Fiscal Policy

Definition and Objectives

Fiscal policy is defined as the government's programme of taxation, expenditure and other
financial operations to achieve certain national goals. The objectives of fiscal policy, like those
of other economic policies of the government, are derived from the 'aspirations and goals' of the
society. Since the economic, political and social conditions of the nations vary, the aspirations of
the people and, therefore, the objectives of their fiscal policy may be different. However, the
most common objectives of fiscal policy of different countries are:
i. Economic growth;
ii. Promotion of employment;
iii. Economic stability and
iv. Economic justice or equity.
The emphasis and the order of priority of these objectives may vary from country to country and
from time to time. For instance, while stability and equality get higher priority in the developed
nations, growth, employment and equality get higher priority in the less developed countries.
Whatever the objectives and the order of their priorities, the two basic instruments that are used
to achieve the social goals are taxation and public expenditure.

India's Taxation Policy - 1950-1990

India's taxation policy was formulated primarily to meet the financial needs of the country in the
post-independence period. The most challenging task that India faced was how to mobilize
adequate financial resources to finance the development programmes chalked out in Five-Year
Plans. The financial resources of the country had to be increased four times so that the rate of
capital formation could be stepped up from "5 per cent of the national income to, say about 20
per cent". The problem was that none of the known sources of development finance—taxation,
domestic borrowing, external borrowing or foreign aid had the potentials of yielding adequate
development finance. Taxable potential of the country was very low because of extremely low
level of per capita income. For the same reason, the scope of domestic borrowing was much
lower. Since India's repaying capacity was incredibly low, she could hardly find lenders abroad.
What India could manage in a considerable measure was 'external assistance' which accounted
for 22.4 per cent of the Second Plan and 28.2 per cent of the Third Plan outlays, though it
declined drastically in the subsequent plans. Foreign aid too, however, proved to be too small to
achieve the target rate of capital formation. Therefore, India had to rely on her domestic sources
howsoever meager they were. It was under these circumstances that the Government of India
formulated its taxation policy.

Formulation of Tax Policy

The tax policy that existed during 1950-1990 was the result of recommendations of dozens of tax
enquiry committees and review panels and deliberations on the recommendations in the
Parliament. The tax policy was formulated, reformulated and reformed several times with view
to making it fair, equitable and efficient. The efforts to formulate such a tax policy began in the
early 1950s with the appointment of a number of enquiry and reform committees one after
another, as listed below.
1. Taxation Enquiry Committee (TEC) in 1953-54 to suggest suitable tax measures for
mobilizing additional tax revenue.
 2. Nicholas Kaldor Committee, under the chairmanship of Prof. Nicholas Kaldor, a
renowned tax expert of Britain, was set up in 1956 to suggest new tax measures to
augment government revenue.
3. Direct Taxes Administration Committee (Tyagi Committee) was appointed in 1958 to
suggest measures for
a. A scheme of integration of direct taxes,
b. Preventing tax evasion and
c. Simplifying the procedure of tax compliance.
4. The Committee on Rationalization and Simplification of the Tax Structure
(Bhoothalingam Committee) was set up in 1967 to suggest measures to reform the tax
system and to prevent tax evasion.
5. Direct Taxes Enquiry Committee (Wanchoo Committee) was appointed in 1971 to
suggest tax reform measures to prevent tax evasion.
6. Indirect Taxation Enquiry Committee (Jha Committee) was appointed in 1976 to find and
examine the sources of anomalies in the indirect tax system and to explore the possibility
of implementing Value Added Tax (VAT) system in place of excise duties.
7. Direct Tax Laws Committee (Choksi Committee) was set up in 1978 to suggest measures
to simplify and rationalize tax laws and to improve their implementation.

