Justin Fiscal Trend

7/29/2019 Justin Fiscal Trend

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Fiscal Situation in India

M. Govinda Rao


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Presentation Scheme

Introduction

Fiscal Situation in India: Centre, States andconsolidated.

Roadmap to achieving fiscal consolidation.Making the adjustment comprehensive,strategic and responsive: Reforms in policiesand institutions.

Medium term prospects and reform agendum.

Concluding Remarks

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Introduction

Fiscal situation is a cause for concern.

The gains of fiscal consolidation until 2007-08have been fritted away after 2008-09.

High crude oil prices and large increases inspending on various subsidies and transfers haveincreased the fiscal imbalances sharply after2008-09.

State finances have not deteriorated much evenafter the pay revision. The aggregate fiscal deficitof the states is estimated at 2.4% of GDP in 2010-

11 (RE) and is budgeted at 2% in 2011-12. Although exit from the stimulus started in 2010-

11, the medium term challenges of fiscalconsolidation at the central level look formidable.

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Fiscal Indicators: India1980-81 1990-91 1995-96 2000-01 2005-06 2010-11

I. Total Receipts

(Includes non-debt capitalreceipts and loans)

23.74 26.61 24.89 28.29 27.94 26.06

A. Revenue receipts 17.58 18.57 18.25 18.02 19.44 18.36

1. Tax receipts 13.59 15.37 14.67 14.53 15.86 14.71

2. Non-tax revenues 3.99 3.19 3.58 3.49 3.58 3.65

B. Capital receipts 6.15 8.05 6.64 10.27 8.49 7.70

II Total Expenditure 26.07 28.59 25.35 28.12 26.29 26.29

1. Revenue Exp 17.97 22.76 21.43 10.35 22.01 22.202. Capital Outlay and

loans3.75 2.73 2.66 3.63 3.77

3. Loans and Advances 2.09 1.18 0.85 0.64 0.32

Total Capital Expenditure 8.08 5.84 3.92 3.50 4.28 4.09

Revenue Deficit -1.02 4.19 3.18 6.60 2.57 3.84

Gross Fiscal deficit 2.55 9.41 6.52 9.51 6.48 7.31

Primary Deficit -1.86 5.02 1.56 3.57 0.91 3.32

Liabilities

Centre 41.1 55.2 50.9 55.6 51.7 50.3

States 18.4 22.5 20.9 28.3 29.9 24.6

Central Loans to States 11.7 13.0 10.7 13.3 4.2 2.0

Outstanding Liabilities 47.8 64.8 61.1 70.6 77.4 72.9

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Fiscal Situation in IndiaFiscal deficit in India: Centre, States and Consolidated

Centre States Consolidated

Rev.

Deficit

Fiscal

Deficit

Primary

Deficit

Rev.

Deficit

Fiscal

Deficit

Primary

Deficit

Rev.

Deficit

Fiscal

Deficit

Primary

Deficit

1996-97 2.4 4.1 -0.2 1.2 2.7 0.9 3.6 6.4 1.3

1997-98 3.1 4.8 0.5 1.1 2.9 0.9 4.1 7.3 2.1

1998-99 3.9 5.1 0.7 2.5 4.3 2.2 6.4 9.0 3.7

1999-00 3.5 5.4 0.8 2.8 4.7 2.4 6.3 9.5 3.8

2000-01 4.1 5.7 0.9 2.5 4.3 1.8 6.6 9.5 3.72001-02 4.4 6.2 1.5 2.7 4.1 1.4 7.0 10.3 2.9

2002-03 4.4 6.0 1.1 2.3 3.9 1.3 6.6 9.7 3.0

2003-04 3.6 4.6 0.0 2.2 4.3 1.5 5.8 8.7 1.9

2004-05 2.4 3.9 0.0 1.2 3.1 0.7 3.5 7.3 1.1

2005-06 2.5 4.7 0.4 0.2 2.3 0.2 2.7 7.3 0.8

2006-07 1.9 4.3 -0.2 -0.6 1.8 -0.4 1.3 6.3 -0.3

2007-08 1.1 3.1 -0.9 -0.9 1.5 -0.5 0.2 4.7 -1.0

2008-09 4.5 8.2 2.6 -0.2 2.4 0.6 4.3 10.6 3.4

2009-10 5.2 6.6 3.1 2.0 2.8 1.0 5.5 9.4 4.0

2010-11 3.4 5.1 2.0 0.2 2.4 0.8 3.6 7.5 2.7

2011-12 3.4 4.7 1.6 -0.3 2.0 0.5 3.2 6.8 2.0

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Revenue Deficit: Centre, States and

