Académique Documents
Professionnel Documents
Culture Documents
1
3.2Research design ........................................................................................................................... 31
3.3 Sample......................................................................................................................................... 33
3.4 Data collection ............................................................................................................................ 35
3.5 Data analysis ............................................................................................................................... 36
3.7 Ethical Issues ............................................................................................................................... 37
3.8 Limitations................................................................................................................................... 38
4. Findings and Analysis .................................................................................................................... 39
4.1 Fiscal deficit of centre, state, combined fiscal deficit and GDP ................................................ 42
4.2 Receipts of government .............................................................................................................. 44
4.3 Expenditure of the government.................................................................................................. 49
4.4 Financing of deficit ...................................................................................................................... 52
4.4 findings from Qualitative analysis (interviews)........................................................................... 54
4.5 Major findings ................................................................................................................................. 58
4.6 Discussion.................................................................................................................................... 62
4.6 Conclusion ................................................................................................................................... 64
4.7 Further studies ............................................................................................................................ 65
5. References .................................................................................................................................... 66
5.1 General References ..................................................................................................................... 66
5.2 Institutional reports and publications......................................................................................... 78
Appendix 1. Inflows, outflows in a budget & Formation of Fiscal Deficit ........................................ 79
Appendix 2. FISCAL DEFICIT OF INDIA AND HOW IT IS FINANCED .................................................. 80
Appendix 2. RECEIPTS OF CENTRAL GOVERNMENT FROM VARIOUS TAXES ................................... 81
Appendix 3. CAPITAL RECEIPTS FROM MAJOR HEADINGS ............................................................... 83
Appendix 4. MAJOR HEADS OF EXPENDITURE OF CENTRAL GOVERNMENT .................................... 83
Appendix 5. GROSS FISCAL DEFICIT OF STATE .................................................................................. 85
Appendix 6. PATTERN OF RECEIPTS BY STATE GOVERNMENT ........................................................ 85
Appendix 7. TOTAL EXPENDITURE OF STATES AND % PAID IN AS A PART OF INTEREST .................. 86
Appendix 8. COMBINED DEFICIT OF CENTRE AND STATE IN CRORES INR ........................................ 86
Appendix 9. GROSS BORROWING OF CENTRE AND STATE .............................................................. 87
Appendix 10. LIABILITIES ON CENTRE AND STATE ........................................................................... 87
Appendix 11. FISCAL INDICATORS OF THE CENTRAL GOVERNMENT, STATE GOVERNMENT AND
COMBINED ALONG WITH GDP GROWTH AND ACCEPTABLE FISCAL DEFICIT AND DIFFERENCE
FROM ACCEPTABLE ........................................................................................................................... 88
2
LIST OF FIGURES
Figure 4.2 Comparative graph of gross fiscal deficit of centre, state, combined (state and
centre) and GDP growth at factor cost from 1971 to 1980……………………………….42
Figure 4.3 Comparative graph of gross fiscal deficit of centre, state, combined (state and
centre) and GDP growth at factor cost from 1981 to 1990………………………..….…..42
Figure 4.4 Comparative graph of gross fiscal deficit of centre, state, combined (state and
centre) and GDP growth at factor cost from 1991 to 2000………………………..………43
Figure 4.5 Comparative graph of gross fiscal deficit of centre, state, combined (state and
centre) and GDP growth at factor cost from 1971 to 1980…………………………………43
Figure 4.7 Breakdown of average revenues (1980-2010) from various sources of central
government…………………………………………………………………………………….….47
Figure 4.8 Breakdown of average tax revenues (1980-2010) from various sources of central
government…………………………………………………………………………………….…..47
Figure 4.9 Comparative Graph of revenues collected from non-tax revenues and capital
receipts……………………………………………………………………………………….…….48
Figure 4.11 figure showing share of states in the taxes collected by the central
government…………………………………………………………………………………….….. 50
Figure 4.13 a) average of revenue expenditures under major headings from year 1980-2010
b) average of capital expenditure under major headings from year 1980-2010……………52
Figure 4.15 Graph showing interest payment and subsidies of central government compared
to % of GDP…………………………………………………………………………………………54
Figure 4.16 Graph showing borrowings of centre and state governments to finance
debts………………………………………………………………………………………………….54
3
Figure 4.17 Graph showing the various sources of central government of financing
debt…………………………………………………………………………………………………..55
Figure 4.18 sustaining fiscal deficit by corrective measures, programme level logic
model….................................................................................………………………………63
LIST OF ABBREVIATIONS
INR INDIAN NATIONAL RUPEE ( 1 POUND = 71.88 INR exchange rate on 7/09/10
1 CRORE 10 MILLION
4
ABSTRACT
Indian economy had continuously faced fiscal deficit (its current fiscal deficit is among the
highest in world (Srinivasan, 1996), more than 90 % of the budgets presented in the
parliament were fiscal deficit budgets. The continued problem of fiscal deficit had deep
negative impact on Indian economy 1) when the expenditure is more debt finance is needed
to full fill the requirements, and debt finance is mostly available at high interest rates, in this
way a major portion of revenues goes out in form of interest payment. 2) when a major
portion of revenues are spent on arrangement of finance certainly their comes pressure on
other expenditure heads, mainly on the infrastructure development human resource
development, which gets retarded due to lack of funds, this is the reason why only five out of
ten five year plans met success in the history of post-independence Indian economy. 3)
Fiscal deficit gives birth to other secondary effects like inflation, retarded growth, trade deficit
and even political instability. Fiscal deficit has the potential to seriously harm any economy in
the world, leave apart a developing economy like India. Actually fiscal deficit problem
compound its affect in presence of other problems. With the advent of global slowdown the
growth rate of Indian GDP declined from 9% to around 6% (RBI data, 2009). This is the time
to be cautious because growth reduces the effects of fiscal deficit but when growth declines
fiscal deficit becomes more potent to harm the macroeconomic environment of the country.
It is very important for a nation to check the problem of fiscal deficit at right time. To solve a
problem one needs to understand the problem first. This research looked into the basic
factors which are causing fiscal deficit. These factors were categorised under two major
budgetary headings, expenditure and revenue. The research further analysed the sources
contributing in revenue generation and activities acting as revenue eaters (black holes of the
economy). The analysis is done by exploratory data analysis tools which clearly separates
the revenue eaters from the other budgetary headings. Also the analysis helped in finding
potential revenue generators.
The next level was to find some solutions or corrective measures to fill the gap between
receipts and expenditure. For this the research employed programme level logic model of
analysis. As the research shows the budgetary economics is made up numerous
components if these components fall in right place the programme would work in a positive
way and if not the programme would work in negative way. So if corrective measures are
applied at right places and at right time the system programme would function in a positive
manner and give better results.
The main aim of the research was twofold first to find why fiscal deficit is continuing to
increase in Indian context and then how this could be brought to sustainable limits. The
research found that certain taxes are not contributing to their potential. The research also
found that subsidy and interest payments are consuming a huge portion (almost 50%) of
revenues.
5
1. Introduction
As the word economics flashes subconsciously our minds start thinking about stock
matter of fact economics is a social science, though it differs a lot from other social
scarcity” (Hall and Lieberman, 2008). Mankiw, 2008 opines that management of
society’s resources are important because resources are limited. Therefore society
cannot give every individual highest standard of living but to give an individual best
management of limited resources is important and this is what economics all about.
Ragnar Frisch. Under Microeconomics the prima focus is on individual units like
consumer, firm, an industry, even a group for example market demand curves (which
On the other hand in macroeconomics, economic problems are studied from the
6
“Study of the overall average and aggregate of the system”. (Trehan et al, 2008)
Even before India got independence there was a broad consensus on national level
that after getting independence India should follow planned development and the
centre should play a dominant role to achieve the planned growth (Srinivasan, 1996).
This was followed by creation of several central government owned enterprises and
and it was hard to come out of the strong administrative system to do any business.
This period is also known as licence-quota-permit raj (Srinivasan, 1996). This policy
of centre did not failed completely neither it did any wonders for Indian economy.
During the period 1950-80 the growth rate of Indian economy was meagre 3.75%.
