Fiscal Reforms in India

A comparative analysis of Fiscal Policies in the past(post 1990s) and last five years(2011-12 to 2016-17).

1. FI$CAL  ₹ EFORMS Presenting by- Trisha Sinha Roy(8629) Sanchari Mohanta (8631)

2. What is a Reform? By Reform we mean making any change to the current condition for the soul purpose of improvement or in Economic terms-to get ‘better off’

3. “Fiscal policy deals with the taxation and expenditure decisions of the government. These include, tax policy, expenditure policy, investment or disinvestment strategies and debt or surplus management.” - Kaushik Basu ( Former Chief Economic Adviser )

4. Fisc : A French word means ‘Treasure of Government’ Fiscal policy refers to the overall effect of the budget outcome on economic activity The idea of using fiscal policy to combat recessions was introduced by John Maynard Keynes in the 1930s Fiscal Policy = Revenue + Expenditure Policy by the Government of India Related to ‘Development Policy’ of the Nation Fiscal Policy

5. What is the need of Fiscal Policy?

6. Where Monetary Meets Fiscal Policy

7. Three Possible Budgetary Positions A Neutral position applies when the budget outcome has neutral effect on the level of economic activity where the govt. spending is fully funded by the revenue collected from the tax . Where, G = T An Expansionary position is when there is a higher budget deficit where the govt. spending is higher than the revenue collected from the tax. Where, G > T An Contractionary position is when there is a lower budget deficit where the govt. spending is lower than the revenue collected from the tax . Where, G < T G-Govt. Spending T-Tax Revenue

8. Methods of Funding This expenditure can be funded in a number of different ways: Taxation Revenue Seigniorage Borrowing money Consumption of fiscal reserves Sale of fixed assets (e.g., land)

9. 1991- BOP Crisis Gulf crisis of 1990--- increase in oil import bill Exports were down significantly due to breakdown of Soviet Union Deterioration in the Exchange Rate of Rupee Growing deficit on capital account Actions Taken Acquisition of Foreign Currency Devaluation of Indian Rupee Encouragement to Inflow of Funds from Abroad Compression of Imports Source: https://www.quora.com

10. Few Noteworthy Fiscal Reforms 1934: Customs Duty 1944:Excise Duty 1953:Taxation Enquiry Commission 1957-58:Wealth Tax, Expenditure Tax, Gift Tax 1960-70 : Marginal Income Tax Rates 1960-80 :Tax Revenue to GDP Ratio Improved from 6.3 % to 16.1 % 1993-94: Reduction of the difference between the interest rate on market borrowings & other internal liabilities 1994-95: Inclusion of loans in conversion of maturing treasury bills & zero coupon bonds Source: shodhganga.inflibnet.ac.in

11. Few Noteworthy Fiscal Reforms 2005:Introduction of Fringe Benefit Tax 2008-09: 2% reduction in Central Excise Duties Reduction of general CENVAT rate to 14% 2009-10: Service Tax cut to 12% Abolition of Fringe Benefit Tax Source: shodhganga.inflibnet.ac.in

12. Tax Reforms Expansion of Tax Base and not Tax Rates Imposition of User Charges on all Non-Merit goods Imposition of Tax on Services Widespread and bold programme on Disinvestment

13. Reducing the corporate tax rate Rationalization of capital gains tax and dividend tax and excise duties Progressive reduction in the peak rate of customs duty on non-agricultural products Value Added Tax ( VAT) Total tax revenues of the centre were 9.7 % of GDP in 1990-91 which declined to only 8.8 % in 2000-01 As a part of the subsequent direct tax reforms, the personal income tax brackets were reduced to three with rates of 20, 30 and 40 percent in 1992-93 Post 1991 Tax Reforms

14. Post 1991 Tax Reforms Tax concessions were also given to non-residents to encourage flow of foreign exchange remittances Lowering the maximum marginal rate on personal income tax Widening of the tax base by including : Introduction of presumptive taxes Adoption of a set of six (one-by-six) economic criteria for identification of potential tax payers in urban areas Taxation of services

15. Our Economy At A Glance in 2016 The growth in the GDP at constant market prices in 2015-16 is estimated at 7.6% Lower inflation rates( 3.78%  as of August 2015) Lower Current Account Deficit( $300 million, in the second quarter of 2016 ) Robust foreign exchange reserves (US$367.169 billion for the week ended August 19, 2016) The government aims to restrict fiscal deficit to Rs.5.33 Lakh Cr. or 3.5% of the GDP Source: Economic Survey of India (Union Budget Document 2016-17)

16. Macroeconomic Policy in 2015-16 The policy aimed at – Promoting growth Revival & Stability in macroeconomic environment The reforms initiated in 2014-15 included measures taken towards De-bottlenecking the economy Removing structural constraints Promoting industry and enterprise Enhancing foreign investment inflows A host of attendant measures were also taken to improve the ease of doing business, improve programme delivery performance through expansion of direct benefit transfers coverage and deepening the financial inclusion initiatives Source: Economic Survey of India (Union Budget Document 2016-17)

17. Revenue Receipts Revenue Receipts= Tax Revenue + Non-Tax Revenue Neither creates a liability nor reduces nor reduces any assets Tax Revenue: Tax Revenue forms part of the Receipt Budget, which in turn is a part of the Annual Financial Statement of the Union Budget Non-Tax Revenue: Non-Tax Revenue is the recurring income earned by the government from sources other than taxes

