidies transfer payments, while keeping taxes constant, this will also create budget surplus and result in removing excess demand in the economy. i) Raising Taxes to Control Inflation: As an alternative to reduction in Government expenditure, the taxes can be increased to reduce aggregate demand .For these purpose especially personal direct taxes such as income tax, wealth tax, corporate tax can be raised. The hike in taxes reduces the disposable in the comes of the people and thereby force them to reduce their consumption demand. ii) Disposal of Budget Surplus: The government either reduces its expenditure or raises taxes to lower aggregate demand for goods and services. Reduction in expenditure or hike in taxes results in decrease in budget deficits {if occurring before such step} or in the emergency of the budge serapes if the government was having balances budget prior to the adoption of antiinflationary fiscal policy measures. Assume that anti-inflationary fiscal policy results in budget surplus. Anti-inflationary impact of budget surplus depends to a good extent on hoe the government disposes of this budget surplus. There are two ways in which budget surplus can be disposed of: 1) Reducing Or Retiring Public Debt: The budget surplus created by Anti-inflationary policy can be use by the government pay back the outstanding debt. However, using budget surplus for retiring public debt will weaken its anti-inflationary effect. In plying of the debt of held by the public the government will be returning the money to the public which it has collected through taxes. Further, this will also add to the money supply with public. General public will spend a part of the money so received, which will raise consumption demand. Beside, retiring of public debt will result in the expansion of money supply in the money market, which will tend to lower the rate of interest. The lower rate of interest will stimulate consumption and investment demand while anti-inflationary policy requires that they should be reduced. 2) Impounding Public Debt: - To realize a large anti-inflationary effect of budget surplus it is desirable to impound the surplus fund. The impounding surplus fund means that they should be kept idle. Thus by impounding the budget surplus, the government shall be withdrawing some income or purchasing power from the income-expenditure stream and thus will not create any inflationary pressure to offset the deflationary impact of the budget. To conclude, the impounding of the budget surplus is the better method of disposing of budget surplus than of paying of public debt. II) Non -Discretionary Fiscal Policy: Automatic Stabilizers There is an alternative to use of discretionary fiscal policy, which generally involves the problem of, large in recognizing the problem of recession or inflation and large of the taking appropriate action to tackle the problem. In this Non-discretionary fiscal policy, the tax structure and expenditure are so designed that taxes and government spending vary automatically inappropriate direction with the changes in National Income. That is, these
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taxes and expenditure pattern without any special deliberate action by the government and parliament automatically raise aggregate demand in times of recession and reduce aggregate demand in times of boom and inflation and thereby help in insuring economic stability. These fiscal measures are therefore called automatic stabilizers or built-in stabilizers. Since these automatic stabilizers do not require any fresh deliberate policy action or legislation by the government, they represent non-discretionary fiscal policy. Built-in-stability of tax revenue and government expenditure of transfer payment of subsidies is created because they vary with national income. These taxes and expenditure automatically bring about appropriate change in aggregate demand and reduce the impact to recession and inflation that might occur in an economy at sometimes. This means that because of existence of this automatic or builtin-stabilizers recession and inflation will be shorter and less intense than otherwise is the case. Important automatic fiscal stabilises compensation, welfare benefits corporate dividends. Below are some taxes and revenue from which varies directly with the change in the National Income: 1) Personal Income Taxes: -The tax rate structure is so designed that revenue from these taxes directly varies with income. Moreover, personal income taxes have progressive rates: The higher rates are changed are from the upper income brackets. As a result, when national income increases during expansion and inflation, increasing percentage op the peoples income is paid to the government. Thus, through causing a decline in their disposable income this taxes automatically reduce peoples consumption and therefore aggregate demand. This decline n aggregate demand because of imposition of progressive personal income tax tenders to check inflation from becoming more severe. On the other hand, when national income declines at times of recession, the tax revenue declines as well which prevent aggregate demand from falling by same proportion as the decline in income. 2) Corporate Income Taxes: - Companies, or corporations as they are called now, also pay a percentage of their profits as tax to the Government. Like personal income taxes, corporate income tax rate is also generally higher at higher levels of corporate profits. As recession and inflation affect corporate taxes greatly, they have a powerful stabilizing effect on aggregate demand; the revenue from them rises greatly during inflation and boom which tends to reduce aggregate demand, and revenue from them falls greatly during recession which tends to offset the decline in aggregate. 3) Transfer payments: Unemployment compensation and welfare benefits: When there is recession and as a result unemployment increases, the Government has to spend more on compensation for unemployment and other welfare programmes such as food stamps, rentsubsidies to farmers. This hike in Government expenditures tends to make recession shortlived and less intense. On the other hand, when at times of boom and inflation national income increases and therefore unemployment falls, the government curtails its programme of social benefit, which resulted in lowering government expenditure. The smaller amount spending by the Government help to control the inflation.
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4) Corporate Dividend Policy: With economic fluctuation, corporate profits also rise and fall. However, corporations do not so quickly increase or reduce dividend in turn with fluctuation in profits and follow a fairly stable dividend policy. This permit the individuals to spend more during recession and spend less then would have the case if dividends were lowered in time of recession and raised in condition of boom and inflation. Thus, fairly stable dividends tend to cushion recession and curb inflation by stabilising consumption.
Effectiveness of Fiscal Policy:

The critics of Keynesians theory has pointed out that expansionary effect of fiscal policy is not as larger as Keynesians economists suggest. In Keynesians theory it is asserted that the Government increases its expenditure, without raising its taxes or when it reduces taxes without changing expenditure it will have a large expansionary effect of national income. In other words deficit budget would lead to the large increase in aggregate demand and thereby help to expand national output and income. However it has been pointed that the above analysis of the effect expansionary fiscal policy of budget deficit ignores the effect of increase in government expenditure or budget deficit on private investment. It has been argued that the increase in government expenditure or creation of budget deficit adversely affects private investment which offsets to a good extent the expansionary affects of budget deficit. This adverse effect comes about as increase in Government expenditure or reduction in taxes causes rate of interest to go up. There are two ways in which rise in rate of interest is explained. First, within the framework of Keynesian theory increase in government expenditure leads to the rise in the national output which raises the transaction demand for money. Given the supply of money in the economy, the increase in transactions demand for money will cause the rate of interest to go up. Secondly, in order to finance its budget deficit the government will borrow funds from the market. This will raise the demand for the loanable funds which will bring about rise in the rate of interest. Whatever the mechanism the budget deficit or increase in Government expenditure to achieve expansion in the national income and output will cause the rate of interest to go up. The rise in the rate of interest will discourage private investment. As we know from the theory of investment, at a higher rate of interest, private investment declines. Thus, increase in government expenditure or fiscal policy of budget deficit crowds out private investment. This fall in private investment as a result of the rise in rate of interest will be quiet substantial and will greatly offset the expansionary effect of the increase in the government expenditure. On the contrary, if investment demand is relatively inelastic, the rise in rate of interest will lead to only a small decline in private investment and therefore crowding out effect will be relatively small.
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Differences in the Effectiveness of Monetary and Fiscal Policies:

When the economy is in a recession (when business and consumer confidence is very low and perhaps where deflationary pressures are taking hold) monetary policy may be ineffective in increasing current national spending and income. The problems experienced by the Japanese in trying to stimulate their economy through a zero-interest rate policy might be mentioned here. In this case, fiscal policy might be more effective in stimulating demand. Other economists disagree they argue that short term changes in monetary policy do impact quite quickly and strongly on consumer and business behaviour. Consider the way in which domestic demand in both the United States and the UK has responded to the interest rate cuts introduced in the wake of the terror attacks on the USA in the autumn of 2001 However, there may be factors which make fiscal policy ineffective aside from the usual crowding out phenomena. Future-oriented consumption theories hold that individuals undo government fiscal policy through changes in their own behaviour for example, if government spending and borrowing rises, people may expect an increase in the tax burden in future years, and therefore increase their current savings in anticipation of this.
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MEDIUM TERM FISCAL POLICY STATEMENT
A. FISCAL INDICATORS - ROLLING TARGETS AS PERCENTAGE OF GDP
2010 - 11
( at current market
Targets for 2012-13 2.7
prices)
Revised Estimates 2009-10 1. Revenue Deficit 2. Fiscal Deficit 5.3 Budget Estimates 2010-11 4.0 Targets for 2011-12 3.4
6.7
5.5
4.8
4.1
3. Gross Tax Revenue 4. Total outstanding liabilities at the end of the year
10.3
10.8
11.5
11.8
51.5
51.1
50.0
48.2
1. The medium term fiscal outlook presented above indicates that the fiscal performance during the year 2009-10 was broadly in line with the Budget presented in July 2009. 2. Notwithstanding additional appropriation sought through Supplementary Demands for Grants during the year, the overall expenditure in absolute terms has been retained at almost the same level of BE 2009-10 in RE 2009-10. Gross tax revenue of the Government which was estimated at 10.4 per cent of GDP (10.9 per cent with pre revised GDP) in BE 2009-10 has marginally declined to 10.3 per cent in RE 2009-10. The shortfall in indirect taxes has largely been covered through estimated additional receipts in direct taxes. Also, the shortfall in non-tax revenue on account of non-realisation of 3G auction proceeds during the year 2009-10 has been met to a large extent through the disinvestment proceeds. The overall borrowings of the Government are the same as projected in the BE 2009-10. 3. For the year 2010-11, the fiscal policy is being guided by the Governments commitment in MTFP statement presented in July 2009. Fiscal deficit which was committed to be brought down to 5.5 per cent of GDP, has actually been estimated at the same level in BE 2010-11. This shows the Governments intention to fulfil the commitment to revert back to the path of fiscal consolidation in the coming years. Government is also getting the benefit of the recommendations of the 13th Finance Commission (FC) in calibrating the fiscal consolidation path for the period 2010-15. Tax revenue is estimated to increase from 10.3 per cent of GDP in RE 2009-10 to 10.8 per cent in BE 2010-11, which is however still lower than 12 per cent of GDP achieved during 2007-08. There is further scope of improvement in this with the economy showing signs of returning to the trend growth rate in recent times.
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4. In spite of no significant increase in tax to GDP ratio and additional expenditure commitments arising on account of the 13th FC recommendations, the fiscal deficit with the help of disinvestment proceeds and reforms in expenditure management including subsidies, has been reduced from 7.8 per cent in 2008-09 (including securities issued in lieu of subsidies to oil and fertiliser companies) to 5.5 per cent in BE 2010-11. It is further estimated to be brought down to 4.8 per cent of GDP in 2011-12 and 4.1 per cent in 2012-13 which is a slight improvement over the suggested roadmap of the 13th FC. 5. The projected fiscal deficit of 4.8 per cent of GDP in 2011-12 is higher than the earlier projected deficit of 4 per cent in the Medium Term Fiscal Policy (MTFP) Statement, 2009-10. This increase in estimated deficit is largely on account of the impact of the recommendations of the 13th FC and lower than estimated tax to GDP ratio. While total expenditure has been projected to reduce from 16 per cent of GDP in BE 2010-11 to 15.2 per cent of GDP in 2011-12, the additional devolution of share in Central Taxes and larger amount of grants in aid to States have made it difficult to keep the fiscal deficit at earlier projected level of 4 per cent of GDP. 6. For the year 2012-13, the fiscal deficit is estimated at 4.1 per cent of GDP. This factors in reduction in expenditure to 14.6 per cent of GDP and increase in tax to GDP ratio to 11.8 per cent of GDP. The details of assumptions are explained in section B of the Statement. The risks associated with the assumptions are also explained therein. Unforeseen expenditure and further shocks in international commodities prices may however affect the projections given above. 7. On the whole, with improvement in prevailing conditions, the process of fiscal consolidation is back on track. The 13th Finance Commission has assessed the finances of the Union and States and specified a combined debt target of 68% of Gross Domestic Product (GDP) to be met by 2014-15. It has worked out a roadmap for Fiscal Deficit (FD) and Revenue Deficit (RD) for the award period. For Centre, it has recommended RD to be eliminated and FD to be brought down to 3% of GDP by 2013-14. The Government has accepted these recommendations in principle. Detailed proposals for amendment of the FRBM Act, as may be necessary, will be taken up separately. 8. The corrections in fiscal deficit during 2010-2013 period are expected to bring down the debt to GDP ratio for the Central Government from 51.5 per cent in RE 2009-10 to 48.2 per cent in 2012-13. The 13th FC in its report has indicated that the Central Governments liability is overstated to the extent of NSSF loans to States. In the rolling targets indicated in the table in paragraph A, this anomaly has been corrected from RE 2009-10 onwards. The liabilities shown in the table exclude loans from NSSF to the States. Further, in consolidation of General Government debt other loans from Centre to States (i.e. external loans) should also be excluded from Centres liability, and 14-days treasury bills should be excluded from State Governments liabilities.
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Fiscal Policy in India Limitations of fiscal policy:
2010 - 11
1. Formulation of an appropriate fiscal policy requires reliable forecasting of the target variables, like GNP, consumption, investment and its determinants, technological changes, and so on. But no one has yet discovered a foolproof method of economic forecasting. 2. The Overall effect of changes in the policy instruments, like, changes in government spending and taxation is determined by the rate of dynamic multiplier. Forecasting the multiplier is in itself an extremely difficult task and a time consuming process. Therefore, by the time the full impact of one policy change is realized, economic conditions change necessitating another change in the fiscal policy. 3. A decision and execution lag in case of discretionary fiscal policy makes both working and efficacy of fiscal policy shrouded with uncertainty. 4. Working and effectiveness of fiscal policy in underdeveloped countries is severely limited by a) low levels of income, b) small proportion of population in taxable income groups, c) existence of large non - monetized sector, d) all pervasive corruption and inefficiency in administration, especially in tax collection machinery. 5. Countries which are excessively dependent on fiscal policy for their economic management, the governments are often forced to have recourse to internal and external borrowings and deficit financing. Excessive borrowings take such countries close to debt trap and deficit financing beyond the absorption capacity of the economy accelerates the pace of inflation, which further creates other control problems. 6. Lack of information. 7. Time lag measures. 8. Effects of changes in Balance of payments
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Conclusion on Fiscal Policy:

The objectives of fiscal policy such as economic development, price stability, social justice, etc. can be achieved only if the tools of policy like Public Expenditure, Taxation, Borrowing and deficit financing are effectively used. Though there are gaps in India's fiscal policy, there is also an urgent need for making India's fiscal policy a rationalised and growth oriented one. The success of fiscal policy depends upon taking timely measures and their effective administration during implementation.
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BIBLIOGRAPHY
Websites: www.indiabudget.nic.in www.dipp.nic.in www.rbi.org.in www.legalserviceindia.com www.cci.in www.legallyindia.com www.icsi.edu www.retailguru.com www.economywatch.com/fiscal policy www.ibef.org www.investopedia.com
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REFERENCE
Newspapers: The Economic Times The Business Standard Books:

Macroeconomics Theory and policy H.L. Ahuja Ministry of Finance and RBI Mishra, S. K. and Puri, V. K. Economic Environment and Business Paul, R. R. - Monetary Economics Dutt, R. and Sundaram, K.P.M.: Indian Economy
Journals and Magazines:

1. 2. 3. 4. 5. 6. ICFAI Journal of Monetary Economics Indian Journal of Economics and Business Monthly Commentary on Indian Economic Condition Quarterly Economic Report of the Indian Institute of Public Opinion Business World Indian Economy Review
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Fiscal Policy in Indian Economy

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Fiscal Policy in India Introduction:

Meaning of Fiscal Policy:

Fiscal Policy Overview:

Fiscal Policy in India

Fiscal Policy in India

Objectives of Fiscal Policy in Developing Countries:

The principal objectives of fiscal policy in a developing economy are:

Fiscal Policy in India

Main Objectives of Fiscal Policy In India:

Fiscal Policy in India

Fiscal Policy in India

Stances of fiscal policy:

Role of Fiscal Policy:

Fiscal Policy in India

Drawbacks of Fiscal Policy:

Fiscal Policy in India

Reforms For Fiscal Policy :

Fiscal Policy in India

Instruments of Fiscal Policy for 2010-11:

Fiscal Policy in India

Fiscal Policy in India

Incremental Net Liabilities of the Central Government

Fiscal Policy in India

Fiscal Policy in India

Fiscal Policy in India

Fiscal Policy in India

Service Tax-A Growing Revenue Source

Fiscal Policy in India

Fiscal Policy in India

Fiscal Policy in India

2010 - 11 Composition of gross tax revenue

Per cent of GDP

Excise Custom Corporate tax Personal Income tax Service tax

Government Borrowings, Lending and Investments:

Fiscal Policy in India

Fiscal Policy in India

Initiatives in Public Expenditure Management

Fiscal Policy in India

Fiscal Policy in India

Fiscal Policy in India

Trends In Deficit of Central Government

Sustainability of high growth enabling conditions

Fiscal Policy in India

Receipts and expenditure of the Central Government

Revenue Expenditure Revenue receipts Capital receipts Capital expenditure

Fiscal Policy in India

Fiscal Policy in India

Fiscal Policy in India

Year 2007-08 2008-09 2009-10(BE) 2009-10(P) 2010-119BE)

Fiscal Policy in India Fiscal Policy Can Be Divided In Two Types:

Personal Income taxes

Increase in Govt Expenditure

Raising Taxes to Control Inflation

Disposing of Budget Surplus

Corporate Income taxes

Corporate Dividend policy

Fiscal Policy in India

Fiscal Policy in India

Fiscal Policy in India

Fiscal Policy in India

Fiscal Policy in India

Effectiveness of Fiscal Policy:

Fiscal Policy in India