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CHALLENGES OF IMPROVEMENT IN INDIA’ FISCAL SITUATION

Kanchan Singh29

ABSTRACT

The fiscal situation of India is worrisome. The problem is largely structural and not cyclical. The slow growth of economy has

contributed to the deterioration in 2011-12. The government at centre and state level is facing with formidable challenge of

fiscal deficit. There are disparities in fiscal performance of the states. While government tried to revive the economy through

restructuring programmes for achieving fiscal consolidation. However, these programmes have not being effectively

implemented at the centre as well as states level. Thus, a programme should draw lessons from the past and design a plan for

the centre as well as the states.

KEYWORDS

Fiscal Deficit, Revenue Deficit, Tax Revenue, Public Debt etc.

INTRODUCTION

India is a one of the fastest growing economy in the world. In 2008-09, the finance minister had stated in his speech “it is widely

acknowledged that the fiscal position of the country has improved tremendously”. However, the situation has change and the

fiscal deficit in country has reached unprecedented level. The government claimed that breaching of the fiscal targets was mainly

due to the global economy slowdown. World economic growth was 3.9 percent in 2011, 3.1 percent in 2012 and 3.0 percent in

2013.

In budget 2014-15, The Global Risks 2014 report has mapped 31 global risks. Of highest concern are ten risks that include fiscal

crisis, structurally high unemployment or underemployment, income disparity, governance failure, food crisis, and political and

social instability. On the other hand, fiscal performance has shown a sharp deterioration since 1990-91 by Indian states and ending

with a fiscal crisis [World Bank, 2005].

Most of the buoyant sources of revenue are in the purview of central government. However, the fiscal responsibilities in meeting

huge expenditure remained with state government. These factors have created acute problem for the fiscal adjustment in the states.

The aggregate picture of all states has shown the vast interstate differences in fiscal performance. The gravest sign of fiscal

imbalance has been apparently the growing revenue deficit, a serious structural malady arising from faster growth of current

expenditure than current revenue.

In order to understand how much additional fiscal stimulus can be given, it is important to understand the nature of the fiscal

imbalance in the country. This paper attempts to analysis of the fiscal situation in the country. The trends of fiscal imbalance will

analysis at centre and state level. It will examine the effort of fiscal consolidation by government since Fiscal Responsibility and

Budget Management (FRBM) at the centre level and Fiscal Responsibility Act (FRA) in the states. This paper is divided into five

section including introduction second section describes the fiscal situation of India during 1990-91to2011-12. Third section deals

with finance of centre level. The state level fiscal situation is present in fourth section. Last section shows that effort of

government at both level for stabilizing fiscal situation and conclusion.

FISCAL SITUATION IN INDIA SINCE 1990-91

The sharp deterioration in fiscal situation at centre and state level has shown in 1990-91. There were many factors to contribute in

this deterioration such as pay and pension revision, large subsidies, huge interest payment and so on. The gross tax revenue of the

centre relative to GDP declined from 8.2 percent in 2001-01to in 2011-12. Interest payment as a ratio of central revenue increased

from 40.3 percent to percent at the same period. Revenue expenditure is exceeding from revenue receipt. On the other hand,

Capital expenditure decreased during 1990-91 to 2011-12. All these factors have created the worst fiscal imbalance in 2011-12

with the revenue and fiscal deficit as a ratio of GDP at 2.9 percent and 7.2percent respectively.

29Research Scholar, Department of Economics, F.S.S., B.H.U., Uttar Pradesh, India, [email protected]

mailto:[email protected]





Table-1: Fiscal indicators of Centre and State Government

State Centre Combine

Revenue

Deficit

Primary

Deficit

Fiscal

Deficit

Revenue

Deficit

Primary

Deficit

Fiscal

Deficit

Revenue

Deficit

Primary

Deficit

Fiscal

Deficit

1990-91 -0.87 1.7 3.2 -3.2 2.8 4.1 -4.1 -4.8 9.1

2000-01 -2.31 1.6 3.9 -4.0 o.90 5.0 -6.1 -3.3 8.9

2008-09 0.28 0.53 2.3 -4.5 2.57 5.9 -4.2 -3.2 8.2

2010- 11 0.21 0.40 2.1 -3.3 1.79 5.8 -5.63 -2.3 6.8

2011-12 0.47 0.59 2.2 -3.4 1.91 5.1 -2.98 -2.5 7.2

Sources: Planning Commission, CSO (2012-13)