Basic Functions of Taxation Policy

A tax policy is supposed to perform multiple functions, depending on the needs of the country.
India's taxation policy has been changing from time to time in the process of tax reforms.
However, India's taxation policy has, in general, been designed to perform two basic functions:
1. Revenue Function. Revenue collection has been the primary objective of India's tax policy. In
pursuance of its revenue objective, the Central government and also the state governments used
their taxing powers extensively and intensively. As regards the extensive use of taxes, the
governments cast their tax net as far and wide as possible. The Centre imposed five new taxes—
estate duty, wealth tax, gift tax, expenditure tax and capital gains tax during the 1950s.
Progressive and high tax rates were imposed in case of both direct and indirect taxes. Both direct
and indirect tax rates were, in general, revised upwards intermittently. Central excise duty was
extended to all imaginable non-agricultural products. Extension of excise duties in India was
'unprecedented'. Prohibitively high import duty was imposed on almost all items of imports. The
state governments on their part, imposed several new taxes, in addition to sales tax, viz.,
agricultural income tax or large holding tax, surcharge on cash crops, profession tax, tax on
urban property, sales tax on motor spirit (petrol), motor vehicle tax, tax on passengers and goods,
entertainment and betting tax, state excise on alcohol and narcotics, though many of these taxes
did not prove revenue productive. As regards the intensive use of taxes, tax rates were hiked
almost every alternate year, more so the rates of excise duty. The upward revision of excise duty
in India was 'unparalleled'. As a result, excise duty rates increased manifold between 1960- 61
and 1971-72. For example, excise duty on synthetic and artificial silk increased by 2232%, on
vegetable product (vanaspati) by 1428%, on matches 737%, cigars and cigarettes by 545%, on
kerosene by 350%, on cotton cloth (A) by 280% and on tea by 174%.
Another important feature of India's taxation policy prior to 1975-76 was to make income tax
rates highly progressive with increased tax rates on all the income slabs, though exemption limit
was raised too. Consequently, income tax rates for higher income groups had risen so much that
it amounted to almost confiscation of income beyond a certain level. For example, in 1973-74,
marginal rate of personal income tax on an income of Rs. 500,000 was 89% and on incomes over
Rs. 10,00,000, the tax rate was 95.7% and with surcharge added, the marginal tax rate for the
latter category rose to 97.75%. The corporate income tax rate was raised from 35% in 1957 to
45% in 1966 and to 55% in 1978-79. With surcharge tax added, the .corporate tax rate in 1978-
79 rose to 61%.
2. Regulatory Function. Regulatory functions of taxation include:
1. Reducing disparities in income and wealth distribution;
2. Restraining consumer demand with a view to containing inflation;
3. Promoting savings and investment and
4. Shifting investment from non-essential and non-priority sectors to priority sectors.
In pursuance of these goals, progressive tax rates were imposed; excise duties were enhanced
more and more on the so-called luxury goods; incentives were provided for savings and tax
holidays were granted for new investments. It is noteworthy that revenue and regulatory
functions of taxes work together and it is extremely difficult to separate the effects of the two
functions.

Taxation Policy Reforms (1991)

The taxation policy that existed in India between 1950 and 1990 had a number of defects and
anomalies which defeated many objectives of taxation policy. Ironically, the anomalies in India's
tax system continued to grow, tax evasion increased at an increasing rate, tax-evaders continued
to thrive and inequity in taxation continued to widen in spite of volumes of suggestions made by
the expert committees for reforming the tax system and their suggestions implemented partially
or wholly. One does not know for sure why tax reforms attempted over a period of 35 years
between 1955-56 and 1990-91 failed to yield the intended results. One does not know whether it
was due to lack of wisdom on the part of the committees or their suggestions lacked foresight or
that the suggestions were not implemented in, letter and spirit or follow up was too poor to make
implementation effective or the administrative machinery was too inefficient and corrupt to
implement the reform measures effectively or all of these factors worked in unison. However,
India's tax system remained beset with many dangerous anomalies. Let us have a brief look at
India's taxation policy prior to 1991.

