Chapter 3 Trends and Composition of Central Government Finances in India

Transcription

1 Chapter 3 Trends and Composition of Central Government Finances in India R.A. Musgrave, a twentieth century economist, in his treatise The Theory of Public Finance published in 1959, defined major roles for government. According to Musgrave the proper roles of government in a market economy falls into three separable branches: the allocation, the distribution and the stabilization. The allocation branch s responsibility is to the provision of public goods and other measures to correct for market failure and improve the allocation of resources. While the distribution branch ensures that the initial distribution is fair i.e. the redistribution of income to achieve equitable distribution of income among households. Monetary and fiscal policy and the problem of macroeconomic stability fall to the stabilization branch, i.e. stabilization of economic activity to attain high levels of employment with reasonable stability of prices. Therefore, one of the core functions of government is to collect revenues/ taxes from public to fulfill above objectives. The observation of Kalidasa is remarkable in this regard, It is only good of the people that the king collects taxes from them just as the sun evaporates water only to return it manifold in the form of rain 34. Hence, the revenue and expenditure process of government i.e., taxing and spending has been considered very essential for realizing the objectives of any country. However, over a period of time, the nature and scope of the government s function has changed manifold. Resultantly, this has also changed the expenditure and tax pattern of the government. As noted above government taxes and expenditure has been seen as means not only to improve the distribution of income, but also to improve the allocation of resources and economic growth by correcting market failure in the labour market and to promote the stabilization of output via the automatic stabilizers provided by taxes and social expenditures. 34 Kalidasa in Raghuvansh eulogizing King Dalip. 59

2 Therefore, the nature and degree of expenditure and tax pattern determine the overall quality of the public finances of any country. To analyses the overall financial position of the central government in the Indian economy, this chapter makes an attempt to present the study by examining trends and compositional changes in expenditure and revenue pattern of the central government and also tries to trace out the underlying fiscal reforms of the central government. This chapter is organized in three sections. Section 3.1 reviews all the important features of the Indian fiscal system and budgetary practice of the government. Section 3.2 examines trend and composition of revenue and expenditure of the Indian economy. Section 3.3 reviews some of the most important fiscal sector reforms in India. 3.1 Fiscal System in India Fiscal system refers to the mechanism through which financial resources (i.e. revenue and capital resources) for the government and its bodies are obtained, channeled or raised, and the scale and pattern of allocation of such resources is determined. Indian fiscal system is based on Constitution of India which is federal in character. The constitution envisages two layer of government: the Union of central government and the state government. Local bodies do not find a place in the Constitution and the function and resources allotted to them are delegated by the state government Constitutional Division of the Revenue Powers and Expenditure Function of the Central Government Indian fiscal system is based on federal principle of state. Therefore, there is a definite division of powers between central government and provincial (state) government. The constitution makes elaborate and complex arrangements relating to the distribution of revenue, expenditure and the power of borrowing between the central government and state government. The Indian constitution has assigned the powers of the 60

3 central government and state governments into three lists: a union list, a state list and a concurrent list. Union list consists of 97 items on which the parliament has exclusive power to legislate, including items like defence, atomic energy, defence production, foreign affairs, railways, national highways, marine, shipping and navigation, airways, post and telegraphs, currency and foreign exchange, foreign and interstate trade, important industries, institution of national importance etc. The state list consists of 66 items and the states individually have the exclusive authority to legislate on items, including items like public order, police, and administration of justice, public health, education, agriculture, forest, fisheries, and the other industries. Concurrent list consists of 47 items which include commercial and industrial monopolies, labour disputes, social security, charity and social legislation like marriage and divorce and social planning etc. on which both the governments can legislate. Amongst the sources of revenue of the government, taxation being the major source, Article 265 of the Constitution specifically states that no taxes shall be levied or collected except by the authority of law. There is a clear demarcation of the taxation powers of the Union and the states in the Seventh Schedule of Constitution under Article 246 of the Constitution. In respect of the subjects listed in the Union List, the Centre has the exclusive power to make laws. Similarly, for the taxes listed in the state list, States have exclusive power to make laws. However, no taxes are listed in the Concurrent List. There are thirteen taxes which are listed in the Union List (Punchi et al, 2010) 35. Nineteen taxes are listed in the state List. Apart from the taxes levied and collected by the states, the constitutions has provided for the revenues for certain taxes on the union list to be allotted, partly or wholly to the states as listed in flowing categories: 35 Punchhi, Singh, Duggal, Menon and Shanker (2010), Report of the Commission on Centre-State Relations Centre-State Financial Relations and Planning, Vol.III. 61

4 a) Duties which are levied by the Union Government but are collected and appropriated by the states. b) Taxes which are levied and collected by the Union, but the entire proceeds of which are assigned to states, in proportion determined by the Parliament. c) Central Taxes on income and union excise duties are levied and collected by the Union but are shared by it with the States in a prescribed manner. d) Proceeds of additional excise duty on mill-made textiles, sugar and tobacco which are levied by the Union since 1957 in replacement of state sale taxes on these commodities are wholly distributed among the States in a manner as to guarantee their former incomes from the displaced sales taxes. In the case of distribution of expenditure powers, the functions of the central government are those required to maintain macroeconomic stability, international trade and relations, and those having implication for more than one state. So far as another instrument of fiscal system i.e. the borrowing powers of the centre government are concerned, it is regulated by Article 292 of the constitution. Article 292 of the constitution empowers the government of India to borrow upon the security of the consolidated fund of India, i.e. the resources of the centre; subject only to such limitations as Parliament by law may impose. The government of India can borrow internally as well as externally. The constitution recognizes that because of its design, assignment of tax powers and expenditure functions would create imbalance between expenditure need and abilities to raise revenue between the centre and the state governments. The imbalance could be both vertical, among different level of governments, and horizontal, among different units within a sub national level (Rao and Sing, 2001) 36. To correct this imbalance, the constitution provided for statutory fiscal transfers from the centre and the states through 36 Rao, M. and Singh, N. (2001), Federation in India: Political Economy and Reform, Conference on India: Ten Years of Economic Reform, at the William Davidson Institute, University of Michigan. 62