The ill effect of licence era was not only it stalled growth rate but also it gave support
This growth in GDP was not overnight but was due to the efforts being made in trade
and industrial liberalization and also tax reforms. In fact it started to become clear
from 1970s that cost of state intervention which earlier was considered to be the
vehicle for growth of Indian economy were far out of proportion to the benefits. The
state intervention not only prevented competition but also constrained efficiency and
With the start of eighties Indian economic started to change tracks from fiscal
7
were primarily aids from World Bank and International Monetary Fund and
statistics handbook, 2010) during this decade, but as mentioned this growth was
The starting of the new decade saw the start of serious economic problem for India,
the reason could be the debt driven economic growth of the eighties. As a result
there were serious macroeconomic imbalances, the economy was in shattered state
and it needed leadership, framework and determination and not just the piecemeal
economic reforms of the past to bring it out the economic crisis and then to put in
fast lane of economic growth. The leadership and determination came in form of then
Mohan Singh. The governance realized that it would not be enough to take
immediate actions which are necessary in the short run to tide over the crisis and
return to the pre-crisis policy thereafter, the need was the formation of systemic
Zagha, 1994)
take control of the current situation and pave way for better economic future. This
included the devaluation of Indian national rupee (INR), fiscal deficit were cut and
special balance of payments were mobilized from the IMF and the World Bank. It
8
gave the government an opportunity to launch an array of long overdue economic
reforms. The list of major reforms undertaken by the government is given below:
Fiscal:
External Sector:
schemes
Industry:
Financial Sector:
9
Government control over capital issues was abolished
Public Sector:
Greater autonomy and accountability for public enterprises was brought into
action
As mentioned earlier Indian economy showed growth and development right from
independence but earlier the growth was slow and it picked momentum after the
economic reforms of 1991-92. Still India is far away from being termed as a
developed economy, to transform itself into a developed economy India needs to find
solution for certain problem which are discussed in the next section.
1. Infrastructure related
compared to requirement)
10
3. Lower physical quality of life
safe water, 65% of the population lacks access to essential drugs and
In many of these physical quality of life indicators, India’s Record is worse than that
of sub-Saharan Africa.
5. Fiscal deficit
Out of the above listed five problems first four are related with infrastructure and
human resources. In fact these problems are the characteristic of any developing
nation, as a matter of fact fiscal deficit too is one of the problems faced by a
developing nation (it is also seen in developed countries). The point that seperates
fiscal deficit from all these problems is the fact that firstly it is an economic problem
secondly it gives rise to numerous other problems which hinders the normal
development of the developing nation (Lal et al, 2003). Fiscal deficit if handled
properly gives a nation an opportunity to plan and develop accordingly. The next
related with budget as fiscal deficit is a budgetary term. To an extent the success of
11
a country in handling limited resources depends on how efficiently it is managed.
list of all planned expenses and revenue of the state (Sullivan and Sheffrin, 2004).
It could be said that budget is an aid to management and not a substitute for
Keeping in mind all these factors it becomes very important for a country to
If a budget of any country is scanned the first thing which one sees is the receipts or
the revenues earned by the government. Next to follow is the expenditure by the
government. If the revenue is more than the expenditure then it is budget surplus, if
the revenue earned is less than the expenditure of the government then it is a case
of budget deficit. Deficits are of different type 1) revenue deficit, which is equal to the
difference between revenue expenditure and revenue receipt. 2) Fiscal deficit, which
is equal to the difference between total expenditure and sum of revenue and capital
receipts (except borrowings and liabilities) 3) primary deficit, which is the difference
between fiscal deficit and interest paid (interest is paid on the money which the
12
1.5 Aim of the research
education, health, agriculture and water supply so that the nation could transform
into a developed country.If the country is spending more than it is earning year after
year this would bring cumulative pressure on macroeconomic stability of the country
borrowing leads to a situation analogous to atomic chain reaction, this chain reaction
worked on fiscal deficit, though work solely on fiscal deficit is less and on indian
fiscal deficit is perhaps more less. The purpose of this research is to start the
The main objective of this research is to find answers of two main questions.
(this question would look in to various aspects of the receipts collected by the
government that is the various sources, contribution % by each source, where the
(This question would try to find the ways how can the holes which are draining the
13
1.6 research design
Thisresearch is divided into five Chapters. Chapter one provides a brief discussion
of fiscal deficit. A detailed literature review is presented in Chapter two which looks
into various aspects of fiscal deficit, which forms the basis of further research and
why case study approach is used, why both quantitative as well as qualitative
method have been applied for this research. Chapter four presents the analysis,
findings, discussions and implications from the research conducted. Conclusions will
14
2. Literature review
The budget deficit is nothing more than the difference between the expenditures of
the government and the tax revenues that government receives (Galbraith and
Darity, 1995), similarly fiscal deficit too is termed as the difference between
government’s spending and earnings, the difference between budget deficit and
fiscal deficit is that in fiscal deficit the earnings from borrowings and liabilities is not
GDP, inflation, trade balance, current account balance, foreign exchange reserves,
15
In spite of having such importance it is easy to ignore fiscal deficits because they do
not have immediate effects, it is just like obesity. In case of obesity there is no
immediate concern except the clothing size gets increasing, but in long turn obesity
increases the risk of chronic heart attack or diabetes (Feldstein, 2004). Like obesity
deficit is also caused by self-indulgent living that is governments spending more than
its revenues. Another similarity of fiscal deficit with obesity is that severe the problem
(obesity/fiscal deficit) more difficult is to correct it. (Feldstein, 2004). One of the
biggest problems with running fiscal deficits is that it curtails the government’s ability
economic activities in a country) and this in turn increases economic and political
overall growth, trade deficit, capital deficit. Certain economic factor like crowding out
effect is also associated with fiscal deficit. Apart from these factors fiscal deficit has
strong connection with political and administrative factors like democracy and
subnational governance. This section would look into these factors critically.
relation to the overall economy increase money supply which in turn leads to
16
Figure2.1. How positive fiscal deficit increases inflationary tendencies
Macroeconomic theory states that persistent fiscal deficits are inflationary (Catao
and Terrones, 2005). Sargent and Wallace, 1981 support the fact that fiscal deficit
increase inflation theory and add that a government facing persistent deficit has to
sooner or later finance these deficits with money creation ‘Seinorage’ thus producing
inflation. Alesina and drazen,1991; Cukierman et al. 1992, Calvo and Vegh,1999
further added to this theory of fiscal deficit and inflation especially for developing
countries because these countries are less tax efficient, less politically stable and
have limited access to external borrowing all these factors lower the relative cost of
Seinorage and thus increase dependence on the inflation tax. Monitiel, 1989 and
Dornbusch et al. 1990 have a slight variation in their view they suggested that fiscal
deficits makes room for inflation rather than playing the driving force. Blanchard and
Fischer, 1989 in his paper mentioned that empiricaly little success has been met in
finding a significant relationship between fiscal deficit and inflation however later
17
fisher et al, 2002 using a panel of ninety four countries were successful in breaking
his dilemma and proved that fiscal deficits is among the main drivers of high
inflations. He further proved from his work that one percentage point improvement or
decline in the ratio of fiscal balance to Gross Development Product typically raise or
Apart from the above studies trying to find a link between fiscal deficit and inflation
few more studies have been done to obtain empirical support for cyclically recurring
such study for Indonesia Aghelvi and khan 1978 for Brazil. Later Sarma 1992
followed the Aghelvi khan model and did a similar study for India and came to a
similar result that deficit induce inflation and vice versa. Heller 1980 differed from
these studies while doing a case study of 24 developing countries; his study found
that cyclic recurring of fiscal deficit is not always true. Naastepad, 2003, not only
regarded fiscal deficit as the main cause of inflation but also with balance of payment
Although many economist have successfully linked fiscal deficit with increasing
inflation, other economist have doubts regarding the above said relation although
none of the doubting researchers were able to prove their point by their researches.
On the whole it could be said that fiscal deficit has a strong direct relation with
inflation.
