Fiscal Policy Prof. Tarun Das

Economic Environment and Policy Session-9 Fiscal Policy Reforms in India

Presented by Dr. Tarun Das Professor, IILM Prof. Tarun Das, IILM

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1.1 Major Fiscal Reforms since 1991 a) Reduction of fiscal deficit b) Fiscal Responsibility and Budget Management Act 2003 c) Simplifying tax rules and procedures d) Strengthening tax administration e) Widening tax base f) Rationalisation and Reduction of both direct and indirect tax rates

Prof. Tarun Das, IILM

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1.2 Fiscal Responsibility and Budget Management (FRBM) Act 2003 FRBM Act 2003 and FRBM Rules 2004 came into force w.e.f. 5 July 2004. • The Act mandates the Central govt to eliminate revenue deficit by March 2009 and to reduce fiscal deficit to 3% of GDP by March 2008. • Under the Act, the central govt is required to lay before both houses of Parliament the following documents: (a) Medium Term Fiscal Policy Statement, (b) Fiscal Policy Strategy Statement, (c) Macro Economic Framework Statement, (d) Annual Financial Statement and (e) Demand for Grants. •

Prof. Tarun Das, IILM

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1.3 FRBM Rules 2004 • • •

• • •

Reduction of revenue deficit by 0.5% of GDP or more every year. Reduction of gross fiscal deficit by 0.3% of GDP or more every year. No assumption of additional debt exceeding 9% of GDP for 2004-05 and progressive reduction of this limit by at least one percentage point of GDP in each subsequent year. No guarantee in excess of 0.5% of GDP in any financial year. Greater transparency in the budgetary process, rules, accounting standards and fiscal policies Quarterly review of the fiscal situation.

Prof. Tarun Das, IILM

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1.4 FRBM Rules 2004 •

•

The rules mandate the Central Government to take appropriate action if revenue and fiscal deficits exceed 45% of the budget estimates, or total non-debt receipts fall short of 40% of the budget estimates at the end of September i.e. first half of the fiscal year. Four fiscal indicators viz. revenue deficit, fiscal deficit, tax revenue and total debt as % of GDP to be projected for the medium term.

Prof. Tarun Das, IILM

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3.5 Medium Term Fiscal Indicators (as % of GDP at current market prices) Items

2007- 2008- 2009- 201008 RE 09 BE 10 Tar 11 Tar

1. Rev. Deficit

1.4

1.0

0.0

0.0

2. Fiscal Deficit

3.1

2.5

3.0

3.0

12.5

13.0

13.5

14.0

63.8

59.6

55.7

52.3

3. Tax revenue 4. Year-end stock of public Prof. Tarun Das, IILM debt

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4.1 Progress of Fiscal Reforms Status in June 1991 (a)Budget support to PSEs: 1.5% of GDP (b) Price and purchase preference for PSEs (c )Preferential treatment for bank credits (d) No hard budget constraints for PSEs (e) No disinvestment (f)SICA does not include sick PSUs Prof. Tarun Das, IILM

Status in Dec 2008 (a) Support reduced to 0.5% of GDP (b)No price preference, but purchase preference exists (c )No preferential treat-ment for bank credits (d) MOUs strengthened (e) Divestment allowed (f)SICA applicable for PSUs EEP-9 Fiscal Policy

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4.2 Fiscal Deficit (as % of GDP) Status in 1990-91 Central Govt Fiscal Deficit 6.6% Revenue deficit 3.3% Primary deficit 2.8% State governments Fiscal Deficit 3.3% Revenue deficit 0.9% Primary deficit 1.8% General Govt Fiscal Deficit 9.9% Revenue deficit 4.2% Primary deficit 4.6%

Prof. Tarun Das, IILM

Status in 2007-08 Central Govt Fiscal Deficit 3.1% Revenue deficit 1.4% Primary deficit -0.6% State governments Fiscal Deficit 2.3% Revenue deficit 0.5% Primary deficit 0.1% General Govt Fiscal Deficit 5.4% Revenue deficit 1.9% Primary deficit -0.5% EEP-9 Fiscal Policy

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4.3 Progress of Fiscal Reforms Status in June 1991 • Public debt as percentage of GDP (a) Central govt 61% - Internal 50% - External 12% (b) States 19% - Internal 19% (c )General govt 68% - Internal 56% - External 12% Prof. Tarun Das, IILM

Status in March 2008 • Public debt as percentage of GDP (a) Central govt 63% - Internal 59% - External 4% (b) States 29% - Internal 29% (c )General govt 92% - Internal 88% - External 4%

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4.4 Progress of Fiscal Reforms Status in June 1991 Fiscal Deficit was financed by: (a) RBI Ad Hoc TBs at 4.6% interest (b) Banks through SLR holdings at 38.5% and CRR 25% (c ) Market borrowings (d) Public funds (e) External debt Prof. Tarun Das, IILM

Status in Dec 2008 (a) Ad hocs replaced by WMAs at market rate (b) SLR reduced to 25% and CRR 5.5% (c)Govt. securities are sold at market rates (d) Reduction of interest rates for public funds (e) Less dependence on External debt

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4.5 Progress of Fiscal Reforms Status in June 1991 High duty & tax rates Maximum rates Excise duty 110% Import duty 400% Income tax 54% Corporate taxes: Domestic COs. 49% and 54% Foreign COs. 65% Prof. Tarun Das, IILM

Status in Dec 2008 Duties & taxes reduced Maximum rates Excise duty 8% Cenvat 14% Import duty 12.5% Income tax 30%

Corporate taxes: Domestic COs. 30% + 10% surcharge Foreign COs. 40%+2.5% surcharge EEP-9 Fiscal Policy

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4.6 Progress of Fiscal Reforms Status in June 1991

Status in Dec 2008

• • No service tax • • No MinAlternativeTax • • No transactions tax • • • No tariff value • Dividend tax on • both individuals & • Cos. • Existence of gift tax• • Limited cases of tax-holidays • No fringe benefit tax (FBT) Prof. Tarun Das, IILM

Service tax @12% MAT introduced Trans. tax introduced Tariff value introduced Dividend tax on only companies Gift tax abolished Tax holidays widened to many infrastructure FBT introduced

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4.7 Progress of Fiscal Reforms Status in June 1991 • No MRP linked excise duties • No estimated income scheme for retail traders • No presumptive tax

Status in Dec 2008 • Concept of MRP introduced for consumer goods • Estimated income scheme introduced for retail traders. • Presumptive income tax scheme introduced • State level VAT introduced wef April 05

• No state level VAT

Prof. Tarun Das, IILM

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4.8 Related Financial Reforms Status in June 1991 • CRR 25% • SLR 38.5% • Bank Rate 12% • PLR above 21% • Deposit and interest rates are controlled • Capital issues and prices determined by the CCI in MOF Prof. Tarun Das, IILM

Status in January 2007 • CRR 5.5% • SLR 25% • Bank rate 6% • PLR 11% to 11.5% • Deposit and interest rates are liberalised • The office of CCI abolished and SEBI established

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4.9 Related Financial Reforms Status in Dec 2008

Status in June 1991 • • Indian firms not allowed to raise funds from foreign stock exchanges • • Portfolio investment by foreign investors in Indian companies not allowed • • Foreigners not allowed to buy G-secs Prof. Tarun Das, IILM

Indian firms allowed to raise foreign funds by GDR, ADR, FCCBs & offshore funds FIIs, NRIs and OCBs allowed to buy stocks in Indian markets s.t. overall limit of 49% FIIs/ NRIs/ OCBs allowed to buy G-secs

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Thank you Have a Good Day

Prof. Tarun Das, IILM

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