(IGP) GS Paper 1 - Economic & Social Development - "Fiscal System"

Integrated Guidance Programme of General Studies for IAS (Pre)

Subject - Economic and Social Development
Chapter - Fiscal System

What is Fiscal Policy

Fiscal policy involves use of taxation and government spending to influence economy. In other words, fiscal policy relates to raising and spending money in quantitative and qualitative terms.

Revenue Account Expenditure

Revenue account expenditure is essentially the non-plan expenditure that does not create assets, that is - interest payments, subsidies and public administration. It is synonymous with maintenance and consumption expenditure as also welfare expenditure.

Capital Account Receipts

Capital account receipts are recoveries of loans and advances made by the Union Government to States, UTs and PSUs; fresh borrowings from inside the country and from abroad; disinvestment proceeds etc. As is clear from above, some of them are debt and some are non-debt.

What is Revenue Deficits

Revenue deficit is the difference between the revenue receipts on tax and non-tax sides and the revenue expenditure.

Revenue Expenditure

Revenue expenditure is synonymous with consumption and non development, in general. But in the case of India, the social sector expenditure flag ship schemes like NREGA is in the revenue expenditure, though as a part of the Plan expenditure.

Fiscal Deficit

Fiscal deficit is the difference between what the government earns and its total expenditure. That is, the difference between what is received by the government on revenue account and all the non-debt creating capital receipts like recovered loans and disinvestment proceeds; and the total expenditure. It amounts to all borrowings of the government in a given period.

What is Budget Deficit

Budget deficit considers only the difference between the total budgeted receipts and the expenditure. It was abolished in 1997.

Monetised Deficit

Monetised deficit is the borrowings made from the RBI through printing fresh currency. It is resorted to when the government can not borrow from the market (banks and financial institutions like LIC etc) any longer due to pressure on interest rates.

Primary Deficit

Primary deficit is the difference between the fiscal deficit and the interest payments. The concept helps in assessing the progress of the government in its fiscal control efforts.

FRBM Act 2003

Fiscal Responsibility and Budget Management (FRBM) Act 2003 was notified in 2004 with the following salient features

  • annual targets of reduction in deficits, government borrowing and debt

  • Government to annually reduce the revenue deficit by 0.5 per cent and the fiscal deficit by 0.3 per cent beginning fiscal 2004-05.

  • elimination of revenue deficit and reduction of fiscal deficit to 3% of GDP by March 31, 2009.

  • a cap on the level of guarantees and total liabilities of the Government.

  • prohibits Government to borrow from the RBI (primary borrowing) after April 1, 2006. RBI can not print money to lend to the government.

  • on a quarterly basis, that Government shall place before both the Houses of Parliament an assessment of trends in receipts and expenditure.

  • annually present the macro-economic framework statement, medium term fiscal

  • policy statement and fiscal policy strategy statement. The three statements would provide the macro-economic background and assessment relating to the achievement of FRBM goals.

  • Under exceptional circumstances, Government may be compelled to breach targets. In case of deviations, the Government would not only be required to take corrective measures, but the Finance Minister shall also make a statement in both the Houses of Parliament.

Fiscal Consolidation

Fiscal consolidation means strengthening government finances. Fiscal consolidation is critical as it provides macro economic stability; cuts wasteful expenditure; can enable government to spend more on infrastructure and social sectors. Tax reforms, disinvestment, better targeting of subsidies and so on are the hallmarks of fiscal consolidation.

Rangarajan Panel on Public Expenditure

  • 18-member high-level expert committee has been set up under the Chairmanship of Dr C. Rangarajan to suggest measures for efficient management of public expenditure.
  • This committee will see whether the classification of expenditure into Plan and Non-Plan is rational and can be continued

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Public Debt

Public debt includes internal debt comprising borrowings inside the country like market loans; borrowing from the RBI on the basis of treasury bills; and external debt comprising loans from foreign countries, international financial institutions, NRI deposits etc

External Debt & its main component

External debt includes both the government and private debt. External debt consists of:

  • Long-term external debt which is the bulk part
  • NRJ deposits and multilateral loans
  • Commercial borrowings
  • Bilateral loans and
  • Trade credit

Internal Debt

Internal debt includes loans raised by the government in the open market through treasury bills and government securities, special securities issued to the RBI and most importantly, various bonds like the oil bonds, fertilizer bonds etc.

Fringe Benefit Tax

The benefits that are usually enjoyed collectively by the employees and cannot be attributed to individual employees. They are the fringe benefits. They are taxed in the hands of the employer. Examples are transport services for workers and staff, gym, club, etc.

What is Fiscal Drag

A situation where inflation pushes income into higher tax brackets- bracket creep. The result is increase in income taxes but no increase in real purchasing power. This is a problem during periods of high inflation.

What is Merit & Demerit Goods

  • Merit goods are goods like education, health care etc that are important for the society as a whole- that is, they have positive externalities
  • Demerit Goods are those whose consumption should be discouraged. They have negative externalities. Examples of Demerit Goods include: tobacco, alcohol etc. Thirteenth Finance Commission calls them sin goods and wants them to be harshly taxed.

Giffen Goods

They include goods whose demand goes up when the price increases. They are the status markers and exclusivist in nature.

What is Twin Deficits

Budget deficit (fiscal deficit) and current account deficit-the two fuelling each other - are known as twin deficits

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