Great degree of attention has been devoted in both theoretical as well as empirical
literatures towards possible impact of different fiscal measures on growth (Adam and
18
Bevan, 2005). While theoretical aspect points out the constraint in government
Empirical literature clearly supports the fact that variations in subset items are growth
(1994),Kneller et al. (2000) and Miller and Russek (1997) assume that relation
between deficit and growth is linear. Although Giavazzi et al. (2000) found their study
to oppose the linear relationship of deficit and growth. Adam and Bevan, 2005
worked on the lines of Giavazzi and found that linear representation between deficit
and growth reasonably fits the case of developing countries. At low levels of fiscal
deficit the non-linearity is masked. They also found that for low and middle income
Fiscal deficit had been linked with trade deficit by certain researchers (Rosensweig
and Tallman, 1991 1992) and these two are referred as twin deficits. Milne (1977) in
her study of 38 countries finds a positive statistical relation between trade deficit and
fiscal deficit. Arunro and Ramchandar,1998 have gone one step ahead and added
that current account and fiscal deficits have important policy implications on a nation
and they effect long term viability of economic progress of a nation, this implies that if
the basic reason for rising trade deficit is the increasing central government budget
deficit then the trade deficit cannot be corrected until the government deficits are put
in place. However if such a view (role of budget deficit in trade deficit) is not correct
then reductions in government budget deficit would not resolve the problem of trade
deficit (Belongia and Stone, 1985). Enders and lee, 1990 and Abell, 1990 slightly
differed from this point and suggested that there is a casual effect of movement in
19
government deficit on trade deficit and contrary to all these Evan (1986) provides
empirical evidence that there is no relation between the two deficits that is trade and
fiscal deficit.
In a democratic nation divided governments and alternating governments are the two
main factors of a political system that generate myopic and inefficient policies (Rumi,
2009). Political competition assures that the current ruling party can lose in the next
government knows this fact and thus can induce an excessive expenditure because
future costs are not completely internalized. The incumbent government strategically
misbalances its count to improve its probability of re-election (Alsina and Tabellini,
1990).
budgetary policies can enhance or retard the likelihood of their remaining in office.
of support contrarily If the politician increases tax and reduction in expenditure this
will tend to weaken his base. It is noticed that politician use budgetary policy to
strengthen their electoral base this in turn increases state expenditure and reduces
taxes (Wagner and Tollison, 1980), which harms the fiscal stability and give rise to
deficit. (Buchannan and Wagner, 1977) are of the view that balanced budget which
has mix of deficit budget and budget surplus is better for macroeconomic stability of
any country.
20
Rodden (2002) states the fact that the fiscal deficits are greater in nations where sub
nations are more dependent on national transfers for financing their spending and
where they have freedom of borrowing from capital markets. Wibbels, 2003 also
supports the statement and his work shows fiscal deficits are larger in federal
governments with the authority to impose hard budget constraints on sub nations by
is a single majority government then the national party leaders can force the sub
nationals to internalise the cost of their policies towards national fiscal stability(
Samuel, 2000; Treisman, 1999) Khemani, 2007 summarises this by stating the fact
that a dominant national party leading the centre as a favourable condition for fiscal
subnational governments then there are chances of the central government itself
found that if the government in centre and state is of same political party then the
The reason behind this could be the financing of the deficit of these states is by
means of subsidized credit taken from financial markets. These financial markets are
21
The 1991 economic liberalization policies not only specifically reduced central control
over industrial policy and public sector investments but also increased prominence of
state level regulations. This increased competition among states for private
investment (Sinha, 2004). From 1960 to present, state governments are responsible
for 50 per cent to 60 per cent of total government expenditure in India ( Rao and
Singh, 2005). While seeing the revenues it was found by Rao and Singh, 2005 that
state governments collect nearly 30 per cent of the total revenue. The reason behind
this discrepancy is the fact that revenue generation power of state governments is
State deficits are financed majorly by direct loans from central government
(constituting about 60 per cent of total borrowing by major states) and the rest is
financed by borrowings from financial markets. These market sources are heavily
regulated by the centre (Khemani, 2007). State also gets finances by means of
borrowings from state owned public enterprises. The burden of these borrowings
2008 found in a study that voters support parties in expectation of benefiting from
state expenditure on public service. When state lacks the fiscal space necessary to
provide public services, voters have little to re-elect these parties and look forward to
alternative choices.
leads a nation to serious economic problems. Several countries in past have ignored
fiscal and as a result have faced severe problems. Therefore it becomes of prime
22
2.3.1 Sustainability of global fiscal deficit
effort to control the economy of the country. In long run these policies should be
feasible so that various macroeconomic indicators do not clash among each other;
this is known as sustainable fiscal policy. To analyse the sustainability of fiscal policy
two approaches have been used by Uctum and Wickens, 2000 (1) testing the
staionarity of debt or deficit (2) other studies looking at the cointegration relationship
Blanchard et al 1990 using sustainability indicator find that most OECD countries
have sustainable policies in the medium term. European stability and growth pact
has made two important implications for fiscal policy. First it puts limit 3% of GDP as
the maximum budget deficit and secondly it imposes fines on those counties who
have excess to this percentage (Hallet and Mcadam, 2003). The idea behind these
implications is that random shock or cyclical movement should not take deficit
are found in fiscal sustainability consequently programmes are run in these countries
to counter the problem of fiscal deficit. Interestingly experiences have shown that
such programmes aiming to reduce fiscal deficit usually fail to restore price stability
and reduce current account deficit in short run (Buti et al, 1998; Perotti, 1999)
India has faced both current account deficits and budget deficits since 1960s (in fact
from the very first union budget but the phenomenon of fiscal deficit became more
23
prominent from the sixties). Economists have considered these twin deficit problems
as two unrelated problems (Parikh and Rao, 2006). Virmani, 2001 was among first
methods of financing budget deficit have implications for current account deficits, so
these two are inter related. Similar conclusion was reached by Cerra and Saxena,
2002. Anuro and Ramchander, 1988 found using granger casualty test that unlike
many developed countries causations in India seems to runs from current account
India has one of the highest overall national fiscal deficits in the world (Buiter and
patel, 2006) and India’s inflation depends on both domestic supply and world
inflation (Minford and Walters, 1989). In Indian context many economist have
expressed their concern over the building governments deficit and mounting debt,
solvency condition seems to be violated in Indian case and there are chances that
with existing trend the public sector may become bankrupt in finite times (Buiter et al
1993)
Many studies have tested sustainability of public debt in Indian context. Buiter and
Patel (1992) tested sustainability of debt of various public sectors (centre, state
government and public sector units) and found that Indian public debt was
on aggregate public debt series of the central and state government between periods
1952 to 1980 found that debt- GDP ratio is on unsustainable path. Contrary to these
studies Goyal et al , 2004 conducted a series of tests on central, state and combined
finances and found that individually the finances of both the central and the state are
unsustainable, the second of the their test conclude that combined finances of centre
and state are sustainable when structural break is taken into account. The reason
24
behind these findings could be that India is a vast country and has twenty eight
states and seven union territories. The state government have independent
executive, legislative and judicial wings and this fact makes sustainability of public
sustainable path Indian government passed the Fiscal Reforms and Budget
to ensure fiscal prudence and support for macroeconomic balance. According to the
Rules framed under the Act the target was to eliminate revenue by 31 March 2009,
and fiscal deficit to be reduced to no more than 3% (much on the lines of European
stability and growth pact) of estimated GDP by March 2009 (11th five year plan
The legitimate size of a sustainable fiscal deficit is debatable but it is beyond any
question that India’s fiscal deficit is not on the higher side but on the danger level,
will pose as a serious threat both on the broader reform processes as well as ability
and creditability of the government to meet prioritized infrastructure and other social
expenses (Shirazi and Zagha, 1994). The major factor that have added to the growth
of fiscal deficit in India and many other developing nation are subsidies, public
The causes and consequences of rising government deficit had received attention in
both developed countries and less developed countries( Blanchard, 1985; Buiter and
Patel, 1992) .Recordance equivalence (re) theorem had been widely discussed in
25
context of funding government deficit (Barro,1974; Seater 1993) RE theorem states
that whether the budget debt is financed by debt issue or tax increase it is
as tomorrow’s tax liabilities (Ghatak and Ghatak, 1996). Also as discussed earlier the
association of fiscal deficit with sub nation governance has some serious setbacks.
