indian fiscal deficit

Table of ContentsLIST OF FIGURES................................................................................................................................5

LIST OF ABBREVIATIONS....................................................................................................................6

1. Introduction...................................................................................................................................8

1.1 Economics an introduction..........................................................................................................8

1.2 Indian Economy- Background......................................................................................................9

1.2.1 Measures taken by government at times of crisis..................................................................10

1.3 Current Problems with Indian Economy....................................................................................12

1.4 Concept of fiscal deficit..............................................................................................................13

1.4.1 Benefits of budget..................................................................................................................14

1.4.2 Formation of deficit................................................................................................................14

1.5 Aim of the research...................................................................................................................15

1.6 research design..........................................................................................................................15

2. Literature review..........................................................................................................................17

2.1 Fiscal deficit an overview...........................................................................................................17

2.2 Various effects of fiscal deficit...................................................................................................18

2.2.1 Effect of fiscal deficit on inflation...........................................................................................18

2.2.2 Effect of Fiscal deficit on growth.............................................................................................20

2.2.3 Effect of Fiscal deficit on trade deficit.....................................................................................21

2.2.5 Democracy and subnational effect on fiscal deficit................................................................22

2.2.5.1 Is a strong central government a solution for fiscal deficit in subnational governance?.....23

2.2.5.2 Subnational governance in Indian context...........................................................................23

2.3 Sustainability of fiscal deficit.....................................................................................................24

2.3.1 Sustainability of global fiscal deficit........................................................................................25

2.3.2 Sustainability of Indian fiscal deficit........................................................................................25

2.4 measures to achieve sustainable fiscal deficit...........................................................................27

2.4.1 Fiscal decentralization............................................................................................................28

2.4.1.1 Problems with fiscal decentralization..................................................................................28

2.4.2 Tax reforms.............................................................................................................................29

2.6 Summary of literature review....................................................................................................30

3. Methodology...............................................................................................................................32

3.1Research methodology...............................................................................................................32

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3.2Research design..........................................................................................................................33

3.3 Sample.......................................................................................................................................35

3.4 Data collection...........................................................................................................................37

3.5 Data analysis..............................................................................................................................38

3.7 Ethical Issues..............................................................................................................................39

3.8 Limitations.................................................................................................................................40

4. Findings and Analysis...................................................................................................................41

4.1 Fiscal deficit of centre, state, combined fiscal deficit and GDP................................................44

4.2 Receipts of government.............................................................................................................46

4.3 Expenditure of the government.................................................................................................51

4.4 Financing of deficit.....................................................................................................................54

4.4 findings from Qualitative analysis (interviews)..........................................................................56

4.5 Major findings................................................................................................................................60

4.6 Discussion..................................................................................................................................64

4.6 Conclusion.................................................................................................................................66

4.7 Further studies...........................................................................................................................67

5. References...................................................................................................................................68

5.1 General References...................................................................................................................68

5.2 Institutional reports and publications........................................................................................80

Appendix 1. Inflows, outflows in a budget & Formation of Fiscal Deficit........................................81

Appendix 2. FISCAL DEFICIT OF INDIA AND HOW IT IS FINANCED.................................................82

Appendix 2. RECEIPTS OF CENTRAL GOVERNMENT FROM VARIOUS TAXES...................................83

Appendix 3. CAPITAL RECEIPTS FROM MAJOR HEADINGS...............................................................85

Appendix 4. MAJOR HEADS OF EXPENDITURE OF CENTRAL GOVERNMENT....................................85

Appendix 5. GROSS FISCAL DEFICIT OF STATE.................................................................................87

Appendix 6. PATTERN OF RECEIPTS BY STATE GOVERNMENT........................................................87

Appendix 7. TOTAL EXPENDITURE OF STATES AND % PAID IN AS A PART OF INTEREST..................88

Appendix 8. COMBINED DEFICIT OF CENTRE AND STATE IN CRORES INR........................................88

Appendix 9. GROSS BORROWING OF CENTRE AND STATE..............................................................89

Appendix 10. LIABILITIES ON CENTRE AND STATE..........................................................................89

Appendix 11. FISCAL INDICATORS OF THE CENTRAL GOVERNMENT, STATE GOVERNMENT AND COMBINED ALONG WITH GDP GROWTH AND ACCEPTABLE FISCAL DEFICIT AND DIFFERENCE FROM ACCEPTABLE.........................................................................................................................90

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LIST OF FIGURES

Figure 2.1 How positive fiscal deficit increases inflationary tendencies…………….…..19

Figure 4.1 fiscal deficit of India from 1970-71 to 2009-10…………………………………41

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 4.6 Revenue collections by central government of India from different sources………………………………………………………………………………………….... 46

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 4.10 comparative graphs of receipts of states and centre……………………….…50

Figure 4.11 figure showing share of states in the taxes collected by the central government…………………………………………………………………………………….….. 50

Figure 4.12 Expenditure of Central Government (Capital & Revenue expenditure)…….…51

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 4.14 graph showing % of central government’s expenditure on interest payments compared with total expenditure………………………………………………………………….53

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

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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

IMF INTERNATIONAL MONETARY FUND

TRC TAX REFORM COMMITTEE (Formed in 1991)

CRR CASH RESERVE RATIO

SLR STATUTORY LIQUIDITY RATIO

UNDP UNITED NATION DEVELOPMENT PLAN

1 CRORE 10 MILLION

OECD ORGANISATION FOR ECONOMIC COORPORATION AND DEVELOPMENT

FRMBA FISCAL RESPONSIBILTY AND BUDGET MANAGEMENT ACT

GDP GROSS DEVELOPMENT PRODUCT

CPSE CENTRAL PUBLIC SECTOR ENTERPRISES

PSU PUBLIC SECTOR UNITS

SLEP STATE LEVEL ENTERPRISE PUBLIC

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ABSTRACTIndian 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.

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1. Introduction

1.1 Economics an introduction

As the word economics flashes subconsciously our minds start thinking about stock

markets, currencies, abstract graphs, economic summits in some developed country

capital or a newspaper talking about money, growth, investment and risk. As a

matter of fact economics is a social science, though it differs a lot from other social

sciences. Economics is defined as “the study of choice under the condition of

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.

