A presentation on Fiscal Reform

& Future Challenges

Shradha Pimple

Fiscal System : • Fiscal system refers to the mechanism through which

financial resources for the government and its agencies are procured, channeled or raised, and the scale and pattern of allocation of such resources is determined.

• Fiscal Policy : State policy dealing with Public Revenue, Public Expenditure & Public Debt

• Fiscal Deficit :Net Borrowings of all kind by Govt.

• Revenue Expenditure: Expenditure of recurring nature incurred year after year. e.g. Civil Administration (Police, judiciary etc.), Defence, Public health, Education, Law & order etc.• Capital Expenditure: Expenditure of non recurring

nature incurred on Buildings, multi-purposes projects, buying of capital Equipments, Machinery etc.

Features of the Indian fiscal system

• Budgetary Parameters• Link between budgetary allocations

and the public • sector plan.• Forms and channels of central

budgetary transfers.

Objective of fiscal policy• To mobilize recourse growth• To promote economic growth• To ensure economic stability• To ensure equitable distribution• To increase employment

opportunities.

How to achieve this objectives

• Create and sustain the economy by providing public service and by undertaking public investment.

• Relocating the resources according to the national priorities.

• Redistributing income and wealth in favor of poorer sections of economy.

• Promoting private saving and investment.• Maintaining stability in economy.• Improving growth of economy and ensuring

the social justice to the people.

Fiscal Sector Reforms

•Complexity and inter-linkages

•Administrative structure

•Rigidities of expenditure pattern – Democratic limitations– Political uncertainties– Late start of State level reforms :

Goals of Fiscal Policy• Necessary to revamp fiscal policies towards developmental goals

• UNDP position for developing countries based on expanding fiscal space for human development

• Fiscal space definition varies according to approach adopted

• UNDP -Roy, Heuty, Letouze, 2007‘the financing that is available to government as a result of concrete policy actions for enhancing resource mobilisation, and the reforms necessary to secure the enabling governance, institutional and economic environment for these policy actions to be effective, for a specified set of development objectives’.

• Different from the IMF definition of fiscal space which is ‘the gap between current level of expenditure and the maximum level of expenditures a government can undertake without impairing its solvency’ (Development Committee 2006)

Goals of Fiscal Policy

• IMF focus on– short term goals– maintaining fiscal stability– incremental resources approach

• UNDP focus on – long term developmental objectives– resource needs for attaining MDGs – ‘transformational change’ rather than

incremental change

Tax ReformsTax reforms during 1990s have been mainly guided by the report of the Chelliah Committee on tax reform (1993). Main objectives :•simplification of the tax system• rationalization of tax rates• fairness in tax system• improvement in tax administration • providing a growth promoting tax structure

Direct taxes:• moderation of tax rates,•widening of tax base• incentives for development of infrastructure and housingIndirect taxes:• reduction in multiplicity of rates. •rationalization of the rate structure. •drastic reduction in the scope for discretionary changes .•uniform floor rates for sales tax by the States.

•Disinvestment / Privatization/Public Sector restructuring

•Systemic reforms in Government's borrowing process

•Expenditure Reforms CommissionTo carry the process of reducing the growth in non-developmental expenditure, the government has set up (in February, 2000) an Expenditure Reforms Commission.

5 ways to improve the quality of expenditure

1. Agency specific reforms, incl. an increased role for the private sector.

2. Strengthening the enabling environment – Promoting citizen demand, – Increasing transparency– controlling transfers– Establishing/strengthening anti-corruption agencies

3. Improving public expenditure management: – Budgeting realistically and implementing the budget as

announced, – Enhancing departmental accountability and flexibility.– Strengthening budgetary controls over open-ended

obligations and capital projects,– Tightening accounting and auditing arrangements.

Capacity building is critical for reforms and performance.5. Improving the quality and increasing the quantity of

productive expenditure go hand in hand: it is not one or the other.

Fiscal Reforms Program for the States

Main objective : to wipe out the revenue deficit in the State budget in the medium term.

The program components are:• Reduction in Non Plan Revenue Expenditure• Pricing/subsidy reforms• Institutional reforms• Reduction in the role of Government in nonessential

•Project Management Unit ( PMU) for Externally Aided Projects.

•RBI initiatives on Reforms in State Finances

•Fiscal Responsibility ActOn December 11, 2000 the Government has introduced a Bill in the Parliament titled as "The Fiscal Responsibility and Budget Management Bill, 2000"

There is a broad consensus on reform objectives-states

• To meet pressing developmental challenges, states need to:– spend more in priority areas.– spend more effectively.

• To finance the required spending increases, while at the same time reducing the deficit, states need to – restructure expenditure – reform tax policy and administration

• This report asks what needs to be done – by the centre as well as the states – to achieve these objectives.

Fiscal Rules

• Using the UNDP approach the fiscal rules in developing countries are

– Zero current deficits

– Focus on domestic resource mobilisation – ODA as a tide over mechanism

• Efficiency gains and expenditure switching necessary but insufficient tools for enhancing fiscal space

• instruments used differ for middle income and poor countries – growth and allocation functions of fiscal policy more important in developing countries – hierarchy of instruments

• Fiscal Space Diamond – 4 pegs– Domestic Resource Mobilisation– Reprioritization and Efficiency of Expenditures– Deficit Financing– ODA

Trends in deficit

Interest Payments

challenges• inadequate growth performance of

the• Indian economy is the poor

productivity of public expenditure.• low magnitude and poor

performance of investment in India

Thank you …………..