5 the instrumentally of the Finance Commission. The Finance Commission is constituted every five years to recommended allocations of centre taxes to the states Constitutional Provisions for the Indian Budgetary Practice In the Indian fiscal system, the budgetary resources and expenditures are determined through the annual budget of the Central Government. Under Article 112 of the Constitution, a statement of estimated receipts and expenditure of the Government of India has to be laid before Parliament and for the State Governments in the State Legislature in respect of the financial year, which runs from April 1 to March 31. This statement titled Annual Financial Statement is the main budget document. The estimates of receipts and disbursement in the Annual Financial Statement and of expenditure in the demand for grants are shown according to the accounting classification prescribed under the Article 150 of the Constitution. The Annual Financial Statement shows the receipts and payments of government under the three parts in which government account are kept. They are (I) Consolidated Fund; (II) Contingency Fund, and (III) Public Account. The significance of the Consolidated Fund, the Contingency Fund and the Public Account are given below 37 : I. Consolidated Fund of India (CFI): The existence of CFI flows from Article 266 of the Constitution. All revenues received by government, loan raised by it, and also the receipts from recoveries of loans granted by it form the Consolidated Fund. All expenditure of government is incurred from the consolidated fund of India and no amount can be drawn from the Consolidated Fund without authorization from Parliament. 37 Government of India (2012), Key to Budget documents, Union Budget , New Delhi. 63

6 II. Contingency Fund of India: Article 267 of the Constitution authorizes the Contingency Fund of India which is an imprest placed at the disposal of the President of India to facilitate government to meet urgent unforeseen expenditure pending authorization from Parliament. Parliamentary approval for such unforeseen expenditure is obtained post-facto, and an equivalent amount is drawn from the Consolidated Fund to recoup the Contingency Fund. The corpus of the Contingency Fund as authorized by parliament presently stands at Rs.500 crore. III. Public Account Money held by Government in Trust as in the case of Provident Funds, Small Savings collections, income of government set apart for expenditure on specific objects like road development, primary education, Reserve/Special Funds etc. are kept in the Public Account. Public Account funds do not belong to government and have to be finally paid back to the persons and the authorities who deposited them. Parliamentary authorization for such payments is, therefore not required, except where amounts are withdrawn from the Consolidated Fund with the approval of Parliament and kept in the Public Account for expenditure o specific objects, in which case, the actual expenditure on the specific object is again submitted for vote of Parliament for drawl from the Public Account for incurring expenditure on the specific object. Under the Constitution, budget has to distinguish expenditure on revenue account from other expenditure. Government budget therefore, comprises (i) Revenue Budget; and (ii) Capital Budget. The significance and distinguishing features of Revenue and Capital Budget are given below 38 : (i) Revenue Budget Revenue Budget consist of the revenue receipts of government (tax revenue and other revenues) and the expenditure met from these revenues. Tax revenue comprises proceeds of taxes and other duties levied by the union. The estimates of revenue receipts shown in 38 Government of India (2012), Key to Budget documents, Union Budget , New Delhi. 64

7 the Annual Financial Statement take into account the effect of various taxation proposals made in the Finance Bill. Other receipts of government mainly consist of interest and dividend on investment made by government, fees and other receipts for services rendered by government. Revenue expenditure is for the normal running of government departments and various services, interest payments on debt, subsidies, etc. Broadly, the expenditure which does not result in the creation of assets for government of India is treated as revenue expenditure. All grants given to State Governments/Union Territories are also treated as revenue expenditure even though some of the grants may be used for creation of assets. (ii) Capital Budget Capital budget consists of capital receipts and capital payments. The capital receipts are loans raised by government from public, called market loans, borrowing by government from Reserve Bank and other parties through sale of Treasury Bills, loans received from foreign governments and bodies, disinvestment receipts and recoveries of loan from State and Union Territory governments and other parties. Capital payments consist of capital expenditure on acquisition of assets like land, buildings, machinery, equipment, as also investment in shares, etc., and loans and advances granted by Central Government to State and Union Territory Governments, Government Companies, Corporations and other parties. 3.2 Trends and Compositions of Expenditure and Revenue of the Central Government The national budget is the main instrument through which government collect resources from the economy in a sufficient and appropriate manner; and allocates and uses those resources responsively, efficiently and effectively. Therefore, public expenditure and revenue policy are the two most important instruments of the government policy. However, before the 20 th century, most of the governments in the world followed laissez faire economic policy and so the role of government was also 65