Anomalies in India's Tax Policy: The Tax Reform Committee (TRC) pointed out the defects
and anomalies in India's tax system. In its opinion, India's tax system has grown over time to
become inefficient, inequitable, regressive, unjust, cumbersome and difficult to administer. Some
of the major defects and anomalies of India's tax system till 1991, as pointed out by the TEC are:
1. Very high tax rates. Central tax rates in India were much higher compared to the average
tax rates in comparable countries. This had harmed the economy, the society, the
taxpayers and the administration. High rates of income tax, company tax and excise
duties were solely responsible for the rampant tax evasion in the country. According to
the TRC, "High tax rates... without indexation and lack of effective enforcement are the
main factors contributing to large scale tax evasion. Lack of effective enforcement means
very little fear of being detected and punished".
2. Tax system of cascading nature. All indirect taxes are of cascading nature. Tax
cascading means taxes piling on taxes and tax on tax so that actual tax burden borne by
 the society is much higher than one calculated on the basis of the tax rates. In the absence
of tax cascading, the actual tax burden on the society would be equal to the calculated tax
burden. Apart from excess tax burden than stipulated, tax cascading distorts the price
structure and, thereby, the resource allocation.
3. Administratively complex tax system. The tax system over time has become so complex
that it is extremely difficult to understand and administer. Complexity arises due to
multiplicity of tax laws, provisions and sub-provisions, sections and sub-sections with
respect to definition of tax base, exemptions and concessions. Even the tax law experts
find it difficult to interpret the laws to their own satisfaction, let alone the tax-payers. The
complexity of the tax system and tax laws gives tax administrators ample opportunity to
interpret the law in their own way with a view to harass the tax payers with the aim of
extracting a share in the concessions and making money. This, practice is ubiquitous in
all the tax departments. One is flabbergasted to come across the news, 'CBI raids the
houses of tax officials'.
4. Anomalies in individual taxes. Apart from pointing out the defects in the tax system as a
whole, the TRC pointed out the anomalies in the individual taxes. In this regard, we will
confine our discussion to three major taxes, viz., personal income tax, import duties and
excise duties. The TRC did not find much against the corporate income tax except that its
effective rate was very high at 51.75 per cent.
a. Personal income tax has 'serious anomalies and inequities'. It is anomalous
because it provides 'tax shelters' to the members of parliament, central
government ministers, a section of government officials and top executives of
private firms by leaving their perks tax-free. There is no rationale for not taxing
perks which account for a considerable proportion of their real income. It is
iniquitous because it discriminates between different categories of tax payers. For
example, the salary income of the government servants has a lower tax burden
than other categories of salary earners because the former category is provided
housing at nominal rent. Personal income tax is regressive because, according to
TRC, at 1990-91 prices, the tax payers with incomes between Rs.50, 000 and Rs.
100,000 had the highest income tax burden and those with incomes above Rs.500,
000 had the lowest tax burden.
b. Import duties had, according to the TRC, the following anomalies:

i. the average rate of import duty (125%) was much higher than
international standards,
ii. tariffs were widely dispersed and complex, and administratively
cumbersome,
iii. import tariffs had a multiple rate system—basic, auxiliary as well as
additional and
iv. Tariffs had a complicated system of concessions granted by notification
which made the system not only administratively inefficient but also
 created room for arbitrary use of discretionary powers by the customs
officials.
c. Excise duty, the largest contributor to the central revenue, had the following
defects:
i. it had unimaginably complex multiple rate system for a commodity
classified under different categories,
ii. it is of cascading nature as it makes the same commodity taxable at
different stages of its production,
iii. Excise duty fell also on capital goods like machinery, tools, accessories,
office equipment, etc. and
iv. The excise concession for small and tiny sectors encouraged manipulation
of firm's size for the purpose of tax evasion.

Tax Reforms In 1991

Thanks to the foreign exchange crisis of 1990 and the IMF which provided financial help to tide
over the crisis, a Tax Reform Committee (Chelliah Committee) was appointed in 1991 to
examine the direct and indirect tax structure and to suggest measures to (i) improve the elasticity
of tax revenue, (ii) make the tax system fairer and more broad based, (iii) rationalize the direct
tax system by removing its anomalies, (iv) improve equity and sustain economic incentives, (v)
identify new areas for taxation, (vi) improve compliance of direct taxes and strengthen
enforcement, (vii) simplify and rationalize customs so as to improve international
competitiveness of Indian exports and (viii) simplify and rationalize the structure of excise duties
for better tax compliance and to widen the scope for MODVAT (a modified value added tax)
scheme.
Although the basic tax structure of the country remains intact, the Government of India made
sweeping changes in the taxation policy on the recommendations of the TRC. The core tax
reforms and those with far reaching consequences are described here tax-wise.
1. Personal income tax. The rate structure of the personal income tax has been reduced
from about six slab-rates in the 1980s to three slab-rates: 10%, 20% and 30%. The most
significant reform is cutting down the tax rate on the top income bracket from about 67%
in the late 1980s to 30%. This has solved many problems but has made the tax system
regressive. Personal income tax exemption limit is raised almost in every budget
primarily on the basis of inflation rate for different categories of income tax payers.
2. Company income tax. The company tax rate has been reduced to 40% for domestic and
45% for foreign companies. The number of concessions granted to the companies under
Sections 35CCA and 34AC have been withdrawn.
3. Excise duties MODVAT. Excise duty rates have been modified across the board. The
number of classifications of commodities under tax laws has been substantially reduced.
The procedure of excise calculation has been simplified. This makes tax compliance a
much easier task. The process to replace the excise duties with MODVAT is underway.
Most state governments have now adopted MODVAT.
4. Import duties. Import duties which appeared to be "a bewildering picture of
combinations of 'basic' and 'auxiliary' duties" have been simplified. The duty rates have
been slashed across the board so that the weighted-average effective rate comes down
from about 85% to 45% and then to 35% in 2006-07 budget.
Conclusion Taxation is an important instrument for mobilizing saving potential for capital
formation in the public sector. In a mixed economy like India, however, capital formation in the
public sector alone would not be sufficient to accelerate the growth of the economy as a whole.
The taxation policy should, therefore, be so designed that it restrains consumption, increases
savings and encourages investment in productive activities. It is, however, difficult to maintain
such a critical balance in the fiscal policy. Although tax effect on work effort is not certain, it is
generally accepted that taxation does affect the willingness and capacity to save and invest. The
negative effect, however, depends on the rate and nature of taxation. Progressive tax rates are
more of a deterrent to saving and investment than the proportional tax rates. And, direct taxation
has a greater adverse effect than indirect taxation. An attempt should, however, be made to
minimize the adverse effect of taxation with a view to promoting economic activities which is
the basic requirement of developing economies like India. As already discussed, the government
has made sweeping tax reforms in respect of both direct and indirect taxes. However, the reform
process has yet to go a long way to eliminate adverse effect of taxation on business activities.

