FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT ACT
For a sustainable fiscal policy it is essential that fiscal consolidation process is not only facilitated but it is also strengthened by concerted efforts to boost revenue flows to meet the growing expenditure requirements. There are two kinds of fiscal consolidation the first type of fiscal consolidation incorporates adjustments which rely mainly on expenditure reduction through cuts in revenue expenditure and, if possible also in rates and types of taxes. In this type of adjustment the composition of spending cuts is an important consideration due to its impact on formation of expectation of the current and impending measure and credibility of the reform process. The second type of fiscal consolidation incorporates measures which rely mainly on broad based tax changes, without affecting public expenditure. However, the type of fiscal consolidation measures that should be followed in any economy would depend upon a clear understanding of the background of the situation with respect to the indicators of important varieties of deficits. In the Indian case, both the approaches have been followed to control deficits. Whole it is true that both the Central and State governments have been suffering from the problem of increasing deficits, the problem of deficits is more serious in the case of Central government in India. Our object, in this chapter is to confine our attention towards efforts made by the Central government and make a critical appraisal of the success achieved in controlling deficits. Since 1991-92, the budget documents of the Government of India set out three key deficit indicators, the revenue deficit (RD), the gross fiscal deficit (GFD) and the primary deficit (PD). Out of these deficit indicators, GFD became an important target fiscal variable and crucial policy target of the Central Government in the context of the structural adjustment programme initiated in 19911. Revenue deficit measures the difference between current expenditure and current revenue. It is used as a measure of the Government’s dissaving. GFD, though traditionally defined as the difference between total government expenditure and current revenues, in the Indian context, was taken as the difference between aggregate expenditure and non-debt receipts consisting of tax revenue, non-tax revenue, recoveries of loans and disinvestment proceeds. Primary deficit which is the difference between GFD and interest payments is a measure of the sustainability of deficit. Other measures used in the literature are net fiscal deficit (NFD) which excludes net lending from GFD, net primary deficit (NPD) which excludes net interest payments from (NFD) and primary revenue balance (PRB) which nets out interest payments from revenue deficit. Fiscal Deficit: The Fiscal Deficit is the difference between the total expenditure of the government and the revenue receipts plus those capital receipts which are not in the nature of borrowing but which finally accrue to the government. Fiscal Deficit = Total Expenditure – Revenue Receipts + Capital Receipts (excluding net borrowing). Revenue Deficit: The Revenue Deficit is the excess of government revenue expenditures over revenue receipts. Revenue Deficit = Revenue Expenditure¬ - Revenue Receipts
Primary Deficit: The Primary Deficit is the fiscal deficit minus interest payments. Primary Deficit = Fiscal Deficit – Interest Payments
The rapid deterioration in the government finances during the late 1980s caused by a faster rise in expenditure growth relative to revenue growth resulted in a steep rise in the central government’s fiscal deficit to GDP ratio which culminated in a balance of payments crisis. Fiscal reforms were initiated with the aim of achieving a reduction in the size of deficit in relation to GDP through revenue enhancement and curtailment in current expenditure growth while enlarging spending on investment and infrastructure so as to provide...
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