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Fiscal Reforms: Presented By: Aman Kumar Neha Batra Himanshu Rastogi

Fiscal reforms in India were presented. The key points are: 1. India's fiscal deficit was high at 9.84% of GDP in 1999-2000, only marginally lower than 1990-91 which was a crisis year. 2. Government debt levels were also approaching unsustainable levels, with domestic debt reaching 60.7% of GDP by 2000. 3. A series of fiscal reforms have been ongoing since 1991 to address fiscal imbalances through tax reforms, reducing deficit financing, and changes to expenditure. 4. However, fiscal consolidation has been complex due to political and democratic limitations on reforms like reducing agricultural subsidies and government employment.

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96 views19 pages

Fiscal Reforms: Presented By: Aman Kumar Neha Batra Himanshu Rastogi

Fiscal reforms in India were presented. The key points are: 1. India's fiscal deficit was high at 9.84% of GDP in 1999-2000, only marginally lower than 1990-91 which was a crisis year. 2. Government debt levels were also approaching unsustainable levels, with domestic debt reaching 60.7% of GDP by 2000. 3. A series of fiscal reforms have been ongoing since 1991 to address fiscal imbalances through tax reforms, reducing deficit financing, and changes to expenditure. 4. However, fiscal consolidation has been complex due to political and democratic limitations on reforms like reducing agricultural subsidies and government employment.

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abhistgautam
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FISCAL REFORMS

PRESENTED BY: AMAN KUMAR NEHA BATRA HIMANSHU RASTOGI

INTRODUCTION
Of late now, Indian economy has been in the spotlight. It has been among the fastest growing economies during the last two decades. Wide ranging economic reforms have taken place. It has undergone a significant structural transformation. The economy is more resilient, less vulnerable to external shocks and has opened up for more potentials. But the attention on the economy is also because it has crossed one billion mark in population and almost a third of the population remains below a modestly defined poverty level.

Fiscal Balances

Deficit

Central government's fiscal deficit for the year 1999-2000 was 5.64 per cent of GDP. State governments fiscal deficit budgeted for 1999-2000 was at its historic high at 4.71 per cent of GDP. The combined fiscal deficit of the government was 9.84 per cent of GDP in 1999-2000 which is only marginally lower than the level in 1990-91 (10.0 per cent) which was a crisis year.

Domestic Debt
The nominal stock of domestic debt of the combined Government sector has been growing at a rate of about 16 per cent during the later part of the 1990s reaching to 60.7 per cent of GDP at endMarch 2000 as against 55.5 per cent at end March 1999 and 56.12 per cent at end March 1991. Central government's debt as per cent of GDP was about 53 per cent at end 1999-2000 almost the same level as in 1990-91. State government's Debt GDP ratio for State governments at 21.50 per cent in 1999-2000 was about a percentage point higher than the level at end 1990-91.

Receipts and Expenditure


Receipts
Central government's gross tax revenue/GDP ratio has fallen by almost 2 percentage points to 8.80 per cent in 1999-2000 from 10.75 percent in 1990-91. State's own tax revenue/GDP ratio however, has not fallen significantly during the same period. Historically tax/GDP ratio both for the Central govt. and for the State Governments had shown about 2 percentage point increase from the first half of seventies to the second half of 'eighties.

Expenditure
Central government's revenue expenditure as per cent of GDP was 13.10 per cent in 1999-2000. This had shown an increase over the previous 3 years but was lower by about 0.6 percentage points when compared to the first half of nineties and even during second half of eighties when, on average, it was about 13.70 per cent.

Overview of Reforms
It is by now almost a two since the process of wide ranging economic reforms was initiated in 1991. A process of stabilization and structural adjustment was, therefore, initiated since July 1991. Wide ranging policy changes and reform measures were taken up. This has been a continuing process. In the area of fiscal policy, the following changes in the system were proposed.

