Indian Economy Quiz: Government Budgeting & Fiscal Policy |22 Feb, 2021

All expenditures incurred by the government are either of revenue kind or current kind or compulsive kind. The basic identity of such expenditures is that they are of consumptive kind and do not involve creation of productive assets. They are either used in running of a productive process or running a government. A broad category of things that fall under such expenditures in India are:

· Interest payment by the government on the internal and external loans;

· Salaries, Pension and Provident Fund paid by the government-to-government employees;

· Subsidies forwarded to all sectors by the government;

· Defense expenditures by the government;

· Postal Deficits of the government;

· Law and order expenditures (i.e., police & paramilitary);

· Expenditures on social services (includes all social sector expenditures as education, health care, social security, poverty alleviation, etc.) and general services (tax collection, etc.);

· Grants given by the government to Indian states and foreign countries.

Source: Ramesh Singh

India started the politically and socially painful process of fiscal reforms, a step towards fiscal consolidation. A number of steps were taken by the government at the Centre in this direction and there had been incessant attempts to do the same in the states’ public finances too. Major highlights in this direction can be summed up as given below:

Policy initiatives towards cutting revenue deficits:

· Cutting down the burden of salaries, pensions and the PFs (downsizing/ right-sizing of the government, out of every 3 vacancies 1 to be filled up, interest cut on the PF, pension reforms-PFRDA, etc.);

· Cutting down the subsidies (Administered Price Mechanism in petroleum, fertilizers, sugar, drugs to be rationalized, it was done with mixed successes);

· Interest burden to be cut down (by going for lesser and lesser borrowings, pre-payment of external debts, debt swaps, promoting external lending, minimal dependence on costlier external borrowings, etc.);

· General Services to be motivated towards profit with subsidized services to the needy only (railways, power, water, etc.);

· Postal deficits to be checked by involving the post offices in other areas of profit;

· Higher education declared as non-priority sector; fees of institutions of professional courses revised upward; etc.

Source: Ramesh Singh

By early September 2014, the Government of India constituted an Expenditure Management Commission (EMC) through a Resolution.

· The EMC will look into various aspects of expenditure reforms to be undertaken by the government and other issues concerning Public Expenditure Management.

· The Commission has one full time, one part time and one ex-officio members other than Chairman of (Cabinet rank). Dr. Bimal Jalan is its first Chairman.

Source: Ramesh Singh

Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets.

· The concept of effective revenue deficit has been suggested by the Rangarajan Committee on Public Expenditure.

· It is aimed to deduct the money used out of borrowing to finance capital expenditure.

· The concept has been introduced to ascertain the actual deficit in the revenue account after adjusting for expenditure of capital nature.

· Focusing on this will help in reducing the consumptive component of revenue deficit and create space for increased capital spending.

· Though the Budget documents have given targets for revenue deficit, the amendments to the Fiscal Responsibility and Budget Management Act 2003 have proposed to substitute the definitions of “effective revenue deficit” and “revenue deficit” with those of “Central government debt” and “general government debt” respectively.

Source: Ramesh Singh

The FRBM Review Committee headed by former Revenue Secretary, NK Singh was appointed by the government to review the implementation of FRBM. In its report submitted in January 2017, titled, ‘The Committee in its Responsible Growth: A Debt and Fiscal Framework for 21st Century India’, the Committee suggested that a rule based fiscal policy by limiting government debt, fiscal deficit and revenue deficits to certain targets is good for fiscal consolidation in India. Following are the main recommendations of the NK Singh Committee.

· Public debt to GDP ratio should be considered as a medium-term anchor for fiscal policy in India. The combined debt-to-GDP ratio of the center and states should be brought down to 60 per cent by 2023 (comprising of 40 per cent for the Centre and 20% for states) as against the existing 49.4 per cent, and 21per cent respectively.

· Fiscal deficit as the operating target: The Committee advocated fiscal deficit as the operating target to bring down public debt. For fiscal consolidation, the center should reduce its fiscal deficit from the current 3.5% (2017) to 2.5% by 2023.

· Revenue deficit target: The Committee also recommends that the central government should reduce its revenue deficit steadily by 0.25 percentage (of GDP) points each year, to reach 0.8% by 2023, from a projected value of 2.3% in 2017.

· Formation of Fiscal Council to advice the government: The Committee advocated formation of institutions to ensure fiscal prudence in accordance with the FRBM spirit. It recommended setting up an independent Fiscal Council. The Council will provide several advisory functions.

· Escape Clause to accommodate counter cyclical issues.

Source: Sriram’s IAS

A Pigovian tax is a tax placed on any good which creates negative externalities.

· The aim of a Pigovian tax is to make the price of the good equal to the social marginal cost and create a more socially efficient allocation of resources.

· It is named after the economist Arthur Pigou who developed the concept of externalities in the 1920s.

· A carbon tax aims to make individuals and firms pay the full social cost of carbon pollution. In theory, the tax will reduce pollution and encourage more environmentally friendly alternatives.

Source: Ramesh Singh

Tax-to-GDP ratio represents the size of a country’s tax kitty relative to its GDP.

· It is a representation of the size of the government’s tax revenue expressed as a percentage of the GDP.

· Higher the tax to GDP ratio the better financial position the country will be in.

· The ratio represents that the government is able to finance its expenditure. A higher tax to GDP ratio means that the government is able to cast its fiscal net wide.

· It reduces a government’s dependence on borrowings.

· Although India has improved its tax-to-GDP ratio in the last six years, it is still far lower than the average OECD ratio which is 34 per cent.

· India’s tax-to-GDP ratio is lower than some of its peers in the developing world. Developed countries tend to have higher tax-to-GDP ratio.

Source: The Hindu

Stealth taxes are sometimes built into the prices of products so that consumers do not see how much tax they are paying.

· In comparison to income taxes and property taxes, stealth taxes are smaller and less visible.

· Because of their lower visibility they attract significantly less attention than income or property taxes.

· Governments find stealth taxes easier to collect than other types of taxes because the government collects them at the point of sale and they do not depend on a taxpayer’s income level.

· The most common stealth tax is the sales tax.

Source: Ramesh Singh

It is a proposal of imposing small tax on all foreign exchange transactions with the objective to discourage destabilizing speculation and volatility in the foreign exchange markets.

Proposed by the Nobel prize-winning economist James Tobin (1918– 2002), the tax has never been implemented anywhere in the world so far.

Source: Ramesh Singh

The introduction of the Goods and Services Tax (GST) is a very significant step in the field of indirect tax reforms in India.

By amalgamating a large number of Central and State taxes into a single tax, GST will mitigate ill effects of cascading or double taxation in a major way and pave the way for a common national market.

The government rolled out GST with effect from 1st July 2017. State taxes that would be subsumed within the GST are: –

· State VAT

· Central Sales Tax

· Purchase Tax

· Luxury Tax

· Entry Tax (All forms)

· Entertainment Tax and Amusement Tax (except those levied by the local bodies)

· Taxes on advertisements

· Taxes on lotteries, betting and gambling

· State cesses and surcharges in so far as they relate to supply of goods and services.

Source: Sriram’s IAS