The table shows improvement in revenue deficit, it declined from 6.1 percent in 2000-01 to 2.9 percent in 2011-12. The aggregate

fiscal deficit in 2000-01 has estimated at about 8.9 percent, which decreased at 7.2 percent in 2011-12. However, it shows a

marginal improvement at centre and state level. In fact, reduction in fiscal and revenue deficit has lagged behind which set under

the target of FRBM at centre. According to the fiscal restructuring plan recommended by the TFC, the central and state

governments taken together were required to phase out the revenue deficits and bring down the consolidated fiscal deficit to 6% of

GDP. The plan envisaged the central government compressing the deficit to 3% of GDP and the consolidated deficit of the states

to be reduced to3 percent.

TREND IN CENTRAL FINANCE

Both the central and state governments contributed to the progress in fiscal consolidation until 2007-08 broadly in equal measure,

although, the improvement in the state finances itself was, to a considerable extent, due to higher tax devolution and grants from

the central government. Analysis shows that during the past decade the fiscal deficit of the central government was the highest in

2001-02 at 6.2%. Similarly, the revenue deficit of the central government was the highest in 2001-02 at 4% of GDP. In subsequent

years, there was a steady reduction in both revenue and fiscal deficits and the reduction was sharper after the FRBMA was passed

in August 2003. The fiscal deficit relative to GDP declined from 6.2% in 2001-02 to 2.7% in 2007-08 further to 5.7% in 2011-12.

Similarly, the revenue deficit was reduced from 4.4% in 2001-02 to 4.5% in 2008-09 and further to 4.3% in 2011-12. The fiscal

slippage in 2011-12 was due to lower realization in direct tax revenues and under provisioning of subsidies. Recognizing the need

for funding the higher levels of outgo on subsidies because of elevated levels of global crude oil prices, higher provision was

made for the same in Budget 2012-13. However, as part of the fiscal consolidation process, the Budget also announced the intent

to restrict expenditure on central subsidies to fewer than 2 per cent of GDP. The continued high levels of global crude oil prices

and domestic pressures were manifested in persistent inflation, which necessitated keeping interest rates high, had their impact on

aggregate demand (both consumption and investment). Although the budget estimate for 2012-13 shows that the revenue and

fiscal deficits relative to GDP would be contained at 3.4% and 4.6%, respectively, the revised estimates for the year show that the

revenue deficits would increase to 4.3% and fiscal deficit would increase to 5.7%. The indications are that the revenue receipts

would be even lower than shown in the revised estimates. Thus, both revenue and fiscal deficits of the central government as

ratios of GDP declined steadily from 2001-02, and the decline was much sharper since 2008-09, but again it increased by 5.8% in

2010-11. Notably, it was the sharp increase in the tax revenues, particularly in direct taxes, that led to the appreciable reduction in

the revenue deficit. In fact, the center‟s gross tax revenues as a ratio of GDP increased by 4.4 percentage points between 2001-02

and 2008-09 of which a 10.8% in 2008-09, which it decrease with 10.4% since 2010-11. The share of direct tax as a percentage of

GDP has increased with 5.9 percent in 2008-09, which decrease with 5.8 %in 2010-11. The share of indirect tax has 5.6%, which

decrease with 4.4% at the period.

Table-2: Trends in Central Finance

%of GDP

(2008-09)

%of GDP

(2011-12)

Deterioration in

2011-12 over 2008-09

Revenue Receipt 9.60 8.37 1.23

Tax Revenue 7.87 7.02 0.85

Non Tax Revenue 1.72 1.36 0.36

Revenue Expenditure 3.41 3.04 0.37

Interest Payment 3.41 3.04 0.37

Subsidies 2.20 2.43 0.23

Defense Expenditure 1.30 1.15 0.15

Capital Outlay 1.60 1.77 0.17

Total Expenditure 15.70 14.53 1.17

Sources: Planning Commission, CSO (2012-13)





The table shows deterioration in central finance between 2008-09 to 2011-12. Revenue receipt is decrease with 1.23% during this

period. However, tax revenue and non-tax revenue has declined. Interest payment show improvement with 0.37% during the same

period. However, improvement of revenue receipt is greater than total expenditure. The main factor that has contributed to the

growth of direct taxes was the institution of the Tax Information Network (TIN) in 2003-04 and entrusting this task to the

National Security Depository Ltd (NSDL).1 The important lesson from this is that the government can mobilize substantial

additional revenues if only it strengthens the information system of union excise and customs duties, entrusting the task to a

competent information technology company rather than continuing with the depleted National Informatics Centre (NIC) which

does not have the capacity to institute the information system required for the effective enforcement of these taxes. However,

under-provision in the budget estimates results in poor planning and implementation of expenditures and contributes to low

productivity of public spending. The above analysis indicates that the government failed to achieve the adjustment as envisaged in

the FRBMA, particularly in containing the expenditures and protecting capital expenditures. Whatever adjustment was achieved

was attributable mainly to the increase in tax revenues arising mainly from improvement in computerized information system and

to some extent, reduction in the interest rates.

