Fiscal Policy

Budget : Revenue Account

Revenue Account

Revenue Receipts

Revenue Expenditure

Tax Revenue (83.8)

Non Tax Revenue (16.2)

Non-Plan (70.9)

Plan (29.1)

Interest Payments (33.6)

Defence Services (12.7)

Subsidies (26.8)

Budget : Capital Account

Capital Account

Capital Receipts

Capital Expenditure

Non-Plan (50.4)

Plan (49.6)

Budget Deficits
Revenue Deficit = Revenue Exp.- Revenue Receipts
(Plan+Non - Plan) (Tax+Non -Tax)

Fiscal Deficit = Total Expenditure ( Revenue Receipts

(Rev.+ Cap. Exp.) +Recovery of Loans +Receipts from PSU

Disinvestment)
Primary Deficit = Fiscal Deficit Interest Payment

Structure and Growth of Subsidies

Per Cent

2009-10

2010-11

2011-12

Food
Fertiliser Petroleum Others

41.3
43.3 10.6 4.7

36.8
35.9 22.1 5.1

33.4
32.1 31.4 3

100

100

100

Source : Fiscal Consolidation, Macro Fundamentals & Growth in Budget 2013-14 by P. Chakraborty & L.Chakraborty, EPW, March 30, 2013.

(Rs. In Crores) 1 Revenue Receipts 2. Tax Revenue (net to centre) 3.Non-tax Revenue 4 Capital Receipts (5+6+7) 5.Recoveries of Loans 6.Other Receipts 7.Borrowings 8 Total Receipts (1+4) 9 Non-Plan Expenditure 10. On Revenue Account of which, 11.Interest payments 12. On Capital Account 13 Plan Expenditure 14. On Revenue Account 15.On Capital Account 16 Total Expenditure (9+13) 17. Revenue Expenditure (10+14) 18.Capital Expenditure (12+15)
BE : Budget Estimates, Re : Revenue Estimates

2011-12 Actuals 751437 629765 121672 552928 18850 18088 515990 1304365 891990 812049 273150 78639 412375 333737 78639 1304365 1145785 158580

2012-13 BE 935685 771071 164614 555241 11650 30000 513590 1490925 969900 865596 319759 100512 521025 420513 100512 1490925 1286109 204816

2012-13 RE 871828 742115 129713 558998 14073 24000 520925 1430825 1001638 919699 316674 85814 429187 343373 85814 1430825 1263072 167753

2013-14 BE 1056331 884078 172252 608967 10654 55814 542499 1665297 1109975 992908 370684 112062 555322 443260 112062 1665297 1436169 229129

Budget Deficits

2011-12
Actuals

2012-13
BE 350424 (3.4) 513590 (5.1) 193831 (1.9)

2012-13
RE 391245 (3.9) 520925 (5.2) 204251 (2.0)

2013-14
BE 379838 (3.3) 542499 (4.8) 171814 (1.5)

19 Revenue Deficit (17-1)

20 Fiscal Deficit {16-(1+5+6)}

394348 (4.4) 515990 (5.7) 242840 (2.7)

21 Primary Deficit (20-11)

Figures in brackets denote deficits as percentages of GDP

BE : Budget Estimates , RE : Revenue Estimates

Why limit primary deficit?

Debt Primary deficit = GDP

GDP

(r growth rate of GDP)

Debt GDP

To reduce the ratio of debt to GDP there must be either a primary surplus (i.e. revenue must exceed non-interest outlays) or the economy must grow faster than the rate of interest, or both If only one of those conditions holds, it must be larger enough to outweigh the adverse effect of the other

Indias debt sustainability in early part of the last decade

Debt = GDP GDP Primary deficit + (r growth rate of GDP) Debt GDP

Around 2000-1 primary deficit was about 1.5 % of GDP and the rate of interest on the national debt had exceeded the growth rate of GDP by 3% The ratio of the central government debt to GDP was about 60% on average

Debt GDP

1.5

+ 3 x 0.6

= 3.3%

The Fiscal Responsibility Legislation

The FRBM Act. (2003) mandates the Central Government to

eliminate revenue deficit by March, 2009 reduce fiscal deficit to 3% of GDP by March, 2008

Trends in Deficits of the Central Government

(as %-age of GDP)

Source : Economic Survey , 2011-12.