Fiscal Policy 2009: An Overview

1. The Union Budget 2008-09 was presented in the backdrop of impressive growth in the
Indian economy which clocked about 9 per cent of average growth in the last four years.
This striking performance coupled with significant improvement in fiscal indicators,
during the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 regime
definitely put the country on a higher growth trajectory inspiring confidence in the
medium to long term prospects of the economy. The process of fiscal consolidation
during these years has resulted in improvement in fiscal deficit from 5.9 per cent of GDP
in 2002-03 to 2.7 per cent of GDP in 2007-08. During the same period, revenue deficit
has declined from 4.4 per cent to 1.1 per cent of GDP. In tune with the philosophy of
equitable growth, the process of fiscal consolidation was taken forward without
constricting the much-required social sector and infrastructure related expenditure. This
improvement in the state of public finances was achieved through higher revenue
buoyancy, driven by efficient tax administration and improved compliance which is
evident from increase in the tax to GDP ratio from 8.8 per cent in 2002-03 to 12.5 per
cent in 2007-08.
2. Riding on the path of fiscal consolidation, the Union Budget 2008-09 was presented with
fiscal deficit estimated at 2.5 per cent of GDP and revenue deficit at 1 per cent of GDP.
However after the presentation of the Union Budget in February 2008, the world
economy was hit by three unprecedented crises -- first, the petroleum price rise; second,
rise in prices of other commodities; and third, the breakdown of the financial system.
The combined effect of these crises of these orders are bound to affect emerging market
economies and India was no exception. The first two crises resulted in serious
inflationary pressure in the first half of 2008-09. The focus of the monetary as well as
fiscal policy shifted from fuelling growth to containing inflation, which had reached 12.9
per cent in August, 2008. Series of fiscal measures both on tax revenue and expenditure
side were undertaken with the objective of easing supply side constraints. These
measures were supplemented by monetary initiatives through policy rate changes by the
Reserve Bank of India, and contributed to the softening of domestic prices. Headline
inflation fell to 4.39 per cent in January, 2009. However, the fiscal measures undertaken
 through tax concessions and increased expenditure on food, fertilizer and petroleum
subsidies along with increased wage bill for implementing the Sixth Central Pay
Commission recommendations significantly altered the deficit position of the
Government.
3. The global financial crisis in the second half of the financial year which heralded
recessionary trends the world over, also impacted the Indian economy causing the focus
of fiscal policy to be shifted to providing growth stimulus. The moderation in growth of
the economy and the impact of the fiscal measures taken to stimulate growth can be seen
reflected in the estimates for gross tax revenue which stand reduced from Rs 6,87,715
crore in B.E.2008-09 to Rs 6,27,949 crore in R.E.2008-09. Additional budgetary
resources of Rs.1,50,320 crore provided as part of stimulus package and various
committed liabilities of Government including rising subsidy requirement, provision
under NREGS, implementation of Central Sixth Pay Commission recommendations and
Agriculture Debt Waiver and Debt Relief Scheme for Farmers contributed to the higher
fiscal deficit of 6 per cent of GDP in RE 2008-09 as compared to 2.5 per cent of GDP in
B.E.2008-09.
4. The Country is facing difficult economic situation, the cause of which is not emanating
from within its boundaries. However, left unattended, the impact of this crisis is going to
affect us in medium to long term. The Government had two policy options before it. In
view of falling buoyancy in tax receipts, the Government could have taken a decision to
cut expenditure and thereby live within the estimated deficit for the year. The second
option was to increase public expenditure, even with reduced receipts, to stimulate
economy by creating demand and maintain the growth trajectory which the country was
witnessing in the recent past. The Government took the second option of adopting fiscal
measures to increase public expenditure to boost demand and increase investment in
infrastructure sector. Ensuring revival of the higher growth of the economy will restore
revenue buoyancy in medium term and afford the required fiscal space to revert to the
path of fiscal consolidation.
5. Fiscal Policy for the ensuing financial year: The Interim Budget 2009-2010 is being