Consolidated

2.4

3.1

3.9

3.5

4.14.4 4.4

3.6

2.4 2.5

1.9

1.1

4.5

5.2

3.4 3.4

1.2 1.1

2.52.8

2.5 2.7

2.32.2

1.2

0.2

-0.6-0.9

-0.2

2.0

0.2

-0.3

3.6

4.1

6.4 6.36.6

7.0

6.6

5.8

3.5

2.7

1.3

0.2

4.3

5.5

3.6

3.2

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Centre

States

Total

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Fiscal Deficit: Centre, States and Consolidated

4.1

4.85.1

5.45.7

6.2 6.0

4.6

3.9

4.7

4.3

3.1

8.2

6.6

5.14.7

2.72.9

4.3

4.7

4.3 4.13.9

4.3

3.1

2.3

1.81.5

2.4

2.82.4

2.0

6.4

7.3

9.0

9.5 9.5

10.3

9.7

8.7

7.3 7.3

6.3

4.7

10.6

9.4

7.5

6.8

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Centre

States

Total

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Centres Fiscal Trends (Per cent of GDP)

2007-08 2008-09 2009-10 2010-11 BE 2010-11 RE 2011-12 BE

Fiscal Deficit 2.56 5.86 6.39 4.84 5.09 4.60

Primary Deficit -0.89 2.40 3.14 1.69 2.03 1.61

Revenue Deficit 1.06 4.33 5.18 3.51 3.43 3.42

Tax Revenue (Gross) 11.99 11.26 9.53 9.48 9.99 10.39

Tax Revenue (net of States' Share) 8.88 8.36 6.97 6.78 7.16 7.40

Non-tax Revenue 2.07 1.73 1.78 1.88 2.79 1.40

Total Revenue (Net) 10.95 10.08 8.74 8.66 9.95 8.80

Revenue Expenditure 12.01 14.41 13.92 12.17 12.39 11.03

Plan 3.51 4.34 3.88 4.00 4.15 4.05

Non-Plan 8.51 10.08 10.04 8.17 9.23 8.17

Capital Expenditure 2.39 1.75 1.72 1.90 2.07 1.79

Plan 4.14 5.08 3.88 4.00 4.15 4.05

Non-Plan 1.75 0.89 0.96 1.17 1.20 0.92

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Trends in Centres Fiscal Situation

Decline in revenue fiscal deficits during 2003-04 to 2007-08 mainly due toincrease in tax revenues. Re-emergence of fiscal deficits not due tostimulus.

Increase in revenue and fiscal deficits in 2008-09 not due to stimulus.

Nevertheless, large increases in spending helped in soft landing theeconomy during the crisis.

Exit from the expansionary stance started in 2010-11. GDP revision hashelped.

Decline in revenue fiscal deficits during 2003-04 to 2007-08 mainly due toincrease in tax revenues. Re-emergence of fiscal deficits not due tostimulus.

Increase in revenue and fiscal deficits in 2008-09 not due to stimulus. Nevertheless, large increases in spending helped in soft landing the

economy during the crisis.

Exit from the expansionary stance started in 2010-11. GDP revision hashelped.

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Decline in revenue fiscal deficits during 2003-04 to

2007-08 mainly due to increase in tax revenues. Re-

emergence of fiscal deficits not due to stimulus.

Increase in revenue and fiscal deficits in 2008-09 notdue to stimulus.

Nevertheless, large increases in spending helped in

soft landing the economy during the crisis.

Exit from the expansionary stance started in 2010-

11. GDP revision has helped.


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Fiscal Consolidation at the Centre:

Some Concerns Recent developments:

Fiscal deficit budgeted at 4.6% of GDP in 2011-12.Assumptions: Tax revenue will increase at 18.5%.Expenditures will be contained at 3.4%. Non-interestexpenditures 1.4% and non-interest revenue expendituresby 2%

Major item of reduction subsidies (Rs. 20583 crore) andsocial services (Rs. 14200 crore).