There in order to look for sustainable fiscal deficit policy both these issues need to
be sorted out.
public spending and revenue collection from central to local government (Neypati,
programme because of certain points (1) since local governments have better local
chances are there of it matching with the preferences of citizens (Oates, 1972,
goods (De Mello 2000a) (3) tax payers are more comfortable with accountable local
governments (Wasylenko, 1987) with all these factors it appears that fiscal
But contrary to this Neypati, 2004 and king and Maa 2001, both find negative relation
between fiscal decentralization and inflation (one of the main characteristics of fiscal
deficit). Jin and Zou, 2002 found in their research that although expenditure
26
decentralisation increases the size of government aggregate but revenue
decentralization has the opposite effect. De Mello 2000b did research on number of
debt, especially in low income countries. Zang, 2006 and Bouton et al, 2008 said that
without a proper central redistribution system fiscal decentralisation may give rise to
more unequal income redistribution if revenue bases vary across regions. Tanzi
2000 adds that effectiveness of fiscal decentralisation depends upon factors such as
creates stable and predictable environment for the markets to function (Rao, 2005).
Ahmad and stern, 1991 are of the view that in many developing countries tax policy
is directed towards the correctness of fiscal imbalances. Bird, 1993 observed tax
reforms in many countries and said that “fiscal crisis has been proven to be mother
of tax reform”
Kurian (1999) stated that failure to contain wasteful expenditure and reluctance to
raise additional resources is the main reason afflicting most of the state finance. He
further added that tax wars among the states governments to attract private
led to starvation of funds of states. Chelliah et al (2002) discussed in their paper that
one of major reasons behind below par revenue receipt is the fault in tax
27
(2002) discussed about the cause of fiscal indiscipline at state level and cited weal
states.
Factors as discussed Major points from literature Major authors Use of the point
in the literature review whose work in this research
review have been
referred
Effect of fiscal deficit Most of the literature suggests that Ashra et al, 2004 Used in concept
on inflation positive fiscal deficit gives rise to Fischer et al, building
increased prices that is inflation 2002
Catao and
Terrones, 2005
Effect of fiscal deficit The literature is majorly in favour Miller and Would be
on growth that there is a linear relationship Russek, 1997 researched
between fiscal deficit and growth Kneller et al,
2000
Adam and
Bevan, 2005
Effect of fiscal deficit Fiscal deficit and trade deficit are Milne, 1977 Used in concept
on trade deficit so closely connected to each other Rosensweig and building, one
that they are termed as twin Tallman, 1991 & aspect of this
deficits, majority of the literature 1992 would be
suggests that there is a positive Arunro and researched in
statistical relation between trade Ramchander, sources of indirect
deficit and fiscal deficit 1998 taxes.
Effect of subnational More than majority of the Rodden, 2002 Would be
governance on fiscal literature supports the fact that Wibbels, 2003 analysed in this
deficit subnational government helps in research
curbing the fiscal deficit
Does strong central In this category also more than Samuel,200 Would be
governance help in majority of the researchers support Wibbels, 2003 analysed in this
reducing fiscal the that strong central governance Khemani, 2007 research
deficit ? helps in reducing fiscal deficit
Subnational Gives an overview how subnational Sinha, 2004 Would be
governance in government factor acts in context Nooruddinn and analysed in this
Indian context of Indian fiscal deficit Chibber, 2008 research
Sustainability of Gives an overview on sustainabilityFischer, 1995 Used in concept
global fiscal deficit of fiscal deficit Uctum and building
Wickens, 2000
Blanchard et al,
1990
Sustainability of Gives an overview on sustainability Shirazi and Would be
Indian fiscal deficit of Indian fiscal deficit Zagha, 1994 Analysed in this
Virmani, 2001 research
28
Parikh and Rao,
2006
Buiter and Patel,
2006
The research would progress with the main aim of finding ‘why’ fiscal deficit
continues to increase and ‘how’ it can be brought to sustainable limits. The research
along with the main research question would also look on some of the factors which
came out from the literature review and are stated above in the summary.
29
3. Methodology
3.1Research methodology
and 2) post positivism. Under positivism a researcher collects the facts and then
(Finch, 1986). While under post positivism the researcher’s aim is not to gather facts
and measure how often patterns occurs, but the focus is on to study different
constructions and meanings that people place upon their experience (Easterby-smith
et al, 1991). Noor, 2008 placed positivism under quantitative method of analysis and
researchers. This type of research is used in every field of life like clinical,
sociological and business research (Adam et al, 2007). Qualitative research uses
This research is looking into ‘why’ and ‘how’ of Indian fiscal deficit therefore it
requires use of both quantitative (to analyse the degree of various factors playing
30
role in fiscal deficit) and qualitative research (to analyse the possible interventions
3.2Research design
The research design is the overall plan or structure used to answer the research
question. (Tharenouet al, 2007). As a matter of fact research designs typically vary in
terms of the extent of researcher interference (Sekaran, 1982). The case study is
(Tharenou et al, 2007) they further add that a case study is an in depth, empirical
in context.Sommer and Sommer, 1991 are of the view that a case study is an in
depth detailed investigation of a single instance or one setting, although more than
The design chosen for a research should suit the particular research question.
affords highly in depth analysis of specific empirical issues. (Tharenou et al, 2007).
circumstances in context using a variety of data source (Baxter and Jack, 2008). Yin,
2003 is of the view that a case study gives the researcher a prospect to explore
points and the research question case study approach becomes an obvious choice
for this research. What makes case study the most appropriate way for this research
is discussed below:
31
Why a Case Study Design Should be How it is Relevant in this Research
Used
The aim of the research is to find The focus of this research is to find why
answers for question ‘how’ and ‘why’ fiscal deficit isincreasing and how
fiscal deficit.
behaviour of those involved in the study phenomenon and the figures and facts
for research
The researcher wants to cover set of This research looks into various factors
particular event because the researcher also looking into possible interventions
Hartley, 1994 and McCutcheon Meredith, 1993 have suggested that case study
(2) Data comes basically from two sources (a) primary source like observations or
32
(3) Focussing on a current condition but using historical data primarily to understand
(4) The researcher does not have the compatibility to manipulate events
All these characteristics were found in this research and this makes case study
Case studies are often associated with a qualitative research design although
(Eisenhardt, 1989) suggested that case studies can be used with both qualitative
and quantitative data. In this research paper too both of these approaches are used.
variables and qualitative analysis is used to get into details, process and sensitivity
of fiscal deficit. (Tharenou et al,2007). The unit of analysis in a case study is the
3.3 Sample
The ultimate test of a sample design is how well the sample represents the purpose
of the research question (Cooper and Schindler, 2003). Since the research is about
fiscal deficit of India, the interviewee group should be those who are directly related
with the 1) forming policies of governance at central as well as at state level 2) the
are operated. This research paper has chosen a small group of interviewees.
Although the sample size is small in this research but still it represents the purpose
of this research. Researchers can never be hundred per cent certain how a sample
reflects its population (Cooper and Schindler, 2003), but the sample chosen for this
33
research supports the purpose in every aspect. To represent the research question
the researcher made four groups and interviewed at least one person in every group.
group)
regulation regarding
in the centre
bureaucrat
34
3.4 Data collection
The base of this research is the budgetary data of Indian government, from this data
a clear picture of fiscal deficit emerges out. The data which is collected by someone
and used by the researcher is known as secondary data. It is easily available from
sources like book, libraries and web. It could be both used as main source for
secondary data is the main source of research. Since the data is mainly concerned
with fiscal deficit of India the source for data is from different government
et al, 2007) are of the view that while collecting secondary data PROD is very
important. PROD can be written as plan, read, observe, document. First as per the
requirement of the research large number of data from various sources were
examined, then the relevant data were chosen and stored for further analysis.
Internal secondary data is the data that already exists within the organisation in
some form or other (Lancaster, 2005). The data may be scattered like different
departments. In this research too the data was voluminous and scattered in different
The secondary data helped in identifying the problem and thereby setting the
35
Secondary data gave a clear insight of the problem and therefore developed
questions.(Lancaster, 2005)
developing summaries so that it becomes easy to look for patterns (Cooper and
Schindler, 2003). Further these patterns are interpreted by the researcher in the light
of research question. The research should be problem oriented rather than tool
driven (Cooper and Schindler, 2003). As the research aim of case study is to find
why and how. 1) Why fiscal deficit occurs (why these factors play such an important
role on the ever increasing fiscal deficit of India) 2) And how interventions (corrective
Exploratory data analysis (EDA) is both a data analysis perspective and a set of
techniques (Cooper and Schindler, 2003). Therefore in this research paper EDA is
used to analyse the secondary data collected from various sources. One major
techniques over summary statistics, Cooper and Schindler, 2003 are of the view that
summary statistics may obscure conceal or in some cases even misrepresent the
underlying structure of data and this could lead the research in possibly wrong
36
direction. Therefore in this researchEDA would bring out various component factors
To further analyse the findings from the quantitative section logic models would be
used. Whaley, 1979 who is considered to be one of the pioneers of this technique
The events are staged in repeated cause-effect-cause-effect path yin, 2003. To find
suitable effects to stop or enhance the chain the findings from the interviewees
would be used and analysed. Logical model analyses are mainly of three types 1)
individual level logic model (ILLM) 2) firm or organisation level logic model (FLLM or
OLLM) 3) program-level logic model (PLLM) Yin, 2003. Since the research is about a
country’s fiscal deficit ILLM model does not fit the analysis. FLLM or OLLM are
organisation based logic levels and although nation works like an organisation but
the results of the programme could be changed) therefore PLLM fits this analysis. So
this research would use PLLM to analyse the intervention in fiscal deficit.