Economics can be classified broadly into two categories microeconomics and

macroeconomics. This classification was first made by Nobel laureate professor

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

in turn are aggregates of individual demand curves.)

Boulding described microeconomics as:

“Study of particular firm, particular household, individual price, wage, income,

industry and particular commodity”.

On the other hand in macroeconomics, economic problems are studied from the

point of view of the entire economy like aggregate consumption, aggregate

employment and national income

Boulding described macroeconomic as:

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“Study of the overall average and aggregate of the system”. (Trehan et al, 2008)

While studying about economic related problem of any country macroeconomic

study is of vital importance.

1.2 Indian Economy- Background

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

plethora of administrative controls. The administrative rules were extremely tedious

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

to political corruption (Bell and Rousseau, 2001)

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

impeded growth. (Debroy, 2004)

With the start of eighties Indian economic started to change tracks from fiscal

conservatism it started to adopt an expansionary policy. The drivers of this change

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were primarily aids from World Bank and International Monetary Fund and

secondarily there were some liberalization in trade and exchange regime

(Srinivasan, 1996). As a result of these developments growth plunged to 5.6 %( India

statistics handbook, 2010) during this decade, but as mentioned this growth was

primarily pillared on foreign aid and debt as a result macroeconomic balances

continued to get disturbed throughout the decade.

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

government headed by Prime Minister P. V. NarsimhaRao and finance minister Man

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

reforms and rethinking of the pre-crisis policy regime. (Kbalilzadeh-Shirazi J and

Zagha, 1994)

1.2.1 Measures taken by government at times of crisis

The government took certain precautionary as well as discretionary steps in order to

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

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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:

Recommendations of tax reform committee was adopted (TRC, India, 1991)

External Sector:

Custom duties were lowered from pre-existing rates

foreign investment were encouraged by introducing lucrative investment

schemes

Emphasis on building foreign reserve

Industry:

Licence era of 1947 to 1990 was brought to an end

Reduction in industries reserved for public sector

Openness to foreign technology

Disinvestment of non performing public sector enterprises

Financial Sector:

Reserve requirements for banks (CRR and SLR) were reduced

Interest rates were gradually relaxed to promote business

Stock exchange board of India was legislatively empowered.

The National Stock Exchange was established

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Government control over capital issues was abolished

Public Sector:

Start of Disinvestment programmes

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.

1.3 Current Problems with Indian Economy

India is a developing economy. The major problems which could be termed as a

hindrance in India’s growth towards a developed economy could be termed as

1. Infrastructure related

Power problem (the current power production is inadequate

compared to requirement)

Quality of roads is below standard

Urban infrastructure needs mammoth growth

2. Weak agriculture performance: agriculture performance is under downslide

(world bank report, 2010)

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3. Lower physical quality of life

Adult literacy rate in India is 66%. (UNDP report, 2009)

Lack of basic facilities, around 12% of the population lacks access to

safe water, 65% of the population lacks access to essential drugs and

69% of the population lacks access to sanitation.

The infant mortality rate is high (70 per thousand)

In many of these physical quality of life indicators, India’s Record is worse than that

of sub-Saharan Africa.

4. Labour market rigidities

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

section would describe how fiscal deficit occurs.

1.4 Concept of fiscal deficit

To understand the concept of fiscal deficit it is necessary to understand the terms

related with budget as fiscal deficit is a budgetary term. To an extent the success of

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a country in handling limited resources depends on how efficiently it is managed.

Budget is an approach towards economic management because it clearly makes a

list of all planned expenses and revenue of the state (Sullivan and Sheffrin, 2004).

1.4.1 Benefits of budget

It helps in planning and formalizing goals on regular bases

It creates early warning system for potential problems

It motivates the organisation to meet plan objectives

It could be said that budget is an aid to management and not a substitute for

management (parkin, 2008)

Keeping in mind all these factors it becomes very important for a country to

successfully manage its budget.

1.4.2 Formation of deficit

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

government takes to finance the deficit in budgets).

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1.5 Aim of the research

The main aim of a developing nation is to invest in infrastructure, power, primary

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

(rakesh,2000). Fiscal deficit leads to an unpleasant scenario where the government

finance its excess expenditure over revenue by means of borrowing. Borrowing

leads to payment of interest as well as the payment of interest. Continuous

borrowing leads to a situation analogous to atomic chain reaction, this chain reaction

if not moderated could be explosive.(Mihir, 2000). Quite a few researchers have

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

thinking process from basics and then carry it forward.

The main objective of this research is to find answers of two main questions.

“Why does fiscal deficit occurs and keeps on increasing”

(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

expenditure is done, which are the black hole of expenditure)

“How the fiscal deficit could be reduced / controlled”

(This question would try to find the ways how can the holes which are draining the

economy be filled to stop fiscal deficit happening)

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1.6 research design

Thisresearch is divided into five Chapters. Chapter one provides a brief discussion

about economics, background of Indian economy, current problems of India, concept

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

analysis. In chapter three, the Research Methodology will be examined, explaining

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

be drawn and limitations as well as recommendations for future research will be

suggested in the final chapter five.

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2. Literature review

2.1 Fiscal deficit an overview

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

counted (see appendix 1). For comparative purposes it is expressed as a percentage

of Gross Domestic Product (GDP) of a nation.

Fiscal deficit holds an important position in macroeconomics theory literature

because they have substantial effect on indicators of macroeconomic performance of

a country like inflation, growth and as a consequence of these imbalances debt

financing and debt management also becomes necessary. The stability of

macroeconomics environment of a country is not only critical for business it is also

important for country’s overall competitiveness in global spectrum (Fischer, 1993

global competiveness report). There are number of macroeconomic indicators like

GDP, inflation, trade balance, current account balance, foreign exchange reserves,

foreign investment inflows. Fiscal deficit itself is an important macroeconomic

indicator and it has direct effect on other macroeconomic indicators.