8 limited, hence the size of the public expenditure and revenue policy was also small. But during 20 th century and onward this thought has changed significantly. J.M Keynes in his book General Theory of Employment, Interest and Money published in 1936 influenced the government fiscal operation. Keynes gave suggestion that government should play an important role in generating employment. This was the big blow to the old classical economist s view which was based on the Laissez fair policy. Since then the economic responsibilities and functions of the government are increasing continuously. Therefore, the role of public expenditure and revenue policy in fiscal policy goals of growth, equity and stability has increased significantly Trends and Composition of Expenditure Pattern of the Central Government Public expenditure is an important instrument of the fiscal system and plays a significant role in the functions of economy at almost all stages of economic development. The government resorts to expenditure programme to produce desirable effects on the national income, production and employment. Therefore, the size and pattern of the public expenditure has great relevance in the growth process. The increasing significance of public expenditure in economic development has become the subject of great interest among economists. According to Adolf Wagner s Law, the expansion of public expenditure is in proportion to the growth of the national income i.e. increase in government activity is accompanied by an increase in public expenditure. This is due to the fact that the government has to perform a number of functions more efficiently, which has led to an intensive growth in public activity thereby increasing government expenditure. According to Peacock and Wiseman, public expenditure grows over time, not at constant rate, but on a rising scale. Emergencies like war and depression leads to increase in public expenditure. In India, the public expenditure has been assigned a key role in the economic development and growth process and hence there has been a rapid expansion of the 66

9 public expenditure in India. Pattnaik et al. (2003) 39, in their paper noted the different dimensions of the expenditure policy in India as follows: the historical importance of public expenditure lies in the mixed economy model adopted after Independence of India whereby the government assumed the primary responsibility of building the capital and infrastructure base to promote growth. The concern regarding equity and poverty alleviation after the two decades of Independence added another dimension to public expenditure in terms of redistribution of resources. The inadequate returns on capital outlays and the macroeconomic crisis of early Nineties arising out of high fiscal deficit shifted the focus of public expenditure of efficiency in its management for facilitating adequate returns and restoring macroeconomic stability. While the fiscal policy goal of stability could be achieved, the modus operandi of the public expenditure management through curtailing capital expenditure raised concern about infrastructure investment and its impact on long-term growth potential of the economy. Recently, Indian economy has been in limelight for its high economic growth. It has been among the fastest growing economies during the last decade. The economy is more resilient, less vulnerable to external shocks and has opened up for more potential. The expenditure pattern of the government is also responsible for the success story. Government of India expenditure pattern has changed dramatically over the last several decades. Classification of Expenditure of Central Government Classification of public expenditure refers to the systematic arrangement of different items on which the government incurs expenditure. The Constitution of India requires revenue and capital expenditures to be shown separately in the budget. Article 112(2) states: The estimates of expenditure embodied in the annual financial statement shall show separately (a) the sums required to meet expenditure charged upon the 39 Patnaik, R. A. et al. (2003), Sustainability of Public Debt in India: An Assessment in the Context of Fiscal Rules, Paper Presented in the 6 th Workshop on Public Finance Organized by Banca d Italia, April 1-3, 2003 at Perugia, Rome. 67

10 Consolidated Fund of India; and (b) the sums required to meet other expenditure proposed to be made from the Consolidated Fund of India, and shall distinguish expenditure on revenue account from other expenditure. Total expenditure of the central government comprises of revenue and capital expenditure. Revenue expenditure is expenditure incurred for the purpose other than creation of assets of the central government. Revenue expenditure is the expenditure incurred on civil administration, defence forces, public health and education, maintenance of government machinery etc. This type of expenditure is of recurring type which is incurred year after year. On the other hand, that expenditure of the government which led to the reduction in recurring financial liabilities falls under the category of capital expenditure. Such expenditure pertain to payments on acquisition of assets and loans and advances, expenditure on durable assets like highways, multipurpose dams, irrigation projects, buying machinery and equipments etc. They are non recurring type of expenditure in the form of capital expenditure. Such expenditures are expected to improve the productive capacity of the economy. Further, public expenditure in India can be classified as development and nondevelopment expenditures. The development expenditure is all expenditure that promotes economic growth and development. Development expenditure is termed as productive expenditure while all un-productive expenditures are termed as non-development expenditure. Yet another classification of public expenditure in India is plan and nonplanned expenditure. Plan expenditure is spent on productive asset creation through centrally sponsored programmes and flagship schemes, while non-plan expenditure refers to all other expenditure such as defiance expenditure, subsidies, and interest payments, including expenditure on establishment and maintenance activities such as salaries. Table 3.1 presents the amount of revenue expenditure, capital expenditure and total expenditure and the percentage share of revenue expenditure and capital expenditure in total expenditure of the central government. Even before independence, there was a 68

11 broad consensus, across the political spectrum that once independence was achieved, Indian economic development should be planned, with the state playing dominant role in the economy and achieving self-sufficiency across the board as a major objectives (Srinivasan 1996) 40. Since 1970 s the main concern of the central government was to increase the development of the country by revamping public expenditure policy in direction of poverty alleviation, employment generation, and rural development and also to the price stability. To achieve this objective the total expenditure of the central government stepped up from Rs billion in to billion in i.e. pre-reform period. This sharp increase in total expenditure is mainly due to continuous increase of revenue expenditure. Expenditure policy of this decade was focused towards promotion of equity and social justice through public expenditure on social welfare and poverty alleviation schemes. However, work of some economists during this phase critiqued the government s policy of using expenditure as a tool to achieve income redistribution and poverty alleviation. On the impact of the public expenditure on income distribution, Zahir (1972) 41 found that, the growth of public expenditure made very insignificant contribution towards the achievement of social justice. This view was supported by Gupta (1977) 42 who evaluated the extent of the impact of Central Government expenditure on mitigation economic inequality and poverty, the pattern of consumption and the generation of employment opportunities. The main aspect of sharp increase in revenue expenditure of the central government from to was the rapid increase in subsidies, growing debt and downward rigidity in prices. Thereafter, the substantial increase was due to hike of expenditure 40 Srinivasan, T.N. (1996), Economic Liberalization and economic development: India, Journal of Asia Economics, vol. 7, no.2, pp Zahir, M. (1972), Public Expenditure and Income Distribution in India, Associated Publishing House, New Delhi. 42 Gupta, P (1977), Central Government Taxes: Have they Reduced Inequality? Economic and Political Weekly, Jan 22, vol. 12 no. 4, pp