The interviews were conducted with the high profile policy makers and bureaucrats’
considering this it was important to ensure that data provided by them be used
cautiously. Since qualitative open end interviews enters into greater details with the
interviewees (Punch, 2005), therefore It was agreed with the interviewees before
37
conducting the interviews that their names and designations would not be disclosed
and only the information provided by them would be used in the research.
3.8 Limitations
Since research is concerned with fiscal deficit of India, interviews had to take place
with policy makers and bureaucrats. Getting an access to this group in itself was a
time consuming process. Time constraint was a major aspect in this research. Since
fiscal deficit is a vast topic, in fact fiscal deficit have numerous sub components and
component levels, this needed a thorough study of literature. The materials available
on fiscal deficit especially Indian fiscal deficit are not much and often fiscal deficit is
dealt with other macroeconomic related problems, the availability of literature was
scarce.
sustainable fiscal deficit, this required interviewing of policy makers and bureaucrats.
The first major problem was reaching these people. These people are always loaded
with responsibilities and work so there was a big time limitation constraint during all
As mentioned earlier India is vast nation and the problem of fiscal deficit is a
combined problem of both centre and states (twenty eight states). It would have
been better if the interviewing of representatives from all major states was possible
but because of time constraint it was not possible to do so. Although the state
selected for this research Uttar Pradesh is the biggest state in terms of population
and considered to be a political hub of India had problems which are universal for
38
4. Findings and Analysis
400000
350000
300000
250000
200000
150000
100000
50000
Figure4.1: fiscal deficit of India from 1970-71 to 2009-10. Source: Reserve bank of
India.
39
10
4
gross fiscal deficit of centre
2 gross fiscal deficit of state
GDP at factor cost
0
-2
-4
-6
Figure4.2: Comparative graph of gross fiscal deficit of centre, state, combined (state
and centre) and GDP growth at factor cost from 1971 to 1980. Source: Reserve
bank of India.
12
10
Figure4.3: Comparative graph of gross fiscal deficit of centre, state, combined (state
and centre) and GDP growth at factor cost from 1981 to 1990. Source: Reserve
bank of India.
40
10
7
gross fiscal deficit of centre
6
Figure 4.4: Comparative graph of gross fiscal deficit of centre, state, combined (state
and centre) and GDP growth at factor cost from 1991 to 2000. Source: Reserve
bank of India.
12
10
Figure4.5: Comparative graph of gross fiscal deficit of centre, state, combined (state
and centre) and GDP growth at factor cost from 1971 to 1980. Source: Reserve
bank of India.
41
Going through the financial data gathered from various sources like reserve bank of
India, union budget official website the researcher collected data (secondary data).
The finding of these data are discussed and analysed in this section.
4.1 Fiscal deficit of centre, state, combined fiscal deficit and GDP
needs expenditure and to expend a nation needs revenue. In case of India more
than often expenditure have surpassed revenue collection; this imbalance gives rise
to deficit.
This financial (budgetary) data of India had been used and the above graphs show
gross fiscal deficit of India from year 1970 to 2010 (fig. 4.1). For purpose of
convenience this period has been divided into four parts. Part 1(fig. 4.2): period 1970
to 1980, during this period average growth rate of Indian economy was less than 3%.
The analysis shows that average fiscal deficit for this period was 3.78% of GDP. In
fact the fiscal deficit surpassed the average economy growth and this could be
termed as one of the numerous reasons of snail speed development in that era,
which was notoriously termed as Hindu growth rate (Kochhar et al, 2006) (fig. 4.3).
The eighties saw Indian policy makers making some piecemeal reforms. Fruits of
these efforts were seen as growth in various sectors this lead to an accelerated
growth of 5.8% in GDP in eighties. The growth in this period was basically supported
by debt finance (srinivasan, 1996). Gross fiscal deficit grew simultaneously and was
6.75% of the GDP. Because of the cyclic effect of loans and interests taken in the
eighties to boost growth the start of new decade was not good for Indian economy
and Indian economy entered into serious economic problems. The nation faced its
worth economic crisis till date, from fig. 4.4 it is clearly visible that the GDP in 1990-
42
91 was just above 5% and the combined deficit of centre and state was close to
10%, when such conditions happen economic crisis is bound to take place. These
economic problems made the government to start thinking and adopting real
economic reforms which had been mentioned as liberalisation policies earlier in this
paper. Because of these measures the economy grew with an average of 5.69% of
GDP in nineties, the reason could be the recovery from a serious economic
showdown. The good thing was this time it was not debt driven growth but the driver
of this growth was increased trade (as trade barriers were lowered) and tax reforms
which were enforced after the recommendations of tax reform committee of 1991
(TRC, 1991), which in turn increased revenue and the result was evident in reduced
), still gross fiscal deficit was more than the average growth in GDP. The economic
measures which were undertaken at the start of 1991 bore better results in the next
decade which showed a remarkable growth of average 7.21% in GDP, for the first
time in its independent history India’s growth surpassed the fiscal deficit which was
The above discussed and analysed part is just one aspect of Indian fiscal deficit. The
picture is incomplete without the reference of states. India is a union of states and
these states run like independent governments. Every state has its own budget,
expenditure, revenue and also the fiscal deficit. If the data for state deficits are
analysed it is found that during seventies it was 2% of GDP, 2.83% during eighties,
3.09% during nineties and this figure rose to 3.22% in the first decade of 21 st
century. A steep rise is seen in state fiscal deficit after the liberalisation of nineties
(fig 4.4), the possible reason could be that many MNC’s entered India as trade
barriers were lowered, to promote business the states needed better infrastructure
43
and thus they began to invest more on development, this is one of the reasons of
The shocking fact which comes out from the analysis is the combined state and
central deficit. This figure has continuously been soaring high. On average during
seventies it was 7.95% of GDP(fig. 4.2), during eighties it was 7.71% of GDP (fig.
4.3) and during the current decade it is 7.45% of GDP(fig. 4.5). This combined fiscal
deficit puts Indian economy under pressure of searching resources to fund the
deficit. This increase in fiscal deficit diminishes the effect of growing GDP. Even
India managed to sustain the growth pattern in GDP but still the swelling combined
450000
400000
350000
revenue collections in crore INR
300000
250000
direct tax
200000 indirect tax
non-tax revenues
150000
capital receipts
100000
50000
year
44
Figure 4.6 Revenue collections by central government of India from different
sources. Source: Reserve Bank of India
20%
38%
direct tax
indirect tax
27% non-tax revenues
15% capital receipts
17%
28%
32%
23%
Figure 4.8 Breakdown of average tax revenues (1980-2010) from various sources of
central government. Source: reserve bank of India
45
450000
400000
Revenue Collection in Crore INR
350000
300000
250000
200000
non-tax revenues
150000 capital receipts
100000
50000
0
1992-93
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
Years
Figure 4.9 Comparative Graph of revenues collected from non-tax revenues and
capital receipts. Source: Reserve bank of India.