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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

to react to business cycles ( expansion, peak, contraction, trough and recovery of

economic activities in a country) and this in turn increases economic and political

instability in a country (Lucas, 1988)

2.2 Various effects of fiscal deficit

Fiscal deficit is associated with various macroeconomic indicators like inflation,

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.

2.2.1 Effect of fiscal deficit on inflation

Monetarist argue that inflation is a monetary phenomenon while the structuralist

school stress focus on structural factors prevalent in a less developed country to

explain inflationary processes ( Ashra et al, 2004). Enlargement of fiscal deficit in

relation to the overall economy increase money supply which in turn leads to

accelerated inflation. This could be summarised as follows:

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Figure2.1. How positive fiscal deficit increases inflationary tendencies

Source: Ashra et al, 2004

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

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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

declines inflation by 4.5 per cent.

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

process of deficit-induced inflation and inflation-induced deficits. Aghelvi, 1977 did

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

crisis and poor investment performance and growth in developing countries.

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.

2.2.2 Effect of Fiscal deficit on growth

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

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Bevan, 2005). While theoretical aspect points out the constraint in government

budget where change in one aspect needs to be countered by changes elsewhere.

Empirical literature clearly supports the fact that variations in subset items are growth

neutral (gemmel, 2001). Eminent group of economists like Easterly et al.

(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

countries the relation is non-linear.

2.2.3 Effect of Fiscal deficit on trade deficit

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

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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.

2.2.5 Democracy and subnational effect on 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

upcoming election; this modifies the planning of government. The incumbent

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).

In democracy a political bias exists in favour of deficit finance. (Buchanan and

Wagner,1977). Politicians at periodic bases face test of their incumbency. The

budgetary policies can enhance or retard the likelihood of their remaining in office.

Generally tax reductions and increase in expenditure strengthen a politician’s base

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.

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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

compared to unitary nations in the developing world.

2.2.5.1 Is a strong central government a solution for fiscal deficit in subnational governance?

As a solution large number of researchers had advocated a strong central

governments with the authority to impose hard budget constraints on sub nations by

monitoring and regulating subnational debt ( Poterba, 1994) If at central government

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 discipline in a federation. Wibbels, 2003 argues to the above discussed

statement he opines that if the central authority is strong enough to impose discipline

on subnational governments then there are chances of the central government itself

getting disciplined by market considerations of efficiency. Khemani, 2007 in his work

found that if the government in centre and state is of same political party then the

level of deficit is more compared to states governed by opposing political parties.

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

indirectly controlled by central government (same political party).

2.2.5.2 Subnational governance in Indian context

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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

limited compared to high yielding tax assigned to the central government.

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

also fall ultimately on central government (Mccarten,2003) Nooruddin and Chibber,

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.

2.3 Sustainability of fiscal deficit

Fiscal deficit has a strong effect on macroeconomic scenario of a nation. If ignored it

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

importance for a country to adopt a sustainable fiscal deficit policy.

22

2.3.1 Sustainability of global fiscal deficit

Government’s policies that influence various macroeconomic conditions are termed

as fiscal policies. These policies affect macroeconomic indicators and government

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

linking the primary deficit.

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

beyond 3% except in exceptional circumstances (Eichengreen, 1997). If problems

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)

2.3.2 Sustainability of Indian fiscal deficit

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

to argue that because of roles of invisibles in India’s balance of payment the

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

deficit to fiscal deficit.

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

unsustainable. Rajaraman and Mukhopadhay, 2000 after performing stationarity test

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

finance an important issue (Goyal et al, 2004).

As said above Indian debt-GDP ratio is not on sustainable path to bring it on

sustainable path Indian government passed the Fiscal Reforms and Budget

Management Act (FRBMA) in 2003, it is an important institutional mechanism formed

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

growth vol. 1, 2008)

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,

and unless it is handled properly by reducing it in an planned and determined way it

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

transfers and interest payments (Roy and Tisdell, 1998)

2.4 measures to achieve sustainable fiscal deficit

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

inconsequential, such an equivalence arises because today’s deficit financing acts

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.

2.4.1 Fiscal decentralization

Fiscal decentralization occurs through transfer of monetary powers or authorities for

public spending and revenue collection from central to local government (Neypati,

2010). Fiscal decentralization is considered to be a feature of economic reform

programme because of certain points (1) since local governments have better local

information decentralization of spending increases efficiency and therefore better

chances are there of it matching with the preferences of citizens (Oates, 1972,

1993) (2) fiscal decentralisation increases accountability and transparency of public

goods (De Mello 2000a) (3) tax payers are more comfortable with accountable local

governments (Wasylenko, 1987) with all these factors it appears that fiscal

decentralization can become an important tool to reduce debt.

2.4.1.1 Problems with fiscal decentralization

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

countries and found that fiscal decentralization helps in reduction of government

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

size of country, extent of privatization in economy, local government’s ability to raise

revenue, transparency and local administration effectiveness.

2.4.2 Tax reforms

To achieve fiscal consolidation tax reformation is critical. The reformation in tax

system is also important because it minimizes distortions in the economy and

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

investment in the wake of economic reforms, pay revision to government employees

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

administration. They debated to modernize tax administration of states. Mukesh et al

27

(2002) discussed about the cause of fiscal indiscipline at state level and cited weal

intergovernmental fiscal relations as prime cause leading to fiscal indiscipline among

states.

2.6 Summary of literature review

Factors as discussed in the literature review

Major points from literature review

Major authors whose work have been referred

Use of the point in this research

Effect of fiscal deficit on inflation

Most of the literature suggests that positive fiscal deficit gives rise to increased prices that is inflation

Ashra et al, 2004Fischer et al, 2002Catao and Terrones, 2005

Used in concept building

Effect of fiscal deficit on growth

The literature is majorly in favour that there is a linear relationship between fiscal deficit and growth

Miller and Russek, 1997Kneller et al, 2000Adam and Bevan, 2005

Would be researched

Effect of fiscal deficit on trade deficit

Fiscal deficit and trade deficit are so closely connected to each other that they are termed as twin deficits, majority of the literature suggests that there is a positive statistical relation between trade deficit and fiscal deficit

Milne, 1977Rosensweig and Tallman, 1991 & 1992Arunro and Ramchander, 1998

Used in concept building, one aspect of this would be researched in sources of indirect taxes.

