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Economic Environment and PolicySession-9
Fiscal Policy Reforms in India
Presented by
Dr. Tarun Das, Professor, IILMFormerly, Economic Adviser, Ministry of Finance
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1.1 Major Fiscal Reforms since 1991
a) Reduction of fiscal deficit
b) Fiscal Responsibility and BudgetManagement Act 2003
c) Simplifying tax rules and proceduresd) Strengthening tax administration
e) Widening tax base
f) Rationalisation and Reduction of both directand indirect tax rates
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1.2 Fiscal Responsibility and BudgetManagement (FRBM) Act 2003
FRBM Act 2003 and FRBM Rules 2004came into force w.e.f. 5 July 2004. The Act mandates the Central govt to
eliminate revenue deficit by March 2009and to reduce fiscal deficit to 3% of GDP
by March 2008. Under the Act, the central govt is requiredto lay before both houses of Parliamentthe 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.
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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 progressivereduction of this limit by at least onepercentage point of GDP in eachsubsequent year.
No guarantee in excess of 0.5% of GDP inany financial year.
Greater transparency in the budgetaryprocess, rules, accounting standards andfiscal policies
Quarterly review of the fiscal situation.
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1.4 FRBM Rules 2004
The rules mandate the CentralGovernment to take appropriate action ifrevenue and fiscal deficits exceed 45% ofthe budget estimates, or total non-debt
receipts fall short of 40% of the budgetestimates 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 mediumterm.
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3.5 Medium Term Fiscal Indicators(as % of GDP at current market prices)
Items 2007-08 RE
2008-09 BE
2009-10 Tar
2010-11 Tar
1. Rev. Deficit 1.4 1.0 0.0 0.0
2. Fiscal Deficit 3.1 2.5 3.0 3.0
3. Tax revenue 12.5 13.0 13.5 14.0
4. Year-endstock of publicdebt
63.8 59.6 55.7 52.3
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4.1 Progress of Fiscal Reforms
Status in June 1991
(a)Budget support toPSEs: 1.5% of GDP
(b) Price and purchasepreference for PSEs
(c )Preferential
treatment for bankcredits
(d) No hard budgetconstraints for PSEs
(e) No disinvestment(f)SICA does not
include sick PSUs
Status in Dec 2008(a) Support reduced to0.5% of GDP
(b)No price preference,but purchase
preference exists(c )No preferentialtreat-ment for bankcredits
(d) MOUs
strengthened(e) Divestment allowed(f)SICA applicable for
PSUs
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4.2 Fiscal Deficit (as % of GDP)
Status in 1990-91
Central GovtFiscal 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 GovtFiscal Deficit 9.9%Revenue deficit 4.2%Primary deficit 4.6%
Status in2007
-08
Central GovtFiscal Deficit 3.1%Revenue deficit 1.4%Primary deficit -0.6%
State governmentsFiscal 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%
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4.3 Progress of Fiscal ReformsStatus in June 1991
Public debt aspercentage of GDP
(a) Central govt 61%
- Internal 50%
- External 12%
(b) States 19%
- Internal 19%
(c )General govt 68%- Internal 56%
- External 12%
Status in March 2008
Public debt aspercentage 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 wasfinanced by:
(a) RBI Ad Hoc TBs at
4.6% interest(b) Banks through SLRholdings at 38.5%
and CRR 25%
(c ) Market borrowings(d) Public funds
(e) External debt
Status in Dec 2008
(a) Ad hocs replaced byWMAs at market rate
(b) SLR reduced to 25%and CRR 5.5%
(c)Govt. securities aresold at market rates
(d) Reduction ofinterest rates forpublic funds
(e) Less dependence onExternal 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%
Status in Dec 2008
Duties & taxes reduced
Maximum ratesExcise duty 8%
Cenvat 14%
Import duty 12.5%
Income tax 30%
Corporate taxes:
Domestic COs. 30% +10% surcharge
Foreign COs. 40%+2.5%surcharge
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4.6 Progress of Fiscal ReformsStatus in June 1991
No service tax No MinAlternativeTax No transactions tax No tariff value
Dividend tax on bothindividuals & Cos. Existence of gift tax Limited cases of tax-
holidays No fringe benefit tax
(FBT)
Status in Dec 2008
Service tax @12% MAT introduced Trans. tax introduced Tariff value introduced
Dividend tax on onlycompanies 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 estimatedincome scheme for
retail traders
No presumptive tax
No state level VAT
Status in Dec 2008
Concept of MRP
introduced for
consumer goods
Estimated incomescheme introduced for
retail traders.
Presumptive income
tax scheme introduced
State level VAT
introduced wef April 05
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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 andprices determined by
the CCI in MOF
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 CCIabolished and SEBI
established
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4.9 Related Financial Reforms
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
Status in Dec 2008
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