To carry out various function any government needs finance, this finance is arranged
are revenue receipt and capital receipts. Revenue receipts are broadly of two types’
tax revenue and non-tax revenue. On functionary basis tax revenue is again divided
into two categories indirect and direct. The direct tax is collected mainly from two
major sources personal income tax and corporate tax. On the other hand indirect tax
The analysis found that the major source of government’s income is by means of
revenue receipts this (average from year 1980-10) forms sixty two percent of the
major collections by the central government (direct tax 20%, indirect tax 27% and
non-tax revenue 15%) figure 4.7. By breaking the different components of revenue
46
receipt it is found that indirect tax makes up 27% of total receipts. Because of the
liberal economic policies adopted in the early nineties (TRC, 1991) (which included
major tax reforms) it is found that direct taxes grew by six folds during nineties and
around five times during the 2000 to 2010. On further analysing direct taxes it was
found that on average income tax contribute to 17% and corporate tax to about 32%
(fig. 4.8). Though over the years income tax have increased about sixty folds, though
the situation is far from satisfactory. Even today only less than 1% of people come
under tax cover. The reason behind this could be the fact that about 60% of the
population of India is employed in agriculture and this sector is still free from majority
With the capital inflow in the country from FDI’s had increased after the economic
liberalization of early nineties it is found that the industries are doing good progress
and therefore corporation tax has increased about 35 folds from the pre liberalisation
era, the easing of investment norms in India after liberalisation had played an
important role in this rise. The same could not be said about excise and custom
which have shown a growth of six and three fold respectively from pre liberalization
period. Since these taxes are linked with the trade, better the trade conditions better
could be the contribution from these two sources, it could be said that trade barriers
2)
47
1000000
900000
800000
700000
600000
500000
total receipts of states
400000
total receipts of centre
300000
200000
100000
0
1990-91
2004-05
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2006-07
2008-09
Figure 4.10 comparative graphs of receipts of states and centre. Source: Reserve
bank of India.
95%
90%
85%
80%
75%
1998-99
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Figure 4.11 figure showing share of states in the taxes collected by the central
government. Source: Reserve bank of India.
When analysing the receipts of state governments it was found the way the states
contributed in increasing gross fiscal deficit similarly they contributed in the revenue
48
collection also (fig. 4.1). In fact it was found in analysis that the average total receipts
of centre from period 1990 to 2009 was 345936 Crore INR which was lower
compared to 363327 Crore INR for central government. The interesting fact found in
the research was that out of the tax collected by the centre a percentage is
considered to be the share of the state and this is placed in the receipts under the
heading tax share of states in central taxes, the average tax collected under this
heading averages 59358 Crore INR for this period. This amount approximately
equals around 15% of all receipts of the state government. Also a major percent of
the revenues of the state comes from sales tax, with the advent of the Value added
tax this would be affected and the revenues of the states could go down. (Fig. 4.11)
2007-08
2004-05
2001-02
1998-99
1995-96 capital expenditure
1992-93 reveue expenditure
1989-90
1986-87
1983-84
1980-81
0 200000 400000 600000 800000 1000000
49
average of revenue
expenditures under major average of capital expenditure under
headings from year 1980-2010 major headings from year 1980-2010(b)
(a)
defence
defence expenditure capital expendit
outlay ure
interest payment 46% 22%
subsidies
22% 22%
loans
56% and
advances
32%
Figure 4.13 a) average of revenue expenditures under major headings from year
1980-2010 b) average of capital expenditure under major headings from year 1980-
2010. Source: Reserve bank of India.
It is evident from the above chart that the main heading for expenditure of the central
government is revenue expenditure (fig. 4.12). On further evaluating the main fields
of revenue expenditure it was found that the main black holes of expenditure are
interest payment and subsidies. As it is evident from the very beginning that the
receipts of the government are less than its expenditure, as a result the government
has to fund from various sources. To avail these loans the government has to give
certain amount of interest, greater is the amount of loan more the government has to
pay as interest. Even in capital expenditure category it was it was found that on
average 33% of the capital expenditure is on loans and advances, again this has
The second biggest revenue eater was found to be subsidies given by the
major portion of government expenditure. Since the rule of democracy is better the
50
party performs or promises to perform better are its chances to get elected or re-
subsidises and capital expenditure on loans and advances accounted for 34% of the
total expenditure by the central government. This brings up the fact that more than
one third of all expenditure of the government gets utilised in compensating for the
100%
95%
85%
total expenditure
excluding interest
80% payment
75%
On examining the pattern of spending by the state government the same trend of
central government is evident. The state governments too spend on average 14%
(fig. 4.14)of their revenue on paying interest to loans which they have availed from
various sources (appendix 7). If these black hole of centre and state are counted
together it could add up to 50% of the expenditure done combinely by centre and
state just gets used up in paying loan interest, subsidies and some part of capital
loan. The year after year occurrence of this situation is giving rise to slow pace of
51
development in India. Because any country whose almost 50% of the expenditure is
4
3
2 interest payment
1 subsidies
0
1970-71
2000-01
1973-74
1976-77
1979-80
1982-83
1985-86
1988-89
1991-92
1994-95
1997-98
2003-04
2006-07
2009-10
Figure 4.15 Graph showing interest payment and subsidies of central government
compared to % of GDP. Source: Reserve bank of India.
250000
200000
150000
gross borrowing of states
50000
Figure 4.16 Graph showing borrowings of centre and state governments to finance
debts. Source: Reserve bank of India.
52
400000
350000
300000
250000
200000
external finance
Axis Title
50000
0
2007-08
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2008-09
2009-10
-50000
-100000
Axis Title
Figure 4.17 Graph showing the various sources of central government of financing
debt. Source: Reserve bank of India.
Analysing the sources of finance for last 15 years it is evident that the central
government is financing the gross fiscal deficit by means of various sources (fig.
4.17). Maximum financing till now had been done by means of market borrowings.
These borrowing are in form of bonds and securities which are kept with the central
bank, nationalized banks and other financial institutes. On these bonds government
has to pay certain amount of interest year after year. The research has already
looked in that aspect under the heading of interests paid by government (appendix 2)
53
4.4 findings from Qualitative analysis (interviews)
From the above analysis few findings which stand out are 1) the problem of fiscal
deficit has played a role of hidden obstruction in Indian economic growth. Through
decades it had been affecting the development process because fiscal deficit puts
pressure on planning. As evident from the study the cause of fiscal deficit is the
expenditure more than earnings of the state. To correct it two ways could be chosen
increasing the revenue. To look into these factors structured interviews were
conducted. And the information gathered from these interviews has been used in
program level logic model to analyse the ways and obstructions which are coming in
The question stated to both group A and B was how the revenue receipts of the
54
Group B’s response is quoted below (appendix 6)
When Group C and D were asked about the administration lapses which cause loss
in revenue, they gave almost the same answer which is quoted below (fig. 4.7)
(appendix 3)
55
When group A was asked the question about the underperformance of non–tax
When group D was countered with question about slackness in administration, they
responded:
56
Group A were asked “Although the capital receipts contribute 38% of all taxes
collected but still with the ever increasing middle class and salary hikes what is the
When group A was asked about the impact of large number of regional parties
57
When the same question was asked to group B they responded:
Although the major findings have been analysed along with the analysis this section
would summarise the findings. It has been found that the after the economic reforms
of 1991 revenues receipts of both centre and state have increased numerous folds
but along with it expenditure have also increased in fact have surpassed revenue
receipts in all years. Looking at the revenue sources individually it was found that tax
revenues (indirect and direct) form on average 47% of all taxes collected, non-tax
revenue 15% and capital receipts 38%. Investigating components of tax revenues it
was found that indirect taxes (custom and excise) need to further improvement, the
government should look into the possibilities of further decreasing the trade barriers
to improve further tax collection. The excise collection of states could yield much
better results if the administration is made more efficient, indirect taxes need tax
reforms in custom section and administrative reforms in excise section. Direct tax
58
collections are on the lower side comparative to other tax collections but it is evident
from the analysis that category has risen many folds after the reform of 1991. The
major concern in this field is the numbers of tax payers which are just 1% of the
population (this percentage is low even after considering the fact that India a poor
In non-tax revenue the situation is far from satisfaction, the PSU’s or central public
sector enterprises (CPSE’s) are not contributing up to its potential. Profit turnover is
less than 9% in 2006 only 157 out of 231 CPE’s are profit making. The condition of
states is even worse, total of 1129 state level public enterprises were functional in
2004 and they incurred a loss of 60517 Crore INR in 2004. The data regarding
CPSE and SLEP’s is not revised that often, the only source is the five year plan and
these plans come only after every five year, that is the reason why data till 2006 in
regards with centre and 2004 for state had been considered. (11 th year plan, 2008).