Effect of subnational governance on fiscal deficit

More than majority of the literature supports the fact that subnational government helps in curbing the fiscal deficit

Rodden, 2002Wibbels, 2003

Would be analysed in this research

Does strong central governance help in reducing fiscal deficit ?

In this category also more than majority of the researchers support the that strong central governance helps in reducing fiscal deficit

Samuel,200Wibbels, 2003Khemani, 2007


Subnational governance in Indian context

Gives an overview how subnational government factor acts in context of Indian fiscal deficit

Sinha, 2004Nooruddinn and Chibber, 2008


Sustainability of global fiscal deficit

Gives an overview on sustainability of fiscal deficit

Fischer, 1995Uctum and Wickens, 2000Blanchard et al, 1990


Sustainability of Indian fiscal deficit

Gives an overview on sustainability of Indian fiscal deficit

Shirazi and Zagha, 1994Virmani, 2001

Would be Analysed in this research

28

Parikh and Rao, 2006Buiter and Patel, 2006

Fiscal decentralisation

Fiscal decentralization helps in reducing and correcting fiscal deficit and thus it could be the key for solving fiscal deficit

De Mello, 2000Neypati,2010


Problems connected with fiscal decentralization

Certain researches find that fiscal decentralization has negative relation with fiscal deficit this section looks into some of the contrary findings

Tanzi, 2000Neypati, 2004Jin and Zou, 2002Zang, 2006


Tax reforms Tax reforms could be the key in funding the fiscal deficit, this section looks into the literature about this aspect

Bird,1993Ahmad and Stern, 1991Rao, 2005


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

Noor, 2008 suggested two basic methodological traditions of research 1) positivism

and 2) post positivism. Under positivism a researcher collects the facts and then

builds up an explanation of social life by arranging such facts in a chain of causality

(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

post positivism under qualitative method of analysis.

Quantitative research refers to the type of research that is based on the

methodological principles of positivism and neopositivism. In quantitative analysis

quantitative measurement is applied therefore statistical analysis is often used by

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

numerous methodological approaches which in turn are based on diverse theoretical

principles. Qualitative research explores social relationship and describes reality as

experienced by the respondents (Adam et al, 2007)

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

which could play part in achieving sustainable fiscal deficit).

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

one of the most common forms of research designs in management research

(Tharenou et al, 2007) they further add that a case study is an in depth, empirical

investigation of a single instance or setting to explain the process of a phenomenon

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

one case at a time may be conducted.

The design chosen for a research should suit the particular research question.

(Tharenou et al,2007).One of the benefits of using a case study design is that it

affords highly in depth analysis of specific empirical issues. (Tharenou et al, 2007).

Case studies give researchers an opportunity to explore or describe facts or

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

individuals or organisations, by this study a researcher deconstructs and

subsequently reconstructs various aspects of a phenomenon. Considering these

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:

Why a Case Study Design Should be How it is Relevant in this Research

31

Used

The aim of the research is to find

answers for question ‘how’ and ‘why’

The focus of this research is to find why

fiscal deficit isincreasing and how

interventions could be made to curb

fiscal deficit.

The researcher cannot manipulate the

behaviour of those involved in the study

since fiscal deficit is a macroeconomic

phenomenon and the figures and facts

are real and not based on observations

case study approach becomes suitable

for research

The researcher wants to cover set of

circumstances or facts that surround a

particular event because the researcher

believes they are relevant to the

phenomenon under study

This research looks into various factors

contributing towards fiscal deficit and

also looking into possible interventions

for sustainable fiscal deficit.

Source: Yin (2003)

Hartley, 1994 and McCutcheon Meredith, 1993 have suggested that case study

involves the following characteristics:

(1) Researcher gathering a large volume of data from within an organisation to

develop the clearest possible picture of a phenomenon

(2) Data comes basically from two sources (a) primary source like observations or

interviews of peoples involved (b) secondary sources, such as documents of records

(3) Focussing on a current condition but using historical data primarily to understand

or substantiate information gathered about the on-going situation.

32

(4) The researcher does not have the compatibility to manipulate events

All these characteristics were found in this research and this makes case study

approach as the most favourable approach for this research.

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.

Quantitative data is used to see theoretical predictions with precise measure of

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

phenomenon under study (lee, 1989)

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

bureaucrats under whose supervision policies once formulated by the governments

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

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.

Name of group Number of persons Purpose of choosing the

33

(symbol used for the

group)

interviewed particular group

Personal from central

government

(Group A) two

The party in central

government is responsible

for making major rules and

regulation regarding

country’s financial status

Personal from state

government

(Group B)

two

The party in state acts in

the same way as the

central government does

in the centre

Bureaucrat from central

government

(Group C) one

Bureaucrat from central

government play important

role in formulating the

rules and regulations

made by the government

Bureaucrat from state

government

(Group D)

three

Bureaucrat from state

government performs the

same role as the central

bureaucrat

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

34

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

research or as a supplement to data one collects (Adam et al, 2007). In research

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

departments like 1) Reserve bank of India 2) Central government of India, official

budget website 3) Finance Ministry of India 4) Planning Commission of India. (Adam

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

ministries and departments of government of India. Data was collected and

organised in forms of numerous charts and graphs to make further analysis.

How secondary data proved to be useful in this research

The secondary data helped in identifying the problem and thereby setting the

objectives of the research.

Secondary data gave a clear insight of the problem and therefore developed

an approach towards the research question.

Analysis of the secondary data helped in to find appropriate research design.

Secondary data helped in finding answers to initial stage research questions.

(Lancaster, 2005)

35

Secondary helped in identifying patterns, these pattern helped in taking the

research to the next level ( Adam et al, 2007)

3.5 Data analysis

The purpose of data analysis is to reduce accumulated data to a workable size by

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

measures) can help to sustain the rising fiscal deficit.