TREND OF STATE FINANCE

The aggregate picture of all the states has shown a sharp deterioration in fiscal health since 1990s. For all the states, the year

1987-88 saw the emergence of a deficit on revenue account. The states‟ revenue deficit as percent of GDP has raised in1997-98

with 3 percent due to the impact of fifth pay commission recommendation. The twelfth finance commission was draw up a fiscal

restructuring plan for fiscal consolidation. According to its recommendation, each of the states was required to phase out its

revenue deficit and contain the fiscal deficit at 3% of GSDP. The commission recommended debt restructuring and a write off

scheme to the states linked to passing of fiscal responsibility legislation and compression of revenue and fiscal deficits.

However, the state has shown a steady improvement in their fiscal health. Until 2010-11, the aggregate revenue deficits of the

states as a ratio of GSDP declined from 2.3percent in 2003-04 to a surplus of about 0.2 percnt in 2007-08. This 2.8 percentage

point improvement in the revenue deficit helped to reduce the fiscal deficit by 2.1 percentage points and increase the capital outlay

by about 0.9% point (Table 4). Thus, the states taken together were able to generate revenue surplus of about half a percent and

reduced their fiscal deficit to a little over 2% of GDP, which is 1 percentage point more than that was recommended in the fiscal

restructuring plan of the TFC. In addition, they could increase the capital outlay by about 1 percentage point of GDP. Surely,

fiscal consolidation in the states until 2007-08 has helped them to cope better with the economic slowdown.

Table-3: Trend in State Finance

2008-09 2010-11 Improvement

Revenue Deficit % 0.28 0.21 0.7

Fiscal Deficit % 2.26 2.06 0.20

Revenue Receipt 651910.13 932291.41 280381.33

Own Tax Revenue % 5.51 6.14 0.63

Own Non Tax Revenue 55441.44 63481.32 8039.88

Grants 1269441.33 169398.32 4245386

Revenue Expenditure 636208.91 915930.03 179711.12

Interest Payment 97637.10 127618.87 29981.77

Capital Outlay 1426.3 2316.2 286.2

Net Lending 49.0 217.3 89.2

Sources: State Finance in RBI (2011-12)

The contribution of own tax revenue was 5.51percent and tax devolution and grant form centre in improvement of revenue. Own

tax revenues of the state governments increased by 0.7 percentage point during the period and a close examination shows that

much of the increase is attributable to the introduction of value added tax (VAT) to replace the cascading type sales tax in April

2005. Of course, buoyant economy, rationalization of stamp duties and a boom in the real estate market also resulted in a

significant increase in stamp duties and state excise duties as well. The economic slowdown and the reduction in excise duties is

likely to shrink the VAT base of the states and with the housing market under severe strain, there could be a significant

deceleration in the states‟ own revenues after 2008-09. On the expenditure side, there are marginal improvements. The economic

slowdown has adversely affected state finance. Almost, all the states have shown improvement in fiscal situation in 2010-11 as

compared to 2008-09. However, there are the large variation in growth of SDP and fiscal performance among given states. Goa,

Maharashtra, UP, Orissa shows declined their SDP‟s growth whereas Gujarat, Rajasthan show improvement. In the case of fiscal

deficit, all states have shown improvement except Maharashtra. In 2008-09, Punjab and Rajasthan show revenue deficit but it turn

surplus in revenue account of the states in 2011-12. It increased in only Punjab with 0.41% deterioration.