Capital receipts are the leading tax generator for the government but it has potential
the collection.
Another fact which came out analysis was that both centre and state governments
are spending a high percentage ( almost 50% of the expenditure) is on subsidy and
again because of debt finance, which government undertakes to cover up the gap
As the purpose of doing EDA and then logic level was not only to find the causes of
fiscal deficit but also to find corrective measures to achieve a sustainable fiscal
deficit.
59
After interviewing the four groups certain key facts came out, these facts when
considered with the factors playing prominent part in increasing fiscal deficit as
brought out by exploratory data analysis of quantitative data gives rise to corrective
1) Direct taxes (particularly income tax) should try to cover more people under tax
cover.
2) Trade barriers need to be revised again to increase more trade and thus
increasing taxes.
employees under various schemes; this would increase capital receipts of the
government.
keep national interest in mind rather than only focussing on regional issues.
9) States should perform an performance appraisal of sick PSU’s and close it down,
60
10) States should look on taking severe measures with state electric board as this
If these measures are applied the steeply increasing fiscal deficit could transform
into sustainable fiscal deficit. The following figure shows the adaptation of these
measures in programme level logic model and resulting in sustainable fiscal deficit.
Figure 4.18 sustaining fiscal deficit by corrective measures, programme level logic
model
61
4.6 Discussion
The research has aimed to look into two basic questions ‘why’ fiscal deficit is a
regular phenomenon in Indian economy and ‘how’ this fiscal deficit could be reduced
several factors related with fiscal deficit and found its implication in Indian context.
1) Effect of fiscal deficit on inflation and neutrality (Catao and Terrones, 2005) are
not covered in this research because they are secondary effects of fiscal deficit and
2) Fiscal deficit has strong linkage with trade deficit ( Rosenweig and Tallman, 1991
& 1992) again this issue is not looked into this research because of its secondary
nature and dealing with this topic was beyond the scope of this research. However
effect of trade barrier on fiscal deficit is examined. Similarly fiscal deficit has a
crowding out effect (Ramirez, 1994) this aspect was overlooked as it of pure
statistical in nature and did not have direct relation with the ‘why’ and ‘how’ of fiscal
deficit.
2) Effect of fiscal deficit on growth has linked by numerous economists (Adam and
Bevan, 2005) Kneller, 2000. It was found that fiscal deficit has impact on GDP.
Figures ( ) show this effect. The research looked into data from both centre and state
perspective and linked it with growth of Indian GDP although the extent of effect on
and Taelliniu, 2000) this aspect was examined in this research primarily because
india is vast nation of twenty states, it was found that states are participating actively
62
in earning revenue receipts, but at certain places there is lack of coordination
between these two. The research also looked into the relationship between
democratic government and increasing fiscal deficit and found that the increase
subsidy is one of major causes of fiscal deficit and this is happening year after year
as subsidised items are lower in prices and this helps in gaining popular votes during
elections. The research also found that fiscal decentralisation (Neypati, 2010) is an
effective way for tax collection as administrating people from local level is easier than
administrating from central level. It was found during interview of state policy makers
that since all states are not equal in resources so states with fewer resources should
4) Fiscal deficit has an important relationship with tax reforms (Bird, 1993 and Rao,
2005), in this research an in depth study was done to understand the various
sources of revenue receipts and was found that there is a scope of further
improvement in all major tax categories like tax revenues, non-tax revenues or
capital tax, certain recommendation on basis of analysis and interviews are also
mentioned.
The aim of the research was to bring out the factors related with fiscal deficit. The
research uses EDA to analyse quantitative budgetary data and programme logic
levels to analyse the fiscal deficit of India and also to find out methods by which this
could be checked. The approach in this research is not statistic based as in case of
most economic related researches, the focus is on finding the direct factors
63
4.6 Conclusion
Fiscal deficit is not an overnight grown problem for India, from its first budget (1947-
48) fiscal deficit had always been a prominent factor in Indian budget. Although
being such an important macroeconomic factor still it was overlooked for decades. In
fact the debt of 1980’s caused the economic crisis of 1991. Corrective measures
were taken which gave economy a new lease of life. But the problem continued to
ponder over. In fact it is curtailing Indian economy and not letting it grow with a pace
which it should have, it is eating up the expenditure which in turn are causing
numerous problems which were mentioned in the introduction. The purpose of the
research was to look into major issues why fiscal deficit kept on occurring in case of
India and how this ever increasing fiscal deficit could be corrected or brought to
sustainable limits.
The research started from the basics of budget, and figured that fiscal deficit is
caused when the expenditure of the nation increases more than various sources of
revenues. Firstly various sources of revenues were explored and was found that the
main source of revenue are different taxes levied by the government both in central
as well as at state level, the research analysed various taxes under different
headings and found that there has been reform in direct taxes but still there is further
scope of improvement. Same was applicable with indirect taxes which needed some
strict administrative reforms to raise its contribution in the overall tax collection.
Another revenue generator capital receipts (the front runner in tax collections) could
further increase its base with innovative schemes at centre and state. Once different
sources of revenue were analysed the focus shifted to various expenditure of the
government and it was found that the black holes of the expenditures are mainly
64
subsidy, interest and military expenses although the latter is out of scope of this
research focus was set on the first two, close examination gave a shocking
revelation that almost 50% of the expenditure by the government is on subsidies and
on interest payment. This cycle is continuing year after year and if not corrected
would lead India into a second economic crisis in near future. The research also
gives few important recommendations to increase tax base like reducing subsidy in a
phased out manner. As stated in the introduction that economics is the study of how
to use limited resources the aim of this research is to bring expenditure at par with
revenue or revenue at par with expenditure so that nation gets out of fiscal deficit
loop and use all of its revenues on real development rather than paying taxes.
Although the result looked into causes of fiscal deficit it overlooks secondary effects
associated with fiscal deficit like level of impact of rising fiscal deficit on growth, to
emphasise on the dangerous side of fiscal deficit. Crowding out effect was also not
taken into account which too has a deep impact on macroeconomics of a nation.
Although data have been taken for whole country including all states but still if
interviewee were from each 28 states the results would have been more broad and
universal.