presented in the backdrop of uncertainties prevailing in the world economy. The impact
of this is seen in the moderation of the recent trend in growth of the Indian economy in
2008-09 which at 7.1 per cent still however makes India the second fastest growing
economy in the World. The measures taken by Government to counter the effects of the
global meltdown on the Indian economy, have resulted in a short fall in revenues and
substantial increases in government expenditures, leading to a temporary deviation from
the fiscal consolidation path mandated under the FRBM Act during 2008-09 and 2009-
2010. The revenue deficit and fiscal deficit for R.E.2008-09 and B.E.2009-2010 are, as a
result, higher than the targets set under the FRBM Act and Rules. The grounds due to
which this temporary deviation has taken place, are detailed in the Fiscal Policy
Overview above and also in the Macro-economic Framework Statement being presented
in the Parliament. The fiscal policy for the year 2009-2010 will continue to be guided by
the objectives of keeping the economy on the higher growth trajectory amidst global
slowdown by creating demand through increased public expenditure in identified sectors.
However, the medium term objective will be to revert to the path of fiscal consolidation
at the earliest, with improvement in the economic situation.
6. Tax Policy
a. Indirect Taxes: During the first half of the fiscal year, the global spurt in
commodity prices (crude petroleum, food items and metals) led to increases in
domestic prices of essential items and industrial inputs, putting a severe
inflationary pressure on the economy. Hence, the Government took several
measures after the presentation of the Union Budget 2008-09, particularly on the
Customs side, to contain the rising inflation, as detailed below:-
i. Customs
1. On 21.3.2008, to curb the inflationary trends in the economy
arising out of a rise in prices of food items, a sharp reduction was
effected in the import duty rates on various food items such as
semi-milled or wholly milled rice (70% to nil) and crude and
refined edible oils (from 40%-75% to 20%-27.5%). On
01.04.2008, a further reduction was effected in the import duty
rate- on all crude edible oils duty was reduced to nil, and on
refined edible oils duty was reduced to 7.5%.
2. Export duty of Rs 8,000 PMT was imposed on exports of Basmati
rice with effect from 10.5.2008.
3. With effect from 10.5.2008, import duties on crude petroleum was
reduced to nil and on petrol and diesel to 2.5% (earlier 7.5%).
Customs duty on other petroleum products was reduced from 10%
to 5% on 04.06.2008.
4. Import duties were reduced to nil on many iron and steel items as
well as on specified inputs for this sector (zinc, ferro-alloys,
metcoke) on 29.4.2008. Further, in order to increase the domestic
availability and bring about moderation in prices, export duties
were imposed on many items in the iron and steel sector @ 15% ad
valorem on pig iron, sponge iron, iron and steel scrap, iron or steel
pencil ingots, semi finished products and HR coils/sheets, etc.
5. On 08.07.2008, raw cotton was also fully exempted from customs
duties so as to contain the prices of raw cotton and augment the
domestic supply.
ii. Excise
1. With effect from 04.06.2008, excise duty on unbranded motor
spirit (MS) was reduced from Rs 6.35 per litre to Rs 5.35 per litre
and on unbranded high speed diesel (HSD), excise duty was
reduced from Rs 2.6 per litre to Rs 1.6 per litre. In the post-
October stage, while the inflationary pressures on the economy
were subdued, the global meltdown and resultant slowdown of the
Indian economy required review of the existing policy in favour of
maintaining the growth momentum and retaining export markets.
As such, the following policy changes were effected which would
 be reviewed in the ensuing financial year in the light of the
macroeconomic situation particularly the growth of the
manufacturing sector.
2. With effect from 07.12.2008, a fiscal stimulus package was
implemented.
3. As part of this package, Government implemented an across-the
board reduction of 4 percentage points in the ad valorem rates of
excise duty on non-petroleum items, with a few exceptions. Thus
the three major ad valorem rates of Central Excise duty viz. 14%,
12% and 8% have been reduced to 10%, 8% and 4%, respectively.
4. The specific rates of duty applicable to cement and cement clinker
were also reduced proportionately.
iii. Customs
1. Export duties on iron and steel items were withdrawn w.e.f.
31.10.2008.
2. Aviation turbine fuel was fully exempted from basic customs duty
for the benefit of the aviation industry w.e.f. 31.10.2008.
3. In addition, to provide a level playing field to the domestic
industry, some customs duty exemptions provided earlier to