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

advantage of EDA is that it emphasises on visual representation and graphical

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

direction. Therefore in this researchEDA would bring out various component factors

related with fiscal deficit of Indian government (Yin, 2003)

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

considers logic models as an analytical technique consisting of matching empirically

observed events to theoretically predict events. The logic model requires an

36

essential condition to make an agreement by a chain of events over a period of time.

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

fiscal deficit is not organisational in structure. PLLM model is concerned with

program and the mechanism of fiscal deficit occurs in a programmed manner

(components of fiscal deficit depend on variables and by altercating these variable

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.

3.7 Ethical Issues

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

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

37

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

therefore fiscal deficit needs to be looked as a whole as well as at numerous

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.

An important part in this research is looking into possible interventions to attain

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

the meetings conducted.

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

other states too.

4. Findings and Analysis

38

1970-71

1972-73

1974-75

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-090

50000

100000

150000

200000

250000

300000

350000

400000

450000

gross fiscal deficit in crores INR

Figure4.1: fiscal deficit of India from 1970-71 to 2009-10. Source: Reserve bank of India.

39

1970-71

1971-72

1972-73

1973-74

1974-75

1975-76

1976-77

1977-78

1978-79

1979-80

-6

-4

-2

0

2

4

6

8

10

gross fiscal deficit of centregross fiscal deficit of stateGDP at factor cost

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.

1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

0

2

4

6

8

10

12

gross fiscal deficit of centregross fiscal deficit of statecombined deficit of centre and stateGDP at factor cost


40

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

0

1

2

3

4

5

6

7

8

9

10


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.

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

0

2

4

6

8

10

12



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

India is a developing nation and its prime focus is on development. Development

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

gross fiscal deficit which was 5.89% of GDP( fig. 4.4

), 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

4.94% of GDP (fig. 4.5)

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 21st 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

rising budget expenditures of the states (appendix 5)

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

centre and state fiscal deficit seems to be extremely problematic.

4.2 Receipts of government

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-090

50000

100000

150000

200000

250000

300000

350000

400000

450000

direct tax indirect taxnon-tax revenuescapital receipts

year

reve

nue

colle

ction

s in

cror

e IN

R

44

Figure 4.6 Revenue collections by central government of India from different sources. Source: Reserve Bank of India

20%

27%15%

37%

Average of Revenues (all sources) from years 1980-2010

direct tax indirect taxnon-tax revenuescapital receipts

Figure 4.7 Breakdown of average revenues (1980-2010) from various sources of central government. Source: reserve bank of India

17%

32%

23%

28%

Average of Tax Revenues(direct and indiect) from years 1980-2010

personal tax corporate tax excise custom

Figure 4.8 Breakdown of average tax revenues (1980-2010) from various sources of central government. Source: reserve bank of India

45

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-090

50000

100000

150000

200000

250000

300000

350000

400000

450000

non-tax revenuescapital receipts

Years

Reve

nue

Colle

ction

in C

rore

INR

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

by the government by means of various receipts. The major components of receipts

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

comprises mainly of excise and custom (appendix 2) & fig. 4.6

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

receipt it is found that indirect tax makes up 27% of total receipts. Because of the

46

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

of tax covers (appendix 2)

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

need further correction to improve collection from this section of receipts.(appendix

2)

47

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-090

100000

200000

300000

400000

500000

600000

700000

800000

900000

1000000

total receipts of statestotal receipts of centre

Figure 4.10 comparative graphs of receipts of states and centre. Source: Reserve bank of India.

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-090%

10%20%30%40%50%60%70%80%90%

100%

effective collected tax remainig with centre share of state in centre's tax collection

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)

4.3 Expenditure of the government

1980-811982-831984-851986-871988-891990-911992-931994-951996-971998-992000-012002-032004-052006-072008-09

0 200000 400000 600000 800000 1000000

capital expenditurereveue expenditure

Figure 4.12 Expenditure of Central Government (Capital & Revenue expenditure). Source: Reserve bank of India.

49

22%

56%

22%

average of revenue expenditures under major headings from year

1980-2010 (a)

defence expenditureinterest paymentsubsidies

de-fence ex-

pen-di-

ture22%

loans and advances

32%

capital outlay46%

average of capital expenditure under ma-jor headings from year 1980-2010(b)

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

resulted because government has to meet up the requirements by means of loans.

The second biggest revenue eater was found to be subsidies given by the

government on fertilisers and petroleum products. These two factors make up a

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-

elected in the election. In year 2009-10 revenue expenditure on interest payment,

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

financing of fiscal deficit because of gross fiscal deficit.(appendix 4)

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-090%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

on interest paymenttotal expenditure exclud-ing interest payment

Figure 4.14 graph showing % of central government’s expenditure on interest payments compared with total expenditure. Source: Reserve bank of India.

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

in financing its Fiscal deficit is not supposed to do development as it plans.

1970-71

1973-74

1976-77

1979-80

1982-83

1985-86

1988-89

1991-92

1994-95

1997-98

2000-01

2003-04

2006-07

2009-100123456

interest payment & subsidies as % of GDP

interest paymentsubsidies

% o

f GDP

Figure 4.15 Graph showing interest payment and subsidies of central government compared to % of GDP. Source: Reserve bank of India.

4.4 Financing of deficit

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-090

50000

100000

150000

200000

250000

300000

Gross borrowings of centre and state

gross borrowing of statesgross borrowing of centre

Figure 4.16 Graph showing borrowings of centre and state governments to finance debts. Source: Reserve bank of India.

52

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

-100000

-50000

0

50000

100000

150000

200000

250000

300000

350000

400000

external financemarket borrowingother borrowingdraw down of cash balance

Axis Title

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

individual or combination of both; they are either reducing the expenditure or

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 path of correcting fiscal deficit or at least bring it lower levels.

The question stated to both group A and B was how the revenue receipts of the

centre and states could be increased. (appendix 4)

Group A’s response is quoted below

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

revenues their response was.

When the same question was asked to group B they responded:

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

future of capital receipts? Could it be looked to increase in near future”?their

response is quoted below (appendix 3)

When group A was asked about the impact of large number of regional parties

adding up to the woes of fiscal deficit, their response was:

57

When the same question was asked to group B they responded:

4.5 Major findings

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

country). Modernization of direct tax collection is one aspect to look for.