Another major compression is in capital expenditure (2.1to 1.8).

Deviation from the Finance Commission's target of capital

expenditure. Finance Commission mandated that MTFPshould not be a mere statement of intent butcommitment.

Are these realistic? Prospects do not look good.

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State Finances: Recent trends

The states have contained their revenue deficitswithin the prescribed targets. Did not take

advantage of additional accommodation The

fiscal deficit- GDP ratio in 2009-10 was 2.8% and

it has shown an improvement since then. It isbudgeted at 2% in 2011-12. The revenue deficit

of 2% in 2009-10 is budgeted to be a surplus of

0.3 per cent in 2011-12. Reasons for improvement lower interest

payments; higher own tax revenues and transfers.

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Fiscal Adjustment Targets Consolidated:

Debt GDP ratio to be contained at 68%; Revenue deficit to be phased

out and a surplus of 0.5% to be created. ; Fiscal deficit not to exceed 3%.Disinvestment 1% and capital expenditure 4.5% by 2014-15.

Centre: Need to maintain the golden rule. The target should focus on reducing debt GDP ratio. Finance

Commission's target 54.2% to 44.8%; Corrected ratio for the Centre is50.5%. The Finance Ministry plans to reduce it from 50.5% to 43% .

RD to compress from 4.8% to a surplus of 0.5%. FD to becontained at 3%. Guarantees to be capped at 5 %.

States:

Debt- to GDP 25%.

Zero revenue deficit and 3% FD by 2011-12 for all general category states

except 3. Separate targets for 3 states. States consolidated fiscal deficitnot to exceed 2.4%.

Incentive provision for West Bengal and Sikkim.

Fiscal deficit targets for Special category States with high base FD.

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Consolidated Reform Path

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15F D - States 2.8 2.6 2.5 2.5 2.4 2.4

F D - Centre 6.8 5.7 4.8 4.2 3.0 3.0

Net Central Loans to States 0.1 0 0 0 0 0FD - Consolidated 9.5 8.3 7.3 6.7 5.4 5.4

Debt Stock - States 27.1 26.6 26.1 25.5 24.8 24.3

Debt Stock - Centre 54.2 53.9 52.5 50.5 47.5 44.8

Outstanding Central Loans to States 2.5 2.2 2.0 1.7 1.5 1.3Consolidated Debt 78.8 78.3 76.6 74.3 70.8 67.8


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Medium Term Prospects

Fiscal deficit has to be reduced from 5.1% in 2010-11 to 3% in2014-15; Revenue deficit has to be compressed from 3.4% (2.3) to a surplus of 0.5%.

Inclusive fiscal policy calibration warrants substantial additionalspending Universalizing health care, Sarva Shiksha MadhyamikAbhiyan and food security require additional spending of 3-4%

of GDP. With interest rates going up, the borrowing cost to the

government will increase.

Substantial pruning/compression/targeting of subsidies

is necessary. Additional revenues will have to be raised at least by

another 3 percentage points.

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Reform Agendum Introduce the GST. DTC.

Tax administration reform. Make the tax department anindependent body.

Need to have a speedy disposal mechanism to reduce taxarrears. Tax arrears in IT alone is Rs. 2.3 lac crore and waysand means will have to be found to reduce it.

Need to rationalize tax treaties to minimize tax evasion andavoidance through tax havens.

Need to have a proper auctioning system to allocate scarceresources.

Reform of the subsidy regime.

FRBM should be a commitment and not a mere statementof intention.

Reform in the budgeting system to ensurecomprehensiveness, transparency and accountability.

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Concluding Remarks

Fiscal situation is precarious and the situation is as bad it wasin 2001-02.

While the state government finances have shown a significantimprovement, central finances continue to be a cause for

concern. Mere passing of the legislation and introducing a MTFP does

not bring about fiscal consolidation.

There seems to be no attempt to bring about systemicimprovement on the lines recommended by the FinanceCommission.

The challenges in the medium term are formidable.

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