12 Table 3.1: Classification of Total Expenditure of the Central Government Year Revenue Expenditure Capital Expenditure Total Expenditure Rs. Billion Percent Rs. Billion Percent Rs. Billion Percent (RE) (BE) Note: Data for are Revised Estimates and data for are Budget Estimates. Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India,

13 items like defence, interest payments and grants and loans to States, UTs on account of relief against drought and other natural calamities (Economic Survey, ). The total expenditure reached to the level of Rs billion in , out of which percent (Rs billion) was revenue expenditure. There has been continuous decline in the share of capital expenditure in the pre-reform period. Although it moved up from Rs billion in to Rs billion in Capital expenditure recorded the growth of 14 percent per annum in the pre-reform period of 21 years and 9 percent growth in the post reform period (Table 3.2). It constituted percent of the total expenditure of the central government in the year This percentage decreased to percent in and further declined to percent in In the pre-reform period the share of capital accounts expenditure in total expenditure declined by 14 percent points. Table 3.2: Compound Annual Growth Rates (CAGR) of Total Expenditure of the Central Government and its Components Year Whole period Pre-reform Period Post-reform Period to to to Total Expenditure 14% 16% 13% (a) Revenue expenditure 16% 17% 14% (b) Capital Expenditure 11% 14% 9% Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India, Since 1990s the government undertook number of measures to curb expenditure growth and to bring about changes in the composition of expenditure. Expenditure reform commission set up by the government suggested a host of measures to curb built-ingrowth in expenditure and some of these measures have been implemented by the government. These included subjecting all ongoing schemes to zero-base budgeting, 71

14 reduction of the posts at various levels and introduction of Voluntary Retirement Scheme (VRS) for surplus staff, review of all subsidies and encouraging to PSUs to maximize generation of internal resources. Despite these numerous measures taken by the government, the expenditure continuously increased during the post-reform period which was the main contributory factor in the fiscal crisis. In the post reform period, total expenditure of the central government has grown at a lesser rate (i.e. 13 percent per annum) from RS billion in to Rs billion in and Rs billion in (B.E.) as compared to the growth of 16 per cent per annum in the pre-reform period. The reason behind increase in the total expenditure was sharp increase in the revenue expenditure of the central government. Revenue expenditure during the period to has registered the growth of 14% per cent per annum i.e. from Rs billion in to Rs billion in It constituted percent in and reached to the level of percent of total expenditure in Reasons behind the increasing share of revenue expenditure in total expenditure in the post-reform period was the rise in interest payment, sharp increase in salary bill, pension payments, government schemes for the welfare of the poor, agriculture schemes like debt relief for agricultural loans, introduction of an employment guarantee scheme. It is observed from the Figure 3.1 that in the total expenditure, share of revenue expenditure not only constitutes a significant part but has also observed an increasing trend. On the other hand, there is a sharp fall in the share of the capital expenditure. Capital expenditure of the central government went up from RS billion in to Rs billion in , and recorded 9 percent growth rate per annum during the post-reform period. It rose to the Rs billion in (BE). Looking at the capital expenditure as a portion of the total expenditure of the central government the share of the capital expenditure has been on the decline in the post-reform period and reached to percent in During post-reform period, the share steeped down by 13 percent points. 72

15 (BE) As Percent of Total Figure 3.1: Share of Revenue and Capital Expenditure in Total capital Expenditure of the Central Government 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Pre-reform period Revenue Expenditure Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India, Therefore, in spite of all these reforms, the decline in the share of capital expenditure in the post-reform period is almost same as the decline in this share in prereform period. Overall it is clear from the table 3.1 that the share of the revenue expenditure as compared to the capital expenditure of the central government remains significantly higher during the period to Post-reform period Capital Expenditure To get the clear picture about the quality of the public finance of the central government in India, total expenditure and its components should be measured and compared as percent of GDP. Table 3.3 shows that the total expenditure of the central government as proportion of GDP had raised from percent in to

16 Table 3.3: Total Expenditure of the Central Government as Percent of GDP Year Revenue Expenditure Capital Expenditure Total Expenditure (RE) (BE) Note: 1. Data for are Revised Estimates and data for are Budget Estimates. 2. Up to , the percentages are calculated based on the data for GDP at current market prices with base year , and thereafter, based on GDP at current market prices with base year Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India,