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. (11th year plan, 2008).

Capital receipts are the leading tax generator for the government but it has potential

to perform much better. Innovative schemes by Government can definitely increase

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

interest payment, such a huge percentage of expenditure under these headings is

again because of debt finance, which government undertakes to cover up the gap

between the expenditure and revenues.

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

measures. These measures are stated below:

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.

3) Non performing PSU’s (CPE’s & SLEP’s) should be closed or disinvested.

4) Administrative reform in field of valuation of property and excise tax collection.

5) Direct tax collection should promote user friendly technology.

6) New schemes should be chalked out to increase investment from government

employees under various schemes; this would increase capital receipts of the

government.

7) Subsidy should be reduced from current level in a phased manner.

8) Proper coordination between state and centre is needed to imply various

corrective measures undertaken by the government. The regional parties should

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,

if corrective measures does not work.

60

10) States should look on taking severe measures with state electric board as this

department is eating up a good portion of state’s revenue and its lacklustre

performance is causing problems to industrial growth.

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

or sustained. As summarised in the literature review this research has categorised

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

the research is looking into primary causes.

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

growth was not studied as it required use of intensive statistics.

3) the literature showed effect of subnational governance on fiscal deficit (Person

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

get some tax collection benefits from the centre.

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

increasing fiscal deficit and further measures to curb fiscal deficit.

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.

4.7 Further research areas

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.

Further research could be done keeping in focus these economic parameters.

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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Economic Policy and Poverty Te6. Appendices

Appendix 1. Inflows, outflows in a budget & Formation of Fiscal Deficit

INFLOWS

(1) Revenue Receipts (2+3)(2) Tax Revenue(3) Non Tax Revenue

(4) Capital Revenue (5+6+7)(5) Recoveries on Loans(6) Other Receipts(7) Borrowing and Liabilities

(8) Total Receipts (1+4)

OUTLAYS

(9) Non Plan Expenditure (10+12)(10) On Revenue Account of Which(11) Interest Payment(12) On capital Account

(13) Plan Expenditure (14+15)(14) On Revenue Account(15) On Capital Account

(16) Total Expenditure (9+13)

79

(17) Revenue Expenditure (10+14)(18) Capital Expenditure (12+15)

BUDGET BALANCE

(19) Revenue Deficit (17-1)

(20) Fiscal Deficit (16 – (1+5+6)

(21) Primary Deficit (20 – 11)

Appendix 2. FISCAL DEFICIT OF INDIA AND HOW IT IS FINANCEDyear gross fiscal deficit in Crores INR

1970-71 14081971-72 17271972-73 21791973-74 17331974-75 23021975-76 30291976-77 30821977-78 36801978-79 57101979-80 6392

external finance

market borrowing

other borrowing

draw down of cash balance

1980-81 8299 1281 2679 1862 24771981-82 8666 964 2913 3389 14001982-83 10627 1258 3771 3942 16561983-84 13030 1338 4038 6237 14171984-85 17416 1452 4095 8124 37451985-86 21858 1449 4884 10209 53161986-87 26342 2024 5532 10525 82611987-88 27044 2893 5862 12473 58161988-89 30923 2460 8418 14403 56421989-90 35632 2595 7404 15041 105921990-91 44632 3181 8001 22103 113471991-92 36325 5421 7510 16539 68551992-93 40173 5319 3676 18866 123121993-94 60257 5074 28928 15295 109601994-95 57703 3582 20326 32834 9611995-96 60243 318 34001 16117 98071996-97 66733 2987 19093 31469 13184

