Transcript Fiscal Management in India

Fiscal Management in India
Tapas K. Sen
Aspects of Fiscal Management
• Fiscal Policy
▫ The context – objectives – tools – limitations
• Fiscal Institutions
▫ Finance Ministry/ Departments – Legislature and
its agencies – Reserve Bank of India – Finance
Commission – Planning Commission – CAG
• Fiscal Practices
▫ Financial rules – Use of IT – Use of Public
Accounts – Treasury, Banking and other channels
of financial transactions – research
Fiscal policy can be taken to be deliberate changes in various
budgetary instruments to achieve given objectives
The Context
• In the early years (1950s and 1960s) low
incomes, widespread poverty and lack of
productive capacity shaped fiscal policy
• India was a nearly closed economy pursuing selfreliance; the chosen model of public-sector
driven mixed economy influenced fiscal policy
• Despite fiscal decentralisation, the policy stance
across the country was fairly coherent given
common goals – substantial regional
inequalities and horizontal imbalances
Objectives
• India needed economic growth to increase the ‘size of the
pie’, simultaneously taking care of its poor through
redistribution as best as it could
• Raising savings and investment (primarily in the public
sector) was important; redistributive activities like
poverty alleviation programmes also needed resources
• Substantial resource mobilisation, with encouragement
to savings, was required
• Correcting horizontal imbalances through
constitutionally mandated fiscal transfers required
concentration of resources at the central level
• This resulted in high tax rates with several
exemptions/concessions for savings/investment
Tools
• While tax policy was a tool intended to achieve
several objectives – notably both resource
mobilisation and redistribution – non-tax revenues
were not used much
• Public expenditure policy intended to increase
productive capacity for growth and redistribute
incomes through pro-poor programmes – only
limited success
• Heavy reliance on deficit financing and debt,
eventually making budgetary sustainability a major
issue
Limitations
• Exogenous factors played a big role, often
forcing adoption of a particular type of policy
• These included wars, oil price shocks, and in the
latest instance, the global financial crisis
• Indian economy was not subject to much of
business cycles as observed in other countries till
the early 1990s, but it was subject to ‘monsoon
cycles’ because of heavy dependence on
agriculture, at least in terms of employment
Some Recent Developments
• One of the important recent developments has been
the classic function of fiscal policy – countering the
global financial crisis induced tendencies towards
depression – package involved both tax cuts and
expenditure increases both at the central and the
state level – since rolled back
• Reform of subsidies have been discussed for long –
some measures to reform fertiliser subsidies have
been undertaken – diesel subsidy removed
Some Recent Developments (contd)
• Preparing the ground for introduction of GST by
permitting cross-flow of credits relating to
service tax and excise duty
• Rationalisation of centrally sponsored schemes
and centre-state transfers consequent to 14th FC
recommendations – normal Plan transfers
included in enhanced tax devolutions
Planning and Fiscal Policy
• The planning machinery was expected to provide
overall guidelines for fiscal policy and also share
the task of meeting he objectives
• The fiscal system was to provide the resources
for implementation of the Plans
• Because of overambitious Plans and/or failure of
the fiscal system, the persistent and substantial
shortfalls in Plan outlays and high debt
financing created serious constraints for fiscal
policy
Finance Commission
• The central Finance Commission, a
constitutional body, is the arbiter of centre-state
financial relations and is constituted every five
years
• Similarly, state level Finance Commissions
oversee state-local financial relations
• Can play important role in mitigating regional
imbalances within/across states
• Transfers mandated by them can affect
availability of resources at different levels
Other Institutions
• Much of the fiscal policy of the country is formulated in
the Ministry of Finance (GoI) and the Finance
Departments of states
• Reserve Bank of India is the central bank of the country,
and is the banker to GoI as well as most of the states –
role in formulation of interest rate, actual government
borrowing, and some policy advice
• CAG and its offices at the state level are statutory
auditors of government accounts – sometimes they look
after pension accounts also
• The legislatures and its agencies (constitutionally
provided like Public Accounts Committee and Estimates
Committee including special committees to examine
budgetary proposals) act as watchdogs
Use of IT
• Modern fiscal administration has come to depend
heavily on use of IT, but it is not utilised equally
effectively or to the same extent by different units of
government
• This covers tax administration, keeping track of
public expenditure in substantial detail, maintaining
budgetary discipline
• Being a tool only, its usefulness depends on
imaginative deployment and appropriate design
• Sometimes, traditional systems have to be adapted
to its use
System of Financial Transactions
• Traditionally, government transactions were
carried out through treasuries only except for a
few departments that remained outside the
treasury system
• There has been increasing use of the banking
system for public sector transactions
• Other systems of transaction like online
payments with credit/debit cards are also being
introduced to make the system as user friendly
as possible
Government Financial Rules
• All public financial transactions are governed by
a set of rules that are substantially the same
across India
• These often have a bearing on how well the
system functions
• For example, rules governing purchases can
affect the prices paid, if there are many
restrictions
• Often favour public enterprises, with or without
justification
Use of Research
• There is a large scope for conducting/ using
research with information available with various
governmental units to aid policy formulation
and improving fiscal administration
• Can be both in-house or in collaboration with
non-government agencies
• Only limited use so far, but incidence studies,
expenditure tracking and several such inputs can
improve the system
Use/misuse of Public Accounts
• Public Accounts are a part of the budget
documents that reflect the transactions of a unit
of government in the nature of banking
• Contains several funds and accounts into which
funds are transferred from the Consolidated
Fund or the reverse as the occasion warrants
• While these can be legitimately used to
smoothen public expenditures, sometimes they
are misused to stash away funds for subsequent
use without legislative approval
An important recent development
• FRBM Act of 2003 recognised budgetary
sustainability issues
• Both at centre and state levels
• States more successful than the centre in
meeting the targets
A mixed bag
• On the taxation side, introduction of GST
remains the most important task
• Systemic changes may require medium term
budgetary framework instead of the current
single year system
• Some appropriate performance appraisal system
is also necessary
• Subsidy rationalisation needs further measures,
particularly with respect to food subidies