17 percent in This expenditure witnessed some fall relative to GDP in the first half of the 1990s which was on account of steps taken by the government in These included reduction in posts at various levels, overall cut on consumption of petrol/diesel, reduction in expenditure on telephone and restriction on purchase of additional vehicles (Economic Survey, ). However, the situation changed with the growth in total expenditure picking up from In , total expenditure was percent of GDP (13.14 percent of GDP revenue expenditure and 3.96 percent of GDP capital expenditure) which was higher than the level in some of the previous years. An important reform undertaken in 2003 was the enactment of the FRBM Act, which becomes effective from July 5, 2004; it provided an institutional framework and moved the government towards prudent fiscal policies which facilitated the process of fiscal consolidation. As a result, the total expenditure fell to percent of GDP in However, it began to rise thereafter and reached percent of GDP in Revenue expenditure rose from 6.77 percent of GDP in to percent of GDP in Because of the serious attempts since , revenue expenditure- GDP ratio of the central government could be brought down from percent in to percent in i.e. a reduction of only 0.76 percent points. Main reason behind this high revenue expenditure was continuously increase in interest payments. Revenue expenditure-gdp ratio increased to percent in Due to the enactment of FRBM act in 2003, revenue expenditure of the central government fell to percent of GDP in It again increased to the level of percent of GDP in Capital expenditure on the other hand, hovered around to 5 to 6 percent of GDP during pre-reform period. However, the fiscal crisis of had its impact on the total expenditure of the central government in the 1990s. In fact, the expenditure cut of the nineties could be affected at the cost of capital expenditure. It declined from 4.45 percent of GDP in to 1.80 percent of GDP in The position improved a little and it reached to the level of 2.04 percent of GDP in This improvement was 75

18 As Percent of GDP mainly the result of an increase in the non-plan capital outlay to acquire RBI s stake in the State bank of India (Report of 13 th Finance Commission, ). Figure 3.2: Revenue, Capital and Total Expenditure as Percent of GDP Pre-reform Period Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India, Figure 3.2 reveals the overall picture regarding total expenditure, revenue expenditure and capital expenditure as percent of GDP of the central government for the period to Revenue expenditure as percent of GDP was high and continuously increasing in the pre-reform period and the gap between revenue and capital expenditure started widening in the mid eighties. During post-reform period revenue expenditure was much higher than capital expenditure and the gap between these two widened extremely up to mid- 2000s. Post-reform Period Revenue Expenditure Capital Expenditure Total Expenditure Economic Classification of Central Government Expenditure Total expenditure of the central government is classified into development expenditure and non-development expenditure. Any expenditure made by the government for the development activities it is regarded as development expenditure. It consist of 76

19 As Percent of Total expenditure on social and community services such as education and health and on economic services such as agriculture, industry, power, transportation, communication etc. On the other hand, the expenditure incurred by the government which is not productive in nature is considered as non-development expenditure. It consists of expenditure on administration, defence, interest payments etc. There has been significant rise in total expenditure (i.e. development plus nondevelopment) during the study period. The share of development expenditure has remained more than non-development expenditure in the pre-reform period, but the situation reversed in the post reform period during the years from to (as shown in Figure 3.3). Figure 3.3: Share of Development and Non-development Expenditure of the Central Government Pre-reform Period Developmental Expenditure Post-reform Period Non-Developmental Expenditure Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India,

20 Table 3.4: Development and Non-Development Expenditure of the Central Government Year Development Expenditure Non-Development Expenditure Total Development and Non- Development Expenditure Rs. Billion Percent Rs. Billion Percent Rs. Billion Percent (R.E.) (B.E) Notes: 1) Data for are Revised Estimates and data for are Budget Estimates. 2) Data on development and non development gross expenditure are inclusive of commercial and postal departments. Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India,

21 Table 3.4 displays the two categorize of the total expenditure i.e. development and non-development expenditure. During the pre-reform period the development expenditure increased from Rs billion in to Rs billion in The share of development expenditure in total expenditure has shown a fluctuating trend. It climbed from percent in to percent in and reached to percent in During the post reform period, development expenditure which stood at Rs billion in galloped to Rs billion in In total expenditure, its share was percent in and it stood at percent in Further, non-development expenditure of the centre increased from RS billion in to Rs billion in The share of non-development expenditure in total expenditure increased continuously. During post reform period, it rose from Rs billion in to Rs billion in (B.E.). The share of non-development expenditure in the post-reform period decreased from percent in to percent in To curtail this high growth rate of nondevelopment expenditure, the government set up an Expenditure Reforms Commission on February 29, From a look at the trends in expenditure at the central level, it is concluded that total expenditure of the central government has been rapidly growing and it increased at the rate of 14 percent per annum throughout the study period. The main reason behind this increase in the total expenditure is the continuous increase in the share of the revenue expenditure which created serious fiscal imbalance in the economy. As a result of reform measures, revenue expenditure has grown at a lower rate in the post reform period than pre-reform period. On the other hand, capital expenditure has recorded a higher growth in the post-reform period than the pre-reform period. While analyzing the economic classification of the expenditure, it was observed that non-development expenditure contributed a significant proportion of the total 79

22 expenditure of the central government. Looking at the share of development expenditure in the total expenditure it was observed that the share of the development expenditure has remained more than non-development expenditure in the pre-reform period, but this situation has been reversed in the post reform period Trends and Composition of Revenue Pattern of the Central Government Government raised fund to finance their activities from various sources; the most important being taxes and non-taxes sources like currency and mint, fees, fines, sale of public assets etc. Many economists have attempted to classify public revenue in various categories. Adam Smith divided public revenue into (i) revenue from the people, and (ii) revenue from state property. Tax revenue falls into first category while income from public undertaking and assets falls in the second category. Smith classification is simple in nature and seems alright in the contest of the limited role assigned to the state by Smith and his followers. But this classification is very narrow from the modern point of view. Dalton preferred to distinguish between public receipts and public revenue. While the former comprises of all sorts of income from each and every source, the latter does not include public borrowing, income from the sale of public assets or from the printing of currency notes. Prof. J.K. Mehta has classified public revenue into taxes, fees and duties. He has used the term tax with a wider connotation. According to him, when the object is to obtain money for the finance of services, the levy should be regarded as tax. The world tax should, therefore possess a wide denotation. It should include all those charges which are meant to bring finance of the government. Classification of Receipts of the Central Government Budget divided the income and the expenditure of the government into the revenue and capital account. Accordingly, total receipts of the government are classified 80