80

1997-98 88937 1091 32499 56257 -9101998-99 11334

91920 68988 42650 -209

1999-00 104716

1180 62076 40597 864

2000-01 118816

7505 73431 39077 -1197

2001-02 140955

5601 90812 46038 -1496

2002-03 145072

-11934 104126 50997 1883

2003-04 123273

-13488 88870 51833 -3942

2004-05 125794

14753 50940 68231 -8130

2005-06 146435

7472 106241 53610 -20888

2006-07 142573

8472 114801 14782 4518

2007-08 126912

9315 130600 -39597 26594

2008-09 326515

9603 266539 110740 -60367

2009-10 400996

16047 397957 -13008 0

Appendix 2. RECEIPTS OF CENTRAL GOVERNMENT FROM VARIOUS TAXES

Year Total reciepts

Total expenditure

Direct tax

Personal income tax

Corporation tax

Indirect tax

Excise Duties

Custom Duties

non-tax revenues

capital receipts

1980-81

20291 22768 1893

438 1311 7465 3723 3409 3015 7918

1981-82

23873 25265 2518

459 1970 9024 4181 4300 3482 8849

1982-83

29135 30791 2723

438 2185 10294 4567 5119 4417 11701

1983-84

34117 35534 3131

527 2493 12310

6165 5583 4270 14406

1984-85

39887 43632 3375

697 2556 14276

6625 7041 5815 16421

1985-86

47350 52666 3698

665 2865 17442

7331 9526 6895 19315

1986-87

54655 62916 4023

719 3160 20296

8164 11475 8764 21572

1987-88

62445 68261 4100

603 3433 23915

9423 13702 9022 25408

81

1988-89

73469 79111 6021

1492 4407 27730

10922

15805 9840 29878

1989-90

82316 92908 6028

1088 4729 32321

13096

18036 13947 30020

1990-91

93951 105298 6903

1250 5335 36075

14100

20644 11976 38997

1991-92

104558

111414 10103

1627 7853 39966

16017

22257 15961 38528

1992-93

110306

122618 12075

1831 8899 41969

16367

23776 20084 36178

1993-94

130893

141853 12522

1355 10060 40927

17224

22193 22004 55440

1994-95

159778

160739 18409

3468 13822 49045

21064

26789 23629 68695

1995-96

168468

178275 22287

4318 16487 59652

22176

35757 28191 58338

1996-97

187823

201007 25374

4715 18567 68326

23463

42851 32578 61544

1997-98

232963

232053 27172

3589 20016 68500

25516

40193 38214 99077

1998-99

279549

279340 32120

5760 24529 72532

28581

40668 44833 130064

1999-00

297189

298053 41436

9131 30692 86836

34944

48419 53211 115707

2000-01

326789

325592 49651

23766 25177 87007

49758

34163 55947 134184

2001-02

363806

362310 47703

22106 25133 85828

54469

28340 67774 162500

2002-03

411365

413248 61612

27779 33893 96932

62388

31898 72290 180531

2003-04

475146

471203 76590

30765 45706 110392

70245

34586 76831 211333

2004-05

506382

498252 95944

35443 60289 128854

77241

41811 81193 200391

2005-06

526626

505738 120692

45238 75187 149572

86642

46645 76813 179549

2006-07

583387

583387 169738

62707 106701 181444

92651

62819 83205 149000

2007-08

712671

712671 231509

86518 144660 209615

95992

75382 102317 170807

2008-09

900953

900953 254903

90118 164451 212867

87924

77668 96203 338780

2009-10

1020838

1020838

271047

77249 193433 198835

86052

66792 140279 406341

direct tax

personal income tax

corporation tax

indirect tax

excise duties

custom duties

non-tax revenues

capital receipts

average of receipts from year 1980 to

54176

73341

40433 100715

82

2010

Appendix 3. CAPITAL RECEIPTS FROM MAJOR HEADINGS

year market borrowings

small savings

provident fund

special deposits

recovery of loan

disinvestment reciepts

external loans

1990-91 8001 8309 2002 7716 5712 31811991-92 7510 5654 2258 6670 6021 3038 54211992-93 3676 4373 2952 7144 6356 1961 53191993-94 28928 7157 3716 7568 6191 -48 50741994-95 20326 14447 4134 8262 6345 5078 35821995-96 34001 10104 4918 5295 6505 362 3181996-97 19093 12174 5417 6162 7540 380 29871997-98 32499 20463 8417 7905 8318 912 10911998-99 68988 33035 5737 8130 10633 5872 19201999-00 62076 8979 6579 6526 10131 1724 11802000-01 73431 8316 4922 8452 12046 2125 75052001-02 90812 4173 8070 16403 3646 56012002-03 104126 4621 9326 34191 3151 -119342003-04 88870 4892 110 67165 16953 -134882004-05 50939 5310 -5750 62043 4424 147532005-06 106241 5545 487 10645 1581 74722006-07 114801 5178 5893 534 84722007-08 130600 -11302 3897 5100 38795 93152008-09 266539 1323 4800 9698 2567 96032009-10 397957 13256 5000 4225 1120 16047

Appendix 4. MAJOR HEADS OF EXPENDITURE OF CENTRAL GOVERNMENT

year Revenue expenditure

defence expenditure

interest payment

subsidies

capital expenditure

loans and advances

capital outlay

defence expenditure

total

1980-81 14410 3278 2604 2028 8358 5285 3073 326 22768

1981-82 15408 3844 3195 1941 9857 5658 4199 485 25265

1982-83 18742 4494 3938 2262 12049 7384 4665 527 30791

1983-84 22251 5189 4795 2902 13283 8053 5230 642 35534

1984-85 27691 6324 5974 4038 15941 9194 6747 737 4363

83

21985-86 33924 7021 7512 4796 18742 11087 7655 967 5266

61986-87 40860 9179 9246 5451 22056 12797 9259 1298 6291

61987-88 46174 8861 11251 5980 22087 12793 9294 3107 6826

11988-89 54106 9558 14278 7732 25005 14750 1025

53783 7911

11989-90 64210 10194 17757 10474 28698 16890 1180

84222 9290

81990-91 73516 10874 21498 12158 31782 19652 1213

04552 1052

981991-92 82292 11442 26596 12253 29122 17723 1104

34905 1114

141992-93 92702 12109 31075 10824 29916 16297 1338

55473 1226

181993-94 108169 14978 36741 11605 33684 20454 1308

96867 1418

531994-95 122112 16426 44060 11854 38627 23736 1489

16819 1607

391995-96 139861 18841 50045 12666 38414 24316 1409

98015 1782

751996-97 158933 20997 59478 15499 42074 27878 1419

68508 2010

071997-98 180335 26174 65637 18540 51718 34193 1752

69104 2320

531998-99 216461 29861 77882 23593 62878 44037 1884

110036 2793

401999-00 249078 35216 90249 24487 48975 24938 2403

711855 2980

532000-01 277839 37238 99314 26838 47753 23008 2474

512384 3255

922001-02 301468 38059 10746

031210 60842 34284 2655

816207 3623

102002-03 338713 40709 11780

443533 74535 31668 2910

114953 4132

482003-04 362074 43203 12408

844323 109129 28768 3415

016863 4712

032004-05 384329 43862 12693

445957 113923 28910 5233

831994 4982

522005-06 439376 48211 13263

047522 66362 11337 5502

532338 5057

382006-07 514609 51682 15027

257125 68778 8524 6025

433828 5833

872007-08 594433 54219 17103

070926 118238 11298 1069

4037462 7126

712008-09 803446 73600 19269

4129243

97507 14202 83305

41000 900953

84

2009-10 897232 86879 225511

111276

123606 12339 111267

54824 1020838

Appendix 5. GROSS FISCAL DEFICIT OF STATE

year receipts in crore INR




1970-71 901 1980-81 3713 1990-91 18787 2000-01 879231971-72 1050 1981-82 4063 1991-92 18900 2001-02 942601972-73 1349 1982-83 4986 1992-93 20891 2002-03 997261973-74 1470 1983-84 6359 1993-94 20364 2003-04 1206311974-75 1243 1984-85 8199 1994-95 27308 2004-05 1077741975-76 1102 1985-86 7521 1995-96 30870 2005-06 900841976-77 1515 1986-87 9269 1996-97 36561 2006-07 775091977-78 2038 1987-88 11219 1997-98 43474 2007-08 1079581978-79 2643 1988-89 11672 1998-99 73295 2008-09 1126531979-80 2873 1989-90 15433 1999-00 90099 2009-10