18. Capital Receipts Capital Receipts = Recoveries of Loans + Other Receipts + Borrowings and other liabilities  It is the amount received from the sale of assets, shares and debentures

19. CHANGE IN ESTIMATED REVENUE AND CAPITAL RECEIPTS (in Crores of Rupees) Source: Economic Survey of India

20. Types of Taxes Direct Taxes I ncome tax Wealth tax Corporation tax Indirect Taxes Service tax Excise Duty VAT Customs duty GST

21. Government Expenditure Plan Expenditure- This is essentially the budget support to the Central Plan and the Central assistance to State and Union Territory plans. Like all budget heads, this is also split into revenue and capital components. Non-Plan Expenditure- This is largely the revenue expenditure of the government, although it also includes capital expenditure. It covers all expenditure not included in the Plan Expenditure.

22. Fiscal Deficit Over Last Five Years Source: Economic Survey of India

23. The FRBMA The Fiscal Responsibility & Budget Management Act (2003) was enacted by the Parliament of India to institutionalize financial discipline, reduce India’s Fiscal Deficit, improve Macroeconomic Management & overall Management of the Public Funds by moving towards a Balanced Budget

24. Objectives of FRBMA Ensure inter-generational equity Long term Macroeconomic Stability Complementing the RBI’s Monetary Policy

25. Kelkar Committee Report Released on 28 December 2015 by The Union Ministry of Finance Revisiting and Revitalising Public Private Partnership (PPP) Model Nine-member committee was headed by former Finance Secretary Vijay Kelkar W as  constituted on 26 May 2015 To improve capacity building in Government for their effective implementation R ecognized the PPP Model in infrastructure as a valuable instrument to speed up infrastructure development in India Needs to focus more on service delivery instead of fiscal benefits alone

26. Significance of the Committee Speeding up of the PPP model is urgently required for India to grow rapidly and generate a demographic dividend for itself and also to tap into the large pool of pension and institutional funds from aging populations in the developed countries • India’s success in deploying PPPs as an important instrument for creating infrastructure will depend on a change in attitude of all authorities dealing with PPPs-public agencies, government departments supervising and auditing and legislative institutions

27. Key recommendations of the Committee The Government may take early action to  amend the Prevention of Corruption Act, 1988 the need to further strengthen the  three key pillars of PPP frameworks  namely Governance, Institutions and Capacity Independent regulators  should be set up in different infrastructure sub sectors to ensure harmonized performance by the regulators advised  against adopting PPP structures for very small projects Unsolicited Proposals (“Swiss Challenge”) may be actively discouraged state owned entities   SoEs /PSU s should not be allowed  to bid for PPP projects to notify  comprehensive guidelines  on the applicability and scope of  access to ,  under RTI and Art 12 of the Constitution ,  and auditing of financial related matters in order to avoid any delays in public asset provision Banks and financial institution should be encouraged to issue  Deep Discount Bonds or Zero Coupon Bonds (ZCB)  to mobilise long term capital at low cost

28. Existing Indirect Tax Structure

29. Goods & Services Tax To Trade To Consumers Reduction in multiplicity of taxes Simpler Tax system Mitigation of cascading/ double taxation Reduction in prices of goods & services due to elimination of cascading of taxes More efficient neutralization of taxes especially for exports Uniform prices throughout the country Development of common national market Transparency in taxation system Simpler tax regime: Fewer rates & exemptions Distinction between Goods & Services no longer required Increase in employment opportunities Source: http://www.cbec.gov.in

30. Can be a powerful tool for accelerating growth Total government expenditure as proportion of GDP needs to be maintained, and raised at the State level Adherence to fiscal legislation Fiscal empowerment The approach to F iscal Federalism 33 Suggestions on Fiscal Policy

31. References http://www.economywatch.com/indianeconomy/fiscal-sector-reforms.html https://www.google.co.in/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=fiscal+deficit+india+2016 https://www.google.co.in/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=foreign%20exchange%20reserves%20of%20india https://www.google.co.in/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=current+account+deficit+in+india https://www.google.co.in/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=inflation+rate+in+india http://www.economywatch.com/indianeconomy/fiscal-sector-reforms.html http://indiabudget.nic.in/ub2016-17/frbm/frbm3.pdf http://economictimes.indiatimes.com/ http://www.indianeconomy.net/splclassroom/223/what-is-fiscal-responsibility-and-budget-management-frbm-act-what-are-the-amendments-to-it/#sthash.TmeRgkXs.dpuf (FRBM)

32. References http://www.jagranjosh.com/current-affairs/report-of-vijay-kelkar-committee-on-revisiting-revitalizing-ppp-model-released-1451371983-1 ( Kelkar Committee Report) https://www.bankbazaar.com/tax/direct-tax.html (Direct Taxes) http://www.cbec.gov.in/resources//htdocs-cbec/deptt_offcr/gst-dgtps-12092016.pdf (GST) https ://www.google.co.in/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=discretionary%20fiscal%20policy https://www.google.co.in/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=automatic%20fiscal%20policy https:// shodhganga.inflibnet.ac.in https:// www.quora.com/What-exactly-happened-to-the-Indian-economy-in-1991-in-laymans-terms (1991 Crisis)

33. Thank You