combat inflation, on iron and steel items, zinc and ferro-alloys,
were withdrawn w.e.f. 18.11.2008.
4. As an incentive to the infrastructure sector, the CVD and Special
CVD exemption granted to imports of cement has been withdrawn
w.e.f. 2nd January, 2009 to provide a cushion to domestic cement
industry and boost demand.
5. In the power sector, customs duty on naphtha used for generation
of electricity by electrical generating stations has been fully
exempted w.e.f. 2nd January, 2009 till the end of this financial
year.
iv. Service Tax
1. The refund of service tax paid by exporters on various taxable
services attributable to export of goods has been further extended
to include clearing and forwarding agents services.
2. The upper limit of refund of service tax paid by exporters on
foreign commission agent services has been enhanced from 2% of
FOB value to 10% of FOB value of export goods.
3. Drawback benefit can now be availed of simultaneously with
refund of service tax paid in respect of exports.
 4. In order to mitigate the genuine hardships of goods transport
agencies, eight specified services which are provided to goods
transport agency have also been fully exempted from service tax.
b. Direct Taxes: Over the last five years, widespread reforms have been ushered in
the area of direct taxes. The reform strategy comprises the following elements: -
i. Minimizing distortions within the tax structure by expanding the tax base
and rationalizing the tax rates.
ii. Enabling the tax administration to provide quality taxpayer services and
also enhance deterrence levels. Both these objectives reinforce each other
and have promoted voluntary compliance.
iii. Re-engineering business processes in the Income-tax Department through
extensive use of information technology, viz., e-filing of returns; issue of
refunds through ECS and refund bankers; selection of returns for scrutiny
through computers; e-payment of taxes; establishing a Centralized
Processing Centre and an effective taxpayer information system. These
measures have substantially enhanced the direct tax revenue productivity
from 3.81 per cent of GDP in 2003-04 to an estimated 6.35 per cent of
GDP in 2008-09. Further, the share of direct taxes in the Central tax
revenues is now significantly higher than the share of indirect taxes
resulting in a substantial improvement in the equity of the tax system.
Therefore, the reform strategy in the medium term is to consolidate the
achievements of the past.
iv. Since there is no change in the tax base and rates, the prospects of growth
in direct tax collection in the ensuing financial year will remain unchanged
vis-a-vis the revised estimate for the financial year 2008-09.
7. Contingent and other Liabilities: The FRBM Act mandates the Central Government to
specify the annual target for assuming contingent liabilities in the form of guarantees.
Accordingly the FRBM Rules prescribe a cap of 0.5 per cent of GDP in any financial
year on the quantum of guarantees that the Central Government can assume in the
particular financial year. The Central Government extends guarantees primarily on loans
from multilateral/bilateral agencies, bond issues and other loans raised by various Public
Sector Undertakings/Public Sector Financial Institutions. The stock of contingent
liabilities in the form of guarantees given by the government has reduced from Rs
1,07,957 crore at the beginning of the FRBM Act regime i.e. 2004-05 to Rs 1,04,872
crore at the end of 2007-08. As a percentage of GDP, it has reduced from 3.4 per cent in
2004-05 to 2.3 per cent in year 2006-07 and further to 2.2 per cent for the year 2007-08.
The disclosure statement on outstanding Guarantees as prescribed in the FRBM Rules,
2004 is appended in the Receipts Budget as Annex 3 (iii).
8. Assumption of contingent liability in the form of guarantee by the sovereign helps to
leverage private sector participation in areas of national priorities. In the current situation,
wherein a large number of infrastructure projects are being cleared for implementation
under the Public Private Partnership (PPP) mode, difficulties are being faced in reaching
financial closure due to the current uncertainties in the global financial market. Within
 the given fiscal constraints and with a view to supporting financing of above mentioned
PPP projects, the India Infrastructure Financing Company Limited (IIFCL) has been
authorized to raise Rs 10,000 crore through Government guaranteed tax free bonds, by
the end of 2008-09 and additional Rs 30,000 crore on the same basis as per requirement
in the next financial year. The capital so raised will be used by IIFCL to refinance bank
lending of longer maturity to eligible infrastructure projects. This initiative of the
