The Triple Threat | Article on Global Resession | Harsh Kumar
Public finance
1. Public finance is the management of a country’s revenue, expenditures, and debt
through various Government, quasi-government institutions, policies, and tools.
Components of public finance: public expenditure + public revenue + financial
scrutiny + fiscal policy + financial administration + public borrowing.]
Annual Financial Statement (Budget): Art 112
The term budget is nowhere used in the Constitution.
Budget is referred to as Annual Financial Statement in the constitution under 112.
Rail Budget was separated from the General Budget on the recommendations of
the Acworth Committee in 1924.
However, was merged again in 2017.
The Budget is a statement of the Government estimated receipts and expenditure in a
financial year starting from APRIL 1 and ending on 31 MARCH.
Those receipts and expenditure that relate to the current financial year only are
included in the revenue account (also called revenue budget) and
Those that concern the assets and liabilities of the government into the capital account
(also called capital budget).
Budget
Receipt
Revenue Receipt
Tax Revenue
Non-Tax Revenue
Non-Revenue Receipt
Expenditure
Capital Expenditure
Revenue Expenditure
2. OBJECTIVES OF BUDGET
RESOURCE ALLOCATION FOR PUBLIC GOODS
REDISTRIBUTION OF INCOME
STABILISATION IN THE ECONOMY
Receipts
Revenue Receipts:
Tax Revenue: Tax collected by government
form of direct and indirect tax.
Non-Tax Revenue: Profits and dividends fr
grants receivedby government, fiscal and gener
services, interest on loan forwarded by governm
penalties, fines etc.
Non-Revenue Receipts
They are loan taken by government which po
financial liability on government.
Expenditure
Revenue Expenditure: Broadly, any expenditure which does not lead to any creation
or reduction in liability is treated as revenue expenditure. Examples of revenue expen
salaries of government employees, interest payment on loans taken by the government,
subsidies, grants, rural development, education and health services, etc. The purpose of
expenditure is not to build up any capital asset, but to ensure normal functioning of
government machinery. It is recurring in nature and incurred regularly.
Capital Expenditure: An expenditure which either creates an asset (e.g., school buil
reduces liability (e.g., repayment of loan) is called capital expenditure. Repayment of
also capital expenditure because it reduces liability. It is non-recurring in nature.
FISCAL CONSOLIDATION
Fiscal consolidation is a process where government’s fiscal health is getting improved and is
indicated by reduced fiscal deficit. Improved tax revenue realization and better aligned
expenditure are the components of fiscal consolidation as the fiscal deficit reaches at a
manageable level.
Types of Deficits
3. Revenue Deficit RD = (2.7 % of GDP)=Revenue expenditure – Revenue receipts.
Effective Revenue Deficit
Effective Revenue Deficit signifies that amount of capital receipts that a
ERD = (1.8% of GDP)=Revenue Deficit -Grants for creation of capital a
Fiscal Deficit
Difference between total revenue and total expenditure of the govern
borrowings needed by the government. While calculating total reven
FD = (3.5% of GDP)=Budget deficit +Borrowings
Primary Deficit
Primary Deficit indicates the borrowing requirements of the government,
a government exceeds the total income. Note that primary deficit does no
Primary Deficit = Fiscal Deficit (Total expenditure – Total income of th
It is 0.4 % of GDP
Off Budget Financing Expenditure that’s not funded through the budget.
Budget Deficit
A budget deficit occurs when expenses exceed revenue and indicate the
budget deficit when referring to spending rather than businesses or indivi
Zero Primary Deficit
Hence, when the primary deficit is zero, the fiscal deficit becomes equal
to borrowings just to pay off the interest payments. Further, nothing is ad
Fiscal Slippage’ Fiscal slippage in simple terms is any deviation in expenditure from the
Monetized deficit
The MonetisedDeficit is the extent to which the RBI helps the central g
deficit means the increase in the net RBI credit to the central government
easily.
GOLDEN RULE OF BUDGET
The Golden Rule is a guideline for the operation of fiscal policy, especially in countries who
uses high borrowing to run the budget. It states that over the economic cycle, the Government
should borrow only to invest and not to fund current spending (current expenditure means
4. day to day running expenses). In layman’s terms, this means that the government should
borrow to finance investment that benefits future generations.
TYPES OFBUDGET
Balanced Budget The government may spend an amount equal to the revenue it collects.
Surplus Budget
If the expected government revenues exceed the estimated government expenditure in
Deficit Budget If the estimated government expenditure exceeds the expected government revenue in
Outcome Budget
It is a budget that convert outlays into outcomes by planning the expenditure, fixing a
scheme and bringing to the knowledge of all, the outcomes for each scheme/programm
Gender Budgeting
It is not an accounting exercise