Appendix 6.PATTERN OF RECEIPTS BY STATE GOVERNMENT

year total revevenue receipts

tax receipts

non-tax receipts

total capital receipts

total receipts

1990-91 66467 44586 21881 24693 911601991-92 80536 52604 27932 27238 1077731992-93 91090 60448 30643 30073 1211631993-94 104997 68269 36728 28489 1334861994-95 120303 78832 41472 43190 1634931995-96 134507 90802 43705 42805 1773121996-97 150041 103604 46436 42011 1920511997-98 166820 118699 48121 58907 2257271998-99 172787 125328 47460 85363 2581511999-00 202927 143272 59655 101925 3048522000-01 232509 164314 68195 109705 3422142001-02 249422 175415 74007 115714 3651362002-03 273674 193474 80200 140866 4145392003-04 309187 221117 88074 205641 5148282004-05 363512 260577 102935 200148 5636602005-06 431021 306332 124690 164607 5956282006-07 530556 372841 157714 142802 6733582007-08 628742 441526 187216 134625 7633672008-09 719835 509957 209879 175472 895307

85

Appendix 7. TOTAL EXPENDITURE OF STATES AND % PAID IN AS A PART OF INTEREST

year total expenditure

on interest payment

1990-91 91088 86551991-92 107929 109441992-93 119335 132101993-94 133849 158011994-95 159147 194131995-96 174632 218391996-97 199254 253871997-98 223924 297991998-99 261419 354411999-00 307977 446412000-01 339835 509852001-02 368680 615962002-03 410249 690272003-04 514302 803962004-05 553428 864212005-06 561682 840242006-07 657280 931642007-08 787489 1028782008-09 892783 108383

Appendix 8. COMBINED DEFICIT OF CENTRE AND STATE IN CRORES INR

year gross fiscal deficit



1980-81 10780 1990-91 53580 2000-01 1998521981-82 10608 1991-92 45850 2001-02 2264251982-83 11116 1992-93 52404 2002-03 2349871983-84 15971 1993-94 70952 2003-04 2345011984-85 22013 1994-95 71639 2004-05 2347211985-86 22174 1995-96 77671 2005-06 2395601986-87 30789 1996-97 87244 2006-07 2304321987-88 32432 1997-98 110743 2007-08 2478311988-89 35887 1998-99 157053 2008-09 2444601989-90 43135 1999-00 184826

86

Appendix 9. GROSS BORROWING OF CENTRE AND STATE

year gross borrowing of centre

gross borrowing of states

1990-91 8989 25691991-92 8919 33641992-93 13855 38051993-94 50388 41451994-95 38108 51231995-96 40509 62741996-97 36152 65361997-98 59637 77491998-99 93953 121141999-00 99630 137062000-01 115183 133002001-02 133801 187072002-03 151126 308532003-04 147636 505212004-05 106501 391012005-06 160018 217292006-07 179373 208252007-08 188205 677792008-09 175780 59062

Appendix 10. LIABILITIES ON CENTRE AND STATE

year total internal liability of centre

total external liability of centre

total liabilty of centre

state total liability

1990-91 283033 31525 314558 1281551991-92 317714 36948 354662 1470301992-93 359655 42269 401924 1683651993-94 430623 47345 477968 1878751994-95 487682 50929 538611 2164731995-96 554983 51249 606232 2495351996-97 621437 54239 675676 2858981997-98 722962 55332 778294 3308161998-99 834552 57254 891806 3995761999-00 962592 58437 1021029 5095292000-01 1120596 65945 1168541 5941472001-02 1294862 71546 1366408 690747

87

2002-03 1499589 59612 1559201 7864302003-04 1690554 46124 1736678 9133762004-05 1933544 60877 1994421 10291742005-06 2165902 94243 2260145 11678662006-07 2435880 102716 2538596 12508192007-08 2725395 112031 2837426 13370442008-09 3014441 121634 3136075 14511692009-10 3357771 137681 3495452

Appendix 11. FISCAL INDICATORS OF THE CENTRAL GOVERNMENT, STATE GOVERNMENT AND COMBINED ALONG WITH GDP GROWTH AND ACCEPTABLE FISCAL DEFICIT AND DIFFERENCE FROM ACCEPTABLE

Year

gross fiscal deficit of centre

gross fiscal deficit of state

combined deficit of centre and state

GDP at factor cost

accebtable GDP

difference from accepatable limit

year

gross fiscal deficit of centre

gross fiscal deficit of state

combined deficit of centre and state

GDP at factor cost

accebtable GDP

difference from accepatable limit

1990-91

7.84

3.3 9.41 5.3 3 6.41 2000-01

5.65

4.18

9.51 4.4 3 6.51

1991-92

5.55

2.89

7 1.4 3 4 2001-02

6.19

4.14

9.94 5.8 3 6.94

1992-93

5.34

2.78

6.96 5.4 3 3.96 2002-03

5.91

4.06

9.57 3.8 3 6.57

1993-94

6.96

2.35

8.19 5.7 3 5.19 2003-04

4.48

4.38

8.51 8.5 3 5.51

1994-95

5.68

2.69

7.05 6.4 3 4.05 2004-05

3.99

3.42

7.45 7.5 3 4.45

1995-96

5.05

2.59

6.52 7.3 3 3.52 2005-06

4.08

2.51

6.68 9.5 3 3.68

1996-97

4.84

2.65

6.33 8 3 3.33 2006-07

3.45

1.88

5.58 9.7 3 2.58

1997-98

5.82

2.85

7.25 4.3 3 4.25 2007-08

2.69

2.29

5.25 9 3 2.25

1998-99

6.47

4.19

8.97 6.7 3 5.97 2008-09

6.14

2.12

4.59 6.7 3 1.59

88

1999-00

5.36

4.62

9.47 6.4 3 6.47 2009-10

6.85

median

7.65

average

7.71

Note all figure are in % except year

Reference

Handbook of statistics on the Indian Economy, Reserve Bank of India 2008-09,

(September 15,2009) available at

http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of

%20Statistics%20on%20Indian%20Economy accessed at (18th may, 2010)

89

http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy

http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics%20on%20Indian%20Economy

indian fiscal deficit

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