government is expected to result in leveraging of bank financing to PPP programmes of
about Rs one lakh crore. The likely assumption of contingent liability in the form of
guarantee for 2008-09, including the above mentioned Rs 10,000 crore for IIFCL, will
amount to Rs 36,606 crore which will be 0.67 percentage of GDP during 2008-09, higher
than the target of 0.5 per cent of GDP set under the FRBM Rules. This deviation has
been necessiated in the larger interest of re-invigorating the economy in the background
of the current economic scenario, to stimulate demand and increase investment in
infrastructure sector projects. In the medium term while this may not have a potential
budgetary impact, the additional demand thus created will help restore the economy to its
higher growth path and contribute to higher revenue buoyancy which has shown a slump
in the current financial year due to moderation in the growth in economy.
9. Government Borrowings, Lending and Investments : The Government policy towards
borrowings to finance its deficit continues to remain anchored on the following principles
namely (i) greater reliance on domestic borrowings over external debt, (ii) preference for
market borrowings over instruments carrying administered interest rates, (iii) elongation
of the maturity profile and consolidation of the debt portfolio and (iv) development of a
deep and wide market for Government securities to improve liquidity in secondary
market.
10. In the first half of the current financial year, the government borrowing was in line with
the indicated auction calendar decided upon in consultation with the Reserve Bank of
India. However, due to the need to provide the fiscal stimulus to counter the situation
created by the effects of the global financial crisis, the borrowing calendar of the
government had to be revised in the second half of the current financial year. The gross
and net market borrowings (dated securities and 364- day Treasury Bills) of the Central
Government during 2008-09 (up to February 9, 2009) amounted to Rs 2,40,167 crore and
Rs 1,68,710 crore, respectively. As part of policy to elongate maturity profile, Central
Government has been issuing securities with maximum 30--year maturity. The weighted
average maturity of dated securities issued during 2008-09 (up to February 9, 2009) was
14.45 years which was marginally lower than 14.90 years during the corresponding
period of the previous year. The weighted average yield of dated securities issued during
2008-09 (up to February 9, 2009) was 7.91 per cent and was lower than 8.12 per cent
during the corresponding period of last year.
11. Consequent to the transition to the FRBM Act mandated environment, recourse to
borrowing from RBI under normal circumstances is prohibited. During the year 2008-09
(up to February 7, 2009) the Central Government resorted to ways and means advance to
meet the temporary mismatch in receipts and expenditure for 77 days as compared with
91 days a year ago. The daily average utilization of ways and means advance by the
Central Government was Rs 7,383 crore as compared with Rs 14,498 crore a year ago.
The Central Government also availed of Overdraft (OD) for 24 days up to February 7,
 2009. The daily average of OD was Rs.11,233 crore as compared with Rs 6,381 crore a
year ago.
12. The outstanding balance under Market Stabilization Scheme (MSS) on 1st April, 2008
was Rs 1,70,554 crore. Notwithstanding fresh issuance of Rs 43,500 crore during 2008-
09, the outstanding balance under the MSS declined to Rs 1,05,773 crore mainly
reflecting the change in policy and unwinding MSS through buyback of Rs 47,544 crores.
This was done in order to ease liquidity in the system in the backgrounds of the additional
borrowing plan during the second half of 2008-09 to finance the increased deficit.
13. In order to have prudent management of debt and greater focus on carrying cost as well
as meeting secondary market liquidity, the government has set up a Middle Office which
in due course will merge with the proposed Debt Management Office.
14. Central Government has stopped playing the role of financial intermediary for State
Government for domestic market borrowings and the trends in the current year shows
that this transition has been very smooth resulting in reduction in cost for the State
Governments while at the same time bringing in a sense of market discipline.
15. Government has set up National Investment Fund (NIF) to which the disinvestment
proceeds from Central PSUs are being transferred. This fund is being managed by
professional fund managers. The receipts in the Fund are not reckoned as resources for
the purpose of financing the fiscal deficit. The income from investments under NIF is