Table-4: Fiscal Consolidations of States

Growth of SDP at Constant

Price

Fiscal Deficit Revenue Deficit

2008-

09

2011-

12

Deterioration

2011-12 over

2008-09

2008-

09

2011-

12

Deterioration

2011-12 over

2008-09

2008-

09

2011-

12

Deterioration

2011-12 over

2008-09

Goa 10.02 9.39 0.36 -3.60 -2.09 1.49 0.40 -0.83 0.07

Gujarat 6.78 8.53 1.75 -2.60 -1.64 0.51 0.22 0.31 0.11

Maharashtra 12.58 8.54 4.04 -1.86 -3.28 0.24 0.74 -0.18 0.56

Punjab 5.85 5.94 0.09 -3.84 -2.37 0.56 -2.22 -2.63 0.41

Bihar 12.11 13.26 1.10 -1.76 -0.87 0.61 3.41 1.96 1.45

Rajasthan 9.04 6.11 2.93 -3.02 -2.73 2.15 -0.36 0.81 0.45

Uttar

Pradesh

6.99 6.88 0.13 -4.61 -2.73 1.88 0.42 1.17 0.75

Orissa 7.75 4.92 2.83 -0.01 -.29 0.28 2.53 2.60 0.07

Sources: Planning Commission, CSO 2012-13

IMPROVEMENT OF FISCAL PERFORMANCE OF STATES

Given the difficult fiscal situation in India, state‟s performances are good. They generated revenue surplus and succeed to

reducing their fiscal deficit. However, there are divergences in other fiscal indicators across the states. Goa is a one of the highest

per capita NSDP with Rs. 112602, UP is one of the lower per capita NSDP with Rs. 13178. Thus divergence of tax GSDP ratio

between higher with 7.42% to lower with 4.98% for given states. On the other hand, debt as a percentage of GSDP is high in UP

with 36%. The variation of own tax revenue among the states are vary with 4.98% to 7.42%. Interest payment is high in Gujarat

and its lower in Bihar with 7.4% as a ratio revenue receipt.

Table-5: Fiscal performance Indicators in States (2010-11)

Per Capita

NSDP(Rs)

Tax GSDP

Ratio

Debt

(%of GSDP)

Interest Payment /

Revenue Receipt

Goa 112602 6.38 28.48 12.2

Gujarat 57508 6.85 26.96 17.4

Maharashtra 64951 7.02 18.14 14.4

Punjab 46951 7.42 32.06 23.9

Bihar 46422 4.98 24.57 8.9

Rajasthan 28851 6.08 25.57 13.8

Uttar Pradesh 13178 6.88 36.08 11.8

Orissa 24184 5.76 19.67 6.4

Sources: Planning Commission, CSO 2012-13

At the centre level, NIC does not able to create the information for implementing a complex tax like VAT. VAT does not cover

services, so the centre government as well as state government appointed the Empowered Committee of State Finance Minister for

recommendations of GST.

CONCLUSION

This discussion shows that the fiscal health of India is very critical. It is very clear that the problem is structural. Much of the

problem arisen with failure of fiscal restructuring plan. Indian government implemented FRBM act since 2003. Revenue deficits

are determined by the interplay of expenditures and revenues, both tax and non-tax. Too often, attention is focused only on

expenditure side and revenue side is neglected. Increasing non-tax revenue requires that public sector services be appropriately

priced, which may be difficult, as the present society has got used to the subsidized education, health, food items etc. The FRBM

Act required the government to reduce revenue deficit to zero by .March 2009, but it increased to 4.4% of GDP during 2008-09 &

further to 5.1% in 2009-10. Thus, critics point out that the targets set for deficit reduction are unrealistic. Today, the levels of

capital expenditures by the government are miserably low in India. These capital expenditures increase the efficiency and

productivity of private investment and thus contribute to the development process in the country. If Revenue Deficit is to be

reduced to zero and GFD to 2% of GDP as per the requirement of FRBM bill, it is the capital expenditure, which will be scarified

and thus will hinder further development of the country.





The decline growth rates of economy contribute to deterioration in fiscal situation. There is a marginal improvement in subsidies

and loan waiver since 2011-12 of course, the tax GDP declined in 2008-09 but in 2011-12, it show improvement. Thus, India

faced the challenge of fiscal deficit. Therefore, the government needs to more consider about its fiscal framework.

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http://docslide.us/documents/fiscal-responsibility-and-budget-management-frbm-act-2003.html

http://kalyan-city.blogspot.com/2011/03/fiscal-responsibility-and-budget.html

http://www.imaginmor.com/economy-of-india.html

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CHALLENGES OF IMPROVEMENT IN INDIA’ FISCAL …pezzottaitejournals.net/pezzottaite/images/ISSUES/V4N3/IJAFMPV4N... · Budget Management (FRBM) at the centre level and Fiscal Responsibility