23 into revenue receipts and capital receipts. Revenue receipts include revenue received in the form of tax and non-tax revenue. On the other hand, receipt on capital account is composed of market borrowing, small saving, provident fund, special deposit, recovery of loans, disinvestment receipts, and external loan. Thus, revenue and capital receipts of the central government are part of revenue account and capital account respectively. All receipts which are non-redeemable may be termed as revenue receipts. These include revenue from taxes and non-taxes sources of revenue such as proceeds of taxes and other duties levied by the centre, interest and dividend on investment made by the government, fees and other receipts for services rendered by the government, income from the public sector undertaking like post and telegraph, railways etc. While those receipts of the central government which create liability and reduce financial asset may be called capital receipts. These include loans raised by the government from public which are called market loans, borrowing by the government from Reserve Bank of India and others through sale of Treasury Bills, loans received from foreign governments and bodies and recoveries of loans granted by the central government to state and union territory governments and others. It also included proceeds from disinvestment of government equity in public enterprises. Table 3.5 shows the amount of total receipts, revenue receipts and capital receipts of the central government. Table shows that total receipts, revenue receipts and capital receipts of the central government of India are showing an increasing trend. Total receipts of the central government have been continuously increasing since expect for the year The deterioration in was due to the decline in interest receipts, shortfall in recoveries of loans and advances and lower receipts under external assistance than originally anticipated (Economic Survey, ). Significant measures were taken by the government to augment revenue such as reduction of maximum marginal rate of personal income tax on the recommendation of the Direct Taxes Enquiry Committee, 1971 (Economic Survey, ). Consequently there was a rapid increase in the total receipts of the central government i.e. from Rs billion in to Rs

24 Table 3.5: Classification of Total Receipts of the Central Government Year Revenue Receipts Capital Receipts Total Receipts Rs. Billion Percent Rs. Billion Percent Rs. Billion Percent (RE) (BE) Note: Data for are Revised Estimates and Data for are Budget Estimates. Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India,

25 billion in that recorded the growth of 15% percent per annum during the prereform period (Table 3.6). Total receipts of the central government increased from Rs billion in to Rs billion in It was due to the reforms undertaken by the central government in the tax system. Total receipts showed an increasing trend and registering the growth of 14% percent per annum in the post reform period. It was Rs billion in (B.E.). Table 3.6 shows that during to the total receipts of the central government increased at the rate of 14% percent per annum. Table 3.6: Compound Annual Growth Rates (CAGR) of Receipts of the Central Government and its Components Year Whole period Pre-reform Period Post-reform Period to to to Total Receipts 14% 15% 14% (a) Revenue Receipts 15% 15% 14% (b) Capital Receipts 14% 16% 13% Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India, The revenue receipts of the central government have also witnessed a sharp rise, along with the increase in the total receipts of the central government. Such receipts steeped up from Rs billion in to Rs billion in , recording the growth of 15 percent per annum during pre-reform period. This percentage rose to percent in This was due to increase in taxes on income, interest receipts and receipts from general services (Report on Currency and Finance, ). The government undertook various policy initiatives to raise revenue which included an overhaul of the excise tax structure through the introduction of Modified Value Added Tax (MODVAT), the lunching of a simpler and more growth oriented schemes of excise duty concessions for small scale units and rationalization of taxation provisions relating 83

26 to gifts and capital gains and systematic steps to curb tax evasion (Economic Survey, ). Despite these fiscal policy initiatives taken by the government, the share of revenue receipts declined and reached to the level of percent in There was a fiscal crisis by the beginning of the fiscal year To deal with the situation the government announced a number of measures targeting tax revenue in These included the announcement of Voluntary Deposits Scheme, reduction of rate of tax on dividend income received from such investment, extension of the scheme of tax deduction at source, limiting ad-valorem rates of custom duty rationalization of auxiliary duties, and rising of special excise duty (Economic Survey, ). As a result there was substantial increase in revenue receipts of the central government. Revenue receipts steeped up to Rs billion in from Rs billion in The share of revenue receipts was percent in which improved to percent and percent in the next two years as an immediate result of tax reforms but decline to percent in Again as a result of large number of reforms in this front, it rose to percent in Thereafter, reduction in personal and corporate tax rates have brought a substantial increase in the share of the revenue receipts in reached to the highest level of percent of total receipts. After that, revenue receipts of the central government have been fluctuating between 50 to 70 percent of the total receipts. Capital receipts of the government increased from Rs billion in to Rs billion in mainly on account of larger market borrowing, state and public provident funds and receipts under the Special Bearer Bonds Scheme (Economic Survey ). It further moved up to Rs billion in which consisted of percent of the total receipts of the central government. During post reform period, it increased from Rs billion in to Rs billion in There was a sharp decline in capital receipts to Rs billion in which was 84