used to finance social infrastructure and provide capital to viable public sector enterprises
without depleting the corpus of NIF.
16. Initiatives in Public Expenditure Management : The focus has shifted from financial
outlays to outcomes for ensuring that the budgetary provisions are not merely spent
within the financial year but have resulted in intended outcomes. Initiatives have been
taken to evenly pace plan expenditure during the year and also to avoid rush of
expenditure at the yearend which results in poor quality of expenditure. The practice of
restricting the expenditure in the month of March to 15 per cent of budget allocation
within the fourth quarter ceiling of 33 per cent is being enforced religiously. The
quarterly exchequer control based cash and expenditure management system which inter
alia involves preparing a Monthly Expenditure Plan (MEP) continues to be followed in
select Demands for Grants. The emphasis is on right pacing plan expenditure by ensuring
adequate resources for execution of budgeted schemes. At the same time, steps have also
been taken in the form of austerity instructions to reduce expenditure in non-priority
areas without compromising on operational efficiency. This has resulted in availability of
adequate resources from realized receipts for priority schemes.
17. Delays in receipts of utilization certificate are broadly indicative of poor implementation
strategy, diversion of funds or delay in utilization of funds for intended purposes.
Monitoring of utilization certificates and unspent balances with the implementing
authorities is reviewed at the highest level in the Ministry of Finance. Necessary control
mechanisms have been put in place with the help of the office of the Controller General
of Accounts (CGA) to avoid parking of funds and to track expenditure.
18. A central monitoring, evaluation and accounting system for the 1258 centrally sponsored
schemes and central sector schemes of the Government has been instituted under the
 Central Plan Schemes Monitoring System. All sanctions issued by the Central Ministries
under these schemes are now identified with a unique sanction ID that enables the
tracking of release as per their accounting and budget heads across the different
implementing agencies. This central system is hosted on the e-lekha portal of the CGA.
19. In addition pilots are currently underway in the States of Punjab, Karnataka and
Uttarakhand for testing a system for expenditure filing and direct payment to
beneficiaries under the schemes. The results of the pilot would form the basis of
designing comprehensive IT based Decision Support System and Management
Information System for all the centrally sponsored schemes and central sector schemes.
This initiative assumes special significance in the light of the significant increase in the
social sector spending by the Government.
20. The application software COMPACT has been extended to all civil ministries of the
Government and expenditure data is being uploaded on a daily basis by the Pay and
Accounts Offices on e-lekha. This is a significant step towards faster and accurate
compilation of the accounts for the Government of India and will lead to the development
of a core accounting solution. The monthly and annual Finance and Appropriation
Accounts are regularly updated on the CGA website: www.cgaindia.gov.in.
21. Policy evaluation: The process of fiscal consolidation during the FRBM Act regime has
created necessary fiscal space to undertake much needed social sector expenditure and
provide for higher infrastructure outlays. The performance up to 2007-08 was
heartening. Fiscal deficit was brought down from 4.5 per cent of GDP in 2003-04 to 2.7
per cent in 2007-08. Similarly, revenue deficit was reduced from 3.6 per cent of GDP in
2003-04 to 1.1 per cent in 2007-08. The government was steadfast in following the fiscal
consolidation path which is reflected in the deficit estimates of B.E.2008-09. However,
subsequent to the global meltdown, there was a compelling need to adjust the fiscal
policy to take care of exceptional circumstances through which the economy has been
passing. The result of the fiscal measures taken by the Government for containing
inflation has been positive as is evident from headline inflation dropping from high of
12.9 per cent in August 2008 to 4.39 per cent in January 2009. Similarly the intervention
of the Government has ensured that the economy grows at a healthy rate of 7.1 per cent in
a difficult year when most of the developed economies are facing recession. The fiscal
consolidation process has to be put on hold temporarily. The process of fiscal
consolidation will be back on track once there is an improvement in economic conditions.