Fiscal Reform Measures:: Ge.4: Indian Economy-Ii Unit-I Macroeconomic Policies and Their Impact

GE.
4: INDIAN ECONOMY-II
UNIT-I
MACROECONOMIC POLICIES AND THEIR IMPACT
FISCAL REFORM MEASURES:

Fiscal Policy refers to the taxation and expenditure decision of government. It includes
various policies like export policy, investment policy, disinvestment policy, expenditure
policy etc. to achieve the development of nation. Broadly, during the first 30 years of
independence, between 1950 and 1980, the fiscal deficits of both the Central and the State
Governments were not excessive. There was a significant deterioration in the fiscal situation
in the 1980s, accompanied by large and automatic monetisation of government deficits. The
fiscal reforms in India address both revenue as well as expenditure related policies.
Goals of Fiscal Policy: The major goals of fiscal policy are:
 Economic Growth and Development

 Price stability and inflation control
 Social stability
Fiscal Reforms in India
The government of India has initiated fiscal reforms in India from time to time to achieve the
above stated goals but major fiscal reforms were started aftermath of 1991 economic crisis.
The focus is on to raise revenue through taxation and improving the quality of public
expenditure.
Revenue Reforms
Until 1980’s the direct tax rate was very high which induced people to evade taxes and create
Black economy. Tax rate of income tax and corporate tax have been lowered to moderate
level so that tax buoyancy is achieved through better compliance and minimum exemptions.
 Excise duties and custom duties have been progressively reduced to make Indian
Exports competitive in international market.
 Service tax was introduced
 GST
 Fringe Benefit Tax
 Minimum Alternate Tax (MAT)
Expenditure Reforms
 FRBM Act
 Chelliah committee
 TRC 1991
Fiscal Reforms 1950’s

The objective of economic policy during the 1950s and 1960s was mainly to increase the
growth rate of the economy through increasing public investment and overall economic
planning. Taxation was used as an instrument for reducing private consumption and for
transferring resources to the Government to enable it to undertake large-scale public
investment in an effort to spur economic growth. Furthermore, taxation policy was geared
towards achieving the economic objectives of:
 promoting employment through grant of tax incentives to new investment

 reducing inequality through progressive taxes on income and wealth
 reducing pressure on balance of payments through increase of import duties
 stabilizing prices through tax rebate in excise duties on consumption goods
The fiscal deficits of both the central and the state governments were not excessive. This was
a period of revenue surplus in general.
Fiscal policy during the 1970s consciously focused on achieving greater equity and social
justice and both taxation and expenditure policies were employed towards this end.
Accordingly, income tax rates were raised to very high levels, with the maximum marginal
rate of income tax moving up to 97 per cent and, together with the incidence of wealth tax, it
even crossed 100 per cent
During the 1980s, Indian public finances were in a state of disarray with the fiscal pattern
destabilising the relationship between the economy and the budget. This resulted in
persistently large deficits which were seemingly intractable. Considerable fiscal deterioration
took place during the 1980s and eventually became unsustainable, though the growth rate did
rise significantly with enhancement in public investment in infrastructure. During this phase,
expenditure of the Government was seen as an instrument having a bearing upon aggregate
demand, resource allocation and income distribution. The Government sought to reduce its
deficit through tax increases. Customs duties were hiked to augment revenue and to protect
domestic industry. There was a structural change in the government budgets during the
1980s. The emergence of revenue deficit in 1979-80 in the Centre’s Budget continued to
enlarge during the 1980s, raising concerns over the rising public debt and interest payments
and the consequent constraint on the availability of resources for meeting developmental
needs. The 1980s witnessed a steady increase in market borrowings along with an increase in
Reserve Bank’s support to such borrowing, thus compromising monetary policy
Fiscal Reforms since 1990’s
India’s reform program included wide-ranging reforms. These reforms can be classified as:
 Banking Sector Reform: It includes measures like:

1. Liberalization, like dismantling the complex system of interest rate controls,
eliminating prior approval of the Reserve Bank of India for large loans, and
reducing the statutory requirements to invest in government securities;
2. to increase financial soundness, like introducing capital adequacy
requirements and other prudential norms for banks and strengthening banking
supervision
3. To increase competition like more liberal licensing of private banks and freer
expansion by foreign banks
4. Reduced CRR, SLR
5. Introduction of prudential norms
6. The Board for Financial Supervision was The Board for Financial Financial
Supervision Supervision was set up within the RBI to attend exclusively to
supervisory functions
7. Removed barriers for entry of private sector banks
8. Opening of payments bank and small finance banks
 Capital Market Reforms: several steps have been taken after 1980’s to attract
investments from foreign investors. This resulted in significant expansion of capital
market in the 1980s. the market capitalization of companies registered in BSE rose
from 5% of GDP in 1980s to 13% in 1990s. The financial market was further
liberalized after Narasimham Committee were accepted by government. SEBI, which
was originally established as a non-statutory body in 1988, was established as full-
fledged market regulator. Based on Chandrashekhar Committee recommendations,
Sebi, in June 2014, merged different classes of investors such as FIIs, their sub-
accounts and qualified foreign investors (QFIs) into a new category called foreign
portfolio investors (FPIs) and simplified the registration rules for FIIs’ entry into the
capital market.
FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT ACT (FRBM ACT)
(FRBM Act) was introduced in Parliament as the FRBM Bill in December 2000. It seeks to
foster fiscal discipline on the Central Government and achieving a balanced budget with
effective revenue management. The Act was passed on August 26, 2003, therefore it is also
called Fiscal Responsibility and Budget Management Act (FRBMA), 2003. FRBMA was
brought into effect from July 5, 2004.
Revenue Deficit, Primary Deficit, Effective Revenue Deficit
Before we start the discussion of FRBM Act, you need to understand following terms:
 Revenue Deficit (RD): It is the difference between revenue expenditure and revenue
receipts.
 Effective Revenue Deficit (ERD): It is the difference between revenue deficit and
grants to states for creation of capital assets.
 Fiscal Deficit (FD): It is the difference of total expenditure of government and total
receipts excluding borrowings.
 Gross Fiscal Deficit (GFD): It is the excess of total expenditure including loans net
of recovery over revenue receipts (including external grants) and non-debt capital
receipts
 Primary Deficit (PD): It is the fiscal deficit minus the interest payments.
FRBM Act Targets
The targets that were set in original version of act were:

 Reduction and Elimination of revenue deficit by 2008-09
 Thereafter build up adequate revenue surplus
 Reduction of fiscal deficit to no more than 3 per cent of GDP at the end of 2008-09
 Reduce the Gross Fiscal Deficit (GFD) by March 31, 2008
Latest Changes in FRBM Act with Union Budget 2021
1. The target of Fiscal deficit at 6.8% of GDP in 2021-22.

2. In 2021-22, the total expenditure proposed by the government is Rs 34,83,236 crore.
3. 123 percent change is seen in the expenditure allocated for Jal Jeevan Mission.
4. The budget allocation for the welfare of women has seen a drop of 26 percent in
comparison to revised estimates 2020-21.
5. 52.7 percent increase in allocation for welfare of SCs and 50 percent for STs.
6. The allocation for the North Eastern region has been increased by 32.7 percent.
(to be continued)

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GE.

FISCAL REFORM MEASURES:

Goals of Fiscal Policy: The major goals of fiscal policy are:

 Economic Growth and Development

Fiscal Reforms in India

Fiscal Reforms 1950’s

 promoting employment through grant of tax incentives to new investment

Fiscal Reforms 1970’s

Fiscal Reforms 1980’s

Fiscal Reforms since 1990’s

 Banking Sector Reform: It includes measures like:

FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT ACT (FRBM ACT)

Revenue Deficit, Primary Deficit, Effective Revenue Deficit

FRBM Act Targets

The targets that were set in original version of act were:

Latest Changes in FRBM Act with Union Budget 2021

1. The target of Fiscal deficit at 6.8% of GDP in 2021-22.

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