27 (BE) As Percent of Total mainly on account of the discontinuance of the debt swap scheme (Economic Survey, ). Looking at capital receipts as a proportion of total receipts of the central government, the share of capital receipts showed a fluctuating trend (Figure 3.4). Figure 3.4: Share of Revenue and Capital Receipts in Total Receipts of the Central Government Pre-reform Period Revenue Receipts Capital Receipts Post-reform Period Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India, It was percent in and declined during next two years but again was as much as percent in Further it rose to the level of percent in but declined to percent in of total receipts. Conclusively, the revenue receipts and capital receipts of the central government have registered growth of 15 percent and 14 percent per annum respectively throughout the study period. Revenue receipts recorded lower growth (15 % percent per annum) as compared to capital receipts (16 % percent per annum) during the pre-reform period. But the rate of growth of revenue receipts (14 percent per annum) was higher than the rate of growth of capital receipts (13 percent per annum) in the post-reform period. 85

28 Table 3.7: Total Receipts of the Central Government as Percent of GDP Year Revenue Receipts Capital Receipts Total Receipts (RE) (BE) Note: 1. Data for are Revised Estimates and data for are Budget Estimates. 2. Up to , the percentages are calculated based on the data for GDP at current market prices with base year , and thereafter, based on GDP at current market prices with base year Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India,

29 As Percent of GDP After analyzing the relative shares of the revenue and capital receipts in total receipts of the central government, it is important to analyze total receipts on both accounts as percent of GDP. Table 3.7 exhibits total receipts of the central government as percent of GDP. As proportion of GDP, total receipts of the central government, comprising of revenue and capital receipts, had risen from percent in to percent in due to large number of reforms to raise revenue. In spite of numerous measures initiated by the government, there was a disquieting picture of shortfall in revenue. Even during the post-reform period, it has shown a declining trend and reached to percent of GDP in and percent of GDP in (B.E.). Further, the revenue receipts as percent of GDP were 7.12 percent in , which increased to 9.65 percent only (by 2.53 percent point) in (Figure 3.5). Reduction in number of slabs of personal income tax (Economic survey, ), introduction of MODVAT (Economic Survey, ), rationalization of custom and excise duties (Economic Survey, ) and enactment of direct Tax Law Bill Figure 3.5: Revenue, Capital and Total Receipts of the Central Government as Percent of GDP Pre-reform Period Post-reform Period Revenue Receipts Capital Receipts Total Receipts Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India,

30 (Economic Survey, ) were the major measures undertaken by the government. However, revenue receipts as percent of GDP had not grown significantly. During the post-reform period too, no improvement has been seen in revenue receipts as percent of GDP which has gone down from percent in to 8.83 percent in It may be noted that the introduction of an additional refinements to MODVAT has resulted in the reduction in revenue receipts of the central government. Further this ratio steeped up and reached at percent in This improvement in the revenue receipts owes to the macro-economic policy frame in which facilitated the implementation of some of the key point in the fiscal agenda in the Kelkar Task Force Reports on direct and indirect taxes (Economic Survey, ). Capital receipts of the central government have been shown fluctuation during to (B.E.). It was 4.42 percent of GDP in , 5.64 percent of GDP in and reached to 6.85 percent of GDP in After 1990, it dipped to 4.46 percent of GDP in , and it went up to 7.67 percent of GDP in The revenue receipts were 5.33 in Economic Classification of Central Government Receipts Total receipts of the central government are composed of Revenue receipts and Capital receipts. First, revenue receipts are classified under two heads, Tax revenue and Non-tax revenue. Tax revenue is an important source of revenue receipts for the government. It includes a variety of taxes like corporation tax, income tax, custom duties, excise duty etc. The total collection of some of these taxes is shared with the states by the central government. The principal source of non-tax revenue are interest receipts, net contributions of public sector undertaking, fiscal services, general services, social and community services, economic services and external grants. 88

31 Table 3.8: Share of Tax and Non-Tax Revenue in Total Revenue Receipts Year Tax Revenue Non-Tax Revenue Total Revenue Receipts Rs. Billion Percent Rs. Billion Percent Rs. Billion Percent (RE) (BE) Note: Tax Revenue is the Net of State Governments share and amount assigned to National Calamity Contingency Fund Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India,

32 Table 3.8 shows that there has been a rapid increase in the tax revenue of the central government from Rs billion in to Rs billion in during pre-reform period. It was due to (a) the higher collections from union excise duties, custom duty and corporation tax (Economic Survey, ; Report on Currency and Finance, ), (b) improvement in the share of direct taxes in total tax receipts of the centre (Report on Currency and Finance, ). Tax revenue was percent in , and stood at percent in and percent in Tax measures initiated since 1991 targeted to enhance tax revenue and also to help in improving structural imbalance and anomalies. These measures included drastic cut in the number of end use notifications with regard to excise and customs, a significant switchover from specific to ad valorem duties to strengthen built-in revenue elasticity, extension of MODVAT, removal of distinction between closely and widely held domestic companies and introduction of service tax on the basis of recommendations of the Tax reforms Committee, 1991 (Economic Survey, ). Consequently, tax revenue rose to Rs billion in from Rs billion in In , it fell to Rs billion. This unsatisfactory performance of tax revenue have to be viewed in the backdrop of fiscal measures which aimed at reducing the tax incidence through abolition of surcharges on direct taxes and customs duties in particular and also rationalization and reduction in excise duties as well to stimulate growth. (Economic Survey, ). Further, some important fiscal measures were taken which included reducing the peak rates of custom duties, rectifying anomalies like inverted duty structure, rationalizing excise duties with a movement towards a median CENVAT rate and revisiting the Tax exemptions (Economic Survey, ). As a result, tax revenue increased to Rs billion in (B.E.). Looking at the share of tax revenue and non-tax revenue of the centre, it is found that the main source of revenue of the central government is tax revenue which remained around 70 to 80 percent of the total revenue receipts throughout the study period (Figure 90