Mid-Term Fiscal Plan (MTFP)

MTFP of 2013-14 proposes to reduce the fiscal deficit by the end of 2015-16 to 3.6 % of GDP and Revenue deficit to 2% of GDP.

RD as %-age of FD
90 81 75.2 70

80

79.7

67.5
60 62.3 63

56.3
50

40

41.4

30

20

10

0 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

The fiscal deficit is driven by the revenue deficit

Revenue & Capital Expenditure as per cent of GDP

16 14.1 14 14.1

12

11.9

11.9

12

11.9

10

RE
CE

3.5
2.4

1.8

1.6

1.6

1.7

0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Whether fiscal deficit is bad?

Fiscal Deficit = Total Expenditure ( Revenue Receipts + Recovery of Loans + Receipts from (Rev. exp. + Cap. Exp.) PSU Disinvestment )

Not Necessarily

Deficit Financing

Deficit Financing

Public / Market

RBI

Hardening of interest rate

Inflation

Whether persistent fiscal deficit is bad?

Crowding out
Inflation

High debt-GDP ratio

Increase in economic risk

Risk of downgrades by rating agencies

Central Govt. : Debt to GDP Ratio

Per Cent
70

60

50

40

30

20

10

0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Tax- GDP Ratio

14

12 11.4

11.9 10.8

10 8.8 8 9.2

10.2 9.7 9.6

10.2

9.9

Tax/GDP Ratio Direct Tax/GDP Ratio Indirect Tax/GDP Ratio

0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Source : Economic Survey (various issues)

Major Indirect Taxes

Indirect Taxes

Goods

Services

Movement of Goods

Excise

VAT

Customs Service Tax CST

Central Entertainment State

Entry Tax

Octoroi

Major Direct Taxes

Direct Taxes

Income

Profit/Securities

Wealth and Assets

Personal

MAT Wealth Tax

Corporate

DDT Capital Gains

Professional

STT

Sources of Tax Revenue

4.5 4

3.5

Personal Income Tax

2.5

Corporate Income Tax Customs Duty

Excise Duty
Service Tax

1.5

0.5

0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Sources : Economic Survey (various issues)

Transactions with/without VAT

Transaction without VAT Transaction with VAT

Details

Purchases

110

100

Value Added

100

40

100

40

Sub-total

100

150

100

140

Add tax 10%

10

15

10

14

Total

110

165

110

154

Goods and Service Tax

GST : An Example
A plastic manufacturing company has consumed the following goods and services

Description

Amount (Rs.in Lakhs) 50 10 15

Rate of Tax (%) 12 12 12

Tax Paid (Rs.in Lakhs) 6 1.2 1.8 9

Raw materials Stores & spares Services Total Input Tax

Selling price of the product is Rs.100 lakhs

Output tax : Descriptio n Sale

GST : An Example
Amount (Rs. in Lakhs) 100 Rate of Tax (%) 12 Total Output Tax Tax Collected(Rs.in Lakhs) 12 12

Net tax payable by manufacturer : Description

Total Output Tax Total Input Tax Net GST Payable

Amount (Rs. in Lakhs)

12 9 3

GST : An Example
Goods are sold to a trader who uses services amounting to Rs. 5 lakhs. Descriptio n Goods sold Services Amount (Rs. in Lakhs) 100 5 Rate of Tax (%) 12 12 Total Input Tax Tax Paid (Rs.in Lakhs) 12 0.60 12.60

Traders profit margin is Rs.10 lakhs. So, output tax for trader is :
Description Goods sold Add : Tax @ 12% Amount (Rs. in Lakhs) 115 13.80 128.80

GST : An Example
Net tax payable by the trader is :

Description Total Output Tax

Amount (Rs. in Lakhs) 13.80

Total Input Tax

Net GST Payable

12.60
1.20

GST : An Example
Tax collected by the government :
Description Amount (Rs. in Lakhs) 6 1.20 1.80 3.00 0.60 1.20 13.80

From the sellers of raw materials

From the suppliers of stores & spares From the service providers of the services consumed by the manufacturer From the manufacturer From the service providers of the services consumed by the dealer From the dealer Total GST received

Rs.115 lakh @ 12% = Rs.13.80