65
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The World Bank (2010) India Economic Update (June, 2010), , South Asia Region:
INFLOWS
(1) Revenue Receipts (2+3)
(2) Tax Revenue
(3) Non Tax Revenue
OUTLAYS
(9) Non Plan Expenditure (10+12)
(10) On Revenue Account of Which
(11) Interest Payment
(12) On capital Account
79
(17) Revenue Expenditure (10+14)
(18) Capital Expenditure (12+15)
BUDGET BALANCE
(19) Revenue Deficit (17-1)
80
1995-96 60243 318 34001 16117 9807
1996-97 66733 2987 19093 31469 13184
1997-98 88937 1091 32499 56257 -910
1998-99 11334 1920 68988 42650 -209
9
1999-00 10471 1180 62076 40597 864
6
2000-01 11881 7505 73431 39077 -1197
6
2001-02 14095 5601 90812 46038 -1496
5
2002-03 14507 -11934 104126 50997 1883
2
2003-04 12327 -13488 88870 51833 -3942
3
2004-05 12579 14753 50940 68231 -8130
4
2005-06 14643 7472 106241 53610 -20888
5
2006-07 14257 8472 114801 14782 4518
3
2007-08 12691 9315 130600 -39597 26594
2
2008-09 32651 9603 266539 110740 -60367
5
2009-10 40099 16047 397957 -13008 0
6
Year Total Total Dir Personal Corpo Indi Excis Custo non- capita
recie expen ect income ration rect e m tax l
pts diture tax tax tax tax Duti Dutie revenu receip
es s es ts
1980 20291 22768 189 438 1311 7465 3723 3409 3015 7918
-81 3
1981 23873 25265 251 459 1970 9024 4181 4300 3482 8849
-82 8
1982 29135 30791 272 438 2185 10294 4567 5119 4417 11701
-83 3
1983 34117 35534 313 527 2493 1231 6165 5583 4270 14406
-84 1 0
1984 39887 43632 337 697 2556 1427 6625 7041 5815 16421
-85 5 6
1985 47350 52666 369 665 2865 1744 7331 9526 6895 19315
-86 8 2
1986 54655 62916 402 719 3160 2029 8164 11475 8764 21572
81
-87 3 6
1987 62445 68261 410 603 3433 2391 9423 13702 9022 25408
-88 0 5
1988 73469 79111 602 1492 4407 2773 1092 15805 9840 29878
-89 1 0 2
1989 82316 92908 602 1088 4729 3232 1309 18036 13947 30020
-90 8 1 6
1990 93951 105298 690 1250 5335 3607 1410 20644 11976 38997
-91 3 5 0
1991 10455 111414 101 1627 7853 3996 1601 22257 15961 38528
-92 8 03 6 7
1992 11030 122618 120 1831 8899 4196 1636 23776 20084 36178
-93 6 75 9 7
1993 13089 141853 125 1355 10060 4092 1722 22193 22004 55440
-94 3 22 7 4
1994 15977 160739 184 3468 13822 4904 2106 26789 23629 68695
-95 8 09 5 4
1995 16846 178275 222 4318 16487 5965 2217 35757 28191 58338
-96 8 87 2 6
1996 18782 201007 253 4715 18567 6832 2346 42851 32578 61544
-97 3 74 6 3
1997 23296 232053 271 3589 20016 6850 2551 40193 38214 99077
-98 3 72 0 6
1998 27954 279340 321 5760 24529 7253 2858 40668 44833 13006
-99 9 20 2 1 4
1999 29718 298053 414 9131 30692 8683 3494 48419 53211 11570
-00 9 36 6 4 7
2000 32678 325592 496 23766 25177 8700 4975 34163 55947 13418
-01 9 51 7 8 4
2001 36380 362310 477 22106 25133 8582 5446 28340 67774 16250
-02 6 03 8 9 0
2002 41136 413248 616 27779 33893 9693 6238 31898 72290 18053
-03 5 12 2 8 1
2003 47514 471203 765 30765 45706 1103 7024 34586 76831 21133
-04 6 90 92 5 3
2004 50638 498252 959 35443 60289 1288 7724 41811 81193 20039
-05 2 44 54 1 1
2005 52662 505738 120 45238 75187 1495 8664 46645 76813 17954
-06 6 692 72 2 9
2006 58338 583387 169 62707 106701 1814 9265 62819 83205 14900
-07 7 738 44 1 0
2007 71267 712671 231 86518 144660 2096 9599 75382 102317 17080
-08 1 509 15 2 7
2008 90095 900953 254 90118 164451 2128 8792 77668 96203 33878
-09 3 903 67 4 0
2009 10208 102083 271 77249 193433 1988 8605 66792 140279 40634
-10 38 8 047 35 2 1
dire personal corpor indir excis custo non-tax capital
ct income ation ect e m revenue receipt
82
tax tax tax tax dutie duties s s
s
average of receipts 541 7334 40433 10071
from year 1980 to 76 1 5
2010
year Revenu defence inter subsi capital loans capi defence total
e expendi est dies expendi and tal expendi
expendi ture paym ture advan outl ture
ture ent ces ay
1980-81 14410 3278 2604 2028 8358 5285 3073 326 2276
8
1981-82 15408 3844 3195 1941 9857 5658 4199 485 2526
5
83
1982-83 18742 4494 3938 2262 12049 7384 4665 527 3079
1
1983-84 22251 5189 4795 2902 13283 8053 5230 642 3553
4
1984-85 27691 6324 5974 4038 15941 9194 6747 737 4363
2
1985-86 33924 7021 7512 4796 18742 11087 7655 967 5266
6
1986-87 40860 9179 9246 5451 22056 12797 9259 1298 6291
6
1987-88 46174 8861 11251 5980 22087 12793 9294 3107 6826
1
1988-89 54106 9558 14278 7732 25005 14750 1025 3783 7911
5 1
1989-90 64210 10194 17757 10474 28698 16890 1180 4222 9290
8 8
1990-91 73516 10874 21498 12158 31782 19652 1213 4552 1052
0 98
1991-92 82292 11442 26596 12253 29122 17723 1104 4905 1114
3 14
1992-93 92702 12109 31075 10824 29916 16297 1338 5473 1226
5 18
1993-94 108169 14978 36741 11605 33684 20454 1308 6867 1418
9 53
1994-95 122112 16426 44060 11854 38627 23736 1489 6819 1607
1 39
1995-96 139861 18841 50045 12666 38414 24316 1409 8015 1782
9 75
1996-97 158933 20997 59478 15499 42074 27878 1419 8508 2010
6 07
1997-98 180335 26174 65637 18540 51718 34193 1752 9104 2320
6 53
1998-99 216461 29861 77882 23593 62878 44037 1884 10036 2793
1 40
1999-00 249078 35216 90249 24487 48975 24938 2403 11855 2980
7 53
2000-01 277839 37238 99314 26838 47753 23008 2474 12384 3255
5 92
2001-02 301468 38059 10746 31210 60842 34284 2655 16207 3623
0 8 10
2002-03 338713 40709 11780 43533 74535 31668 2910 14953 4132
4 1 48
2003-04 362074 43203 12408 44323 109129 28768 3415 16863 4712
8 0 03
2004-05 384329 43862 12693 45957 113923 28910 5233 31994 4982
4 8 52
2005-06 439376 48211 13263 47522 66362 11337 5502 32338 5057
0 5 38
2006-07 514609 51682 15027 57125 68778 8524 6025 33828 5833
2 4 87
84
2007-08 594433 54219 17103 70926 118238 11298 1069 37462 7126
0 40 71
2008-09 803446 73600 19269 12924 97507 14202 8330 41000 9009
4 3 5 53
2009-10 897232 86879 22551 11127 123606 12339 1112 54824 1020
1 6 67 838
85
2004-05 363512 260577 102935 200148 563660
2005-06 431021 306332 124690 164607 595628
2006-07 530556 372841 157714 142802 673358
2007-08 628742 441526 187216 134625 763367
2008-09 719835 509957 209879 175472 895307
year total on
expenditure interest
payment
1990-91 91088 8655
1991-92 107929 10944
1992-93 119335 13210
1993-94 133849 15801
1994-95 159147 19413
1995-96 174632 21839
1996-97 199254 25387
1997-98 223924 29799
1998-99 261419 35441
1999-00 307977 44641
2000-01 339835 50985
2001-02 368680 61596
2002-03 410249 69027
2003-04 514302 80396
2004-05 553428 86421
2005-06 561682 84024
2006-07 657280 93164
2007-08 787489 102878
2008-09 892783 108383
86
1983-84 15971 1993-94 70952 2003-04 234501
1984-85 22013 1994-95 71639 2004-05 234721
1985-86 22174 1995-96 77671 2005-06 239560
1986-87 30789 1996-97 87244 2006-07 230432
1987-88 32432 1997-98 110743 2007-08 247831
1988-89 35887 1998-99 157053 2008-09 244460
1989-90 43135 1999-00 184826
87
1993-94 430623 47345 477968 187875
1994-95 487682 50929 538611 216473
1995-96 554983 51249 606232 249535
1996-97 621437 54239 675676 285898
1997-98 722962 55332 778294 330816
1998-99 834552 57254 891806 399576
1999-00 962592 58437 1021029 509529
2000-01 1120596 65945 1168541 594147
2001-02 1294862 71546 1366408 690747
2002-03 1499589 59612 1559201 786430
2003-04 1690554 46124 1736678 913376
2004-05 1933544 60877 1994421 1029174
2005-06 2165902 94243 2260145 1167866
2006-07 2435880 102716 2538596 1250819
2007-08 2725395 112031 2837426 1337044
2008-09 3014441 121634 3136075 1451169
2009-10 3357771 137681 3495452
88
5- 5 9 06 8 1
96
199 4.8 2.6 6.33 8 3 3.33 2006- 3.4 1.8 5.58 9.7 3 2.58
6- 4 5 07 5 8
97
199 5.8 2.8 7.25 4.3 3 4.25 2007- 2.6 2.2 5.25 9 3 2.25
7- 2 5 08 9 9
98
199 6.4 4.1 8.97 6.7 3 5.97 2008- 6.1 2.1 4.59 6.7 3 1.59
8- 7 9 09 4 2
99
199 5.3 4.6 9.47 6.4 3 6.47 2009- 6.8
9- 6 2 10 5
00
me 7.65
dia
n
ave 7.71
rag
e
Note all figure are in % except year
Reference
http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Sta
89
90