33 (RE) As Percent of Total 3.6). Further, non-tax revenue has gone up from Rs billion in to Rs in largely on account of a considerable increase in the internal resources of the central public sector undertaking for the plan (Economic survey, ). Figure 3.6: Share of Tax and Non-Tax Revenue in Total revenue Receipts of the Central Government Pre-reform Period Tax Revenue (net) Non-Tax Revenue Post-reform Period Note: Tax Revenue is the Net of State Governments share and amount assigned to National Calamity Contingency Fund Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India, Non-tax revenue also recorded a rise from Rs billion in to Rs billion in during the pre-reform period of fifteen years. The major contributory factors were interest receipts, fiscal services, general services, economic service (Report on currency and Finance, ). The relative share of non-tax revenue remained between 20 to 26 percent in the pre-reform period. During the post-reform period to , non-tax revenue has gone up from Rs billion to Rs billion. As proportion of total revenue receipts it hovered between 25 to 30 percent and even reached at percent in Thereafter, it started declining and reached at percent in This decline in relative share of non-tax revenue 91

34 was mainly due to reduction in interest receipts, debt swap scheme and softening interest rate regime (Report of Twelfth Finance Commission, ). Thus it may be concluded that tax revenue and non-tax revenue had grown at the same rate in the pre-reform period and the growth in the pre-reform period was higher than that of the post-reform period. So more initiatives are needed to increases tax as well as non-tax revenue. The receipts of the central government which create liabilities or reduce financial assets are called capital receipts. The components of capital receipts are market borrowing, small savings, provident funds, special deposits, recovery of loans, disinvestment receipts, and external loan. The data contained in Table 3.9 shows the distinctive features of the capital receipts and their year wise changing pattern over the study period. It exhibits that there has been a wide variation in the share of market borrowings in total capital receipts. The share of market borrowings was percent in , which increased to percent in and further came down to percent in In post reform period, it was percent in that rose to percent in and stood at percent in (B.E.). The contribution of small savings was 8.99 percent in It went up to percent in and rose further to percent in During post-reform period, the share of small savings was percent in the which decline to 2.75 percent in Provident Fund, as portion of capital receipts, was 4.45 percent in and increased to 5.13 percent in Its share was 5.86 percent in to 2.65 percent in and 3.06 percent in The share of special deposit in total capital receipts was 2.51 percent in and increased to percent in In the post reform period, it was percent in which declined to 0.27 percent in There were no special deposits after The recovery of loan showed a downward trend in pre-reform period and fluctuating trend during the post-reform period. It was percent in that 92

35 Table 3.9: Share of Different Components of Capital Receipts in Total Capital Receipts (As Percent of Total) Year Market Re- Dis- External Total Small Provident Special Borrowings covery Invest- Loans Capital Savings Funds Deposits (Net) of Loans ment (Net) Receipts Notes: 1. Data for are Revised Estimates and data for are Budget Estimates. 93

36 2. Market Borrowing comprises dated Securities and 364-day Treasury Bills. 3. Since , Provident Funds data represent only state provident fund as public provident fund is included under small savings. 4. Data are net of repayments. Also excluding amount raised under, Market Stabilization Scheme (MSS) and variation in cash balances. 5. Disinvestment receipts and total capital receipts of include an amount of Rupees billion which represents the Reserve Bank's surplus transferred to the Central Government on account of transfer of its stake in SBI to the Central Government. Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India, declined to percent in After recording fluctuating trend it steeped down to percent in During post-reform period, it was percent in and reached to percent in , further decline to 3.04 percent in and 2.10 percent in Disinvestment process started in India in Disinvestment receipts were 7.89 percent in which went up to percent in Since most of the disinvestment had already taken place it declined to 5.59 percent in and 5.40 percent in The share of the external loan in the total capital receipts came down to 8.16 percent in from percent in However it is no longer an important source of finance for the government. The relative share of the external loan was percent in which came down to 3.32 percent in and 1.83 percent in It is be clear from Figure 3.7 that the share of the market loans in total capital receipts is the highest throughout the study period. During , external debt constituted maximum part in the capital receipts of the central government but, thereafter, in the post reform period, this share has continuously declined and reached to 1.83 percent only in (B.E.). Further, the share of small saving has also declined. This changing profile of capital receipts also had an adverse impact on the government finances, as both market borrowing and small saving are more expensive sources of the 94

37 As Percent of Total capital receipts and invariably lead to higher interest burden in the future (Sinha and Pant, 2004) 43. Figure 3.7: Share of Different Components of Capital Receipts in Total Capital Receipts of the Central Government Pre-reform Period Post-reform Period Market Borrowings (net) Small Savings Provident Funds Special Deposits Recovery of Loans Disinvestment Receipts External Loans (net) Source: Data Compiled and Computed from Handbook of Statistics on Indian Economy, Reserve Bank of India, In short, it may be said that total receipts, revenue receipts as well as capita receipts of the central government have grown at the rate 14 percent, 15 percent, and 14 percent respectively throughout the study period. The analysis reveals that the reform measures undertaken by the central government have not resulted into significant improvement in the revenue receipt as the growth of revenue receipts in the post-reform period has 43 Sinha, K. S. and Pant, D. K. (2009), Fiscal Imbalance and Indian Economy: Implication for Growth, in Asian Development Bank (ADB) Book Macroeconomic Management and Government Finance, Oxford University Press pp