India's Fiscal Reforms Journey: Past, Present, and Future

1. SECOND GENERATION FISCAL REFORMS IN INDIAA Presentation byDr. R. P. Acharya,Director, Department of Atomic Energy,India

2. THE 1991 CRISIS • External debt had tripled to $69.3 billion. • Foreign currency reserves had dwindled down to USD 975 million. • Export growth had turned negative and foreign commercial lenders had shut the door to India. • Industrial growth was negative and inflation was soaring above 16 per cent. • The gross fiscal deficit had grown to about 10% of GDP. • The 1991 BOP crisis forced India to procure a $1.8 billion IMF loan and acted as a “tipping point” in India’s economic history. • Taxes were very High & Structure was very complex.

3. The first phase of reforms(1991-2002) • Removal of controls on industrial investment. • Revamping PDS and liberalization of trade. • Reduction in import tariffs. • Creation of a less unfavorable environment for attracting foreign capital. • Opening energy and telecommunication sectors for private investment (domestic and foreign). Fiscal System - Fiscal consolidation and limited tax reforms. • Deficit Financing effectively Curbed. • Autonomy to RBI in controlling money supply. • Personal income tax and Corporate tax rates lowered to 30%, with considerable simplification. • Massive simplification of excise tax structure to achieve a central rate (CENVAT) of 16 percent

4. Why second phase reforms in 2003? • Effect of Vth central pay commission recommendations had put a huge burden on central as well as the states exchequer. • Cyclical recessions in economic activity lead to unanticipated fiscal deficits. • Huge interest burden on government borrowings. It was found that average annual interest rate on government borrowings had increased to 11.86% in the year 1998-99. Similarly the average interest rate on state government borrowings was of 6.75% in 1980’s to 12.35% in the year 1998-99. • Huge subsidy bill of the central government. Subsidies formed about 14.3% of centre’s revenue receipts in the year 1999-2000. • Huge revenue expenditure of the governments at both the centre and state levels .in the year 1998-99 revenue expenditure of the centre was 77.4% and the capital expenditure was of 22.6%. Has serious implications for the long term rate of growth of the economy. • the revenue deficit worsened from 3.3 per cent of GDP in 1990-91 to 4.4 per cent of GDP in 2002-03.

5. Second generation reforms(2003 onwards) • To raise capital expenditure on rural infrastructure so as to stimulate growth of agriculture and rural development. • Programme of disinvestment of loss making enterprises in the public sector. • Bringing down subsidies in the non-merit goods and targeting subsidies to the deserving. • To have better cost recoveries on the social and the economics services provided by the government. • To widen the tax base • To reduce public debt so that interest burdens come down. • FRBM Act, 2003 to enforce stricter fiscal discipline.

6. Fiscal Responsibility and Budget Management (FRBM) Act 2003(came into force w.e.f. 5 July 2004) • FRBM Act 2003 and FRBM Rules 2004 The Act mandates the Central Govt to eliminate revenue deficit by March 2009 and to reduce fiscal deficit to 3% of GDP by March 2008.(Revised to 2008-09) • The central Govt is required to lay before both houses of Parliament Medium Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macro Economic Framework Statement along with the Annual Financial Statement and Demand for Grants. • Reduction of revenue deficit by 0.5% of GDP or more every year. • Reduction of gross fiscal deficit by 0.3% of GDP or more every year. • No assumption of additional debt exceeding 9% of GDP for 2004-05 and progressive reduction of this limit by at least one percentage point of GDP in each subsequent year. • Four fiscal indicators to be projected for the medium term. These include revenue deficit, fiscal deficit, tax revenue and total debt as % of GDP. • Greater transparency in the budgetary process, rules, accounting standards and policies having bearing on fiscal indicators. • Quarterly review of the fiscal situation.

7. Effects of Second phase of fiscal reforms • The tenth plan(2002-07) achieved a net growth rate of 7.6%. The years of 2006-07 and 2007-08 has shown a growth rate of 9%. • Buoyant economy has checked deficits and also financed welfare measures. • The fiscal deficit target of 3% mandated for 2008-09 by theFRBM Act is likely to be met in 2007-08 itself. Also in the 2008-09 budget, the Sixth Pay Commission impact is expected to be around 0.5% of GDP. Despite this; there is a good chance of meeting the FRBM target for 2008-09.

8. CENTRAL BUDGET: AN OVERVIEW

9. FISCAL(2008-09)

10. THE OTHER SIDE • India’s fiscal deficit is still far higher than the budget gap in most other emerging markets. • Government expenditure on, interest payment on domestic debt by privatization of state assets; fertilizer &food subsidies; public administration; state grants; and loss-making public enterprise is still very high. • Populist measures still override fiscal concerns. • Reforms have benefited less than 10% of the populace.

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12. REFERENCES • Amita Singh (ed), Administrative reforms – Towards sustainable practices, New Delhi: Sage Publication, 2005. • Bidyut Chakrabarty and Mohit Bhattacharya, Administrative Change and Innovation – a reader, New Delhi: Oxford University Press, 2005. • C. Narishma Rao(ed), Reforming the economic reforms: A decade of economic reforms in India, New Delhi, Serials Publication, 2004. • Jeffery Sachs, Ashutosh Varshney and Nirupam Bajaj(ed.), India in the era of economic reforms, New Delhi, Oxford University Press, 1999. • Kirit S. Parikh and Ajay Shah, Second generation reforms. India Development Report, 1999-2000, Oxford University Press, 1999 • Rahul Mukherji (ed), India’s economic transition, New Delhi, Oxford University Press, 2007 • Ruddar Datt and Sundharam Kpm, Indian economy (S Chand & Company Ltd, New Delhi, 2008) • India 2005: A Reference Annual, Ministry of Information and Broadcasting of India, Publication Division, New Delhi, 2005. • RBI website, [www.rbi.org.in] • Planning commison website [http://planningcommission.nic.in/] , “Report of the task force on the implementation of Fiscal Responsibility and Budgetary Management Act, 2003” • Palaniappan Chidambaram, Finance Minister of India “India’s Economic Growth and Outlook” (Prepared remarks delivered at a meeting at the Peterson Institute on September 25, 2007) [www.petersoninstitute.org/publications/papers]

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