Contd..
Streamlining and rationalizing the levels, structure, and procedures of the tax system. Changes in the financing pattern of the fiscal deficits through borrowings at market rates and reduced dependence on the system of monetizing the deficits. Changes in expenditure pattern through reduced transfer payments on services, subsidies, budget support to public sector entities, etc.

Fiscal Consolidation

Fiscal Sector Reforms

Fiscal sector reforms were perhaps the most critical part of the reforms initiatives taken by the government after the 1991 economic crisis. The level of fiscal deficit combined both for the Central government and State governments was more or less at the same level at the end of nineties as it was at the beginning. Government debt was approaching a critical mark beyond which it could be labeled as unsustainable. The fiscal issues are complex at the first place and at the same time they are inter linked with all other macro variables and democratic/political issues.

Complexity and inter-linking

Tax rationalization process particularly for indirect taxes was not complex but also inter-linked to reform measures to be taken in other sectors like foreign trade policy, industrial policy, opening of the economy for foreign investment, financial sector reforms etc.

Rigidities of Expenditure Pattern


The allocation of budgetary expenditure in terms of contractual and obligatory payments like interest payments, pensions, defence, transfers to states, etc. have been growing in such a proportion that there has been very little scope of any sharp change in the allocation pattern of expenditure in a short period.

Democratic Limitations
It is now well known that there remain certain basic issues which no elected government would prefer to even raise. Taxing agricultural income, sharp reduction of food subsidy, sharp downsizing of government staff etc. are some such issues which no government has been able to face head on, howsoever, critical these may be for correcting fiscal imbalances.

Political Uncertainties
Political uncertainties particularly during the second half of the 'nineties was an important factor for delays in implementation of reformsso speedily required in a well structured sequence.

Tax Reforms
Tax reforms during nineties have been mainly guided by the report of the Chelliah Committee on tax reform (1993). The main objectives have been simplification of the tax system, rationalization of tax rates, fairness in tax system, improvement in tax administration and above all providing a growth promoting tax structure.

Public Sector Restructuring


The policy announced in the budget speech 2000-2001 by the Finance Minister had the following as main elements Restructure and revive potentially viable PSUs Close down PSUs which cannot be revived Bring down Government equity in all non-strategic PSUs to 26 percent or lower, if necessary Fully protect the interests of workers.

COntd.
In particular, it needs to be noted that budget support to CPEs as a per cent of GDP has come down to only 0.5 per cent in 1998-99 from 1.5 per cent in 1990-91 and CPEs deficit GDP ratio has come down to 1.3 per cent in 199899 from 3.0 per cent in 1990-91. Moreover, profitability trends have shown a distinct improvement. The profit after tax, as per cent of net worth, for CPEs, had increased to 10.4 per cent in 1997-98 from 3.9 per cent in 1990-91.

Fiscal Responsibility Act


On December 11, 2000 the Government has introduced a Bill in the Parliament titled as "The Fiscal Responsibility and Budget Management Bill, 2000". The proposed legislation is to provide ensure inter-generational equity in fiscal management macro-economic stability by achieving sufficient revenue surplus consistent with fiscal sustainability through limits on the Central Government borrowings greater transparency in fiscal operations of the Central Government

OBSERVATIONS
The above analysis and assessment clearly revealed that the significant fiscal consolidation in the immediate aftermath of the fiscal reforms was essentially brought about through cut in investment expenditure, as rise in committed revenue expenditure could not be curtailed. In 2006-07 Annual budget, three principal themes underpin the Budget proposals - a focus on the rural sector, augmentation of infrastructure and fiscal consolidation. On fiscal consolidation, the Finance Minister avers his determination to adhere to the targets set under the Fiscal Responsibility and Budget Management Act by lowering fiscal deficit from 4.1 per cent in financial year 2005-06 to 3.8 per cent in financial year 2006-07 and revenue deficit from 2.6 per cent to 2.1 per cent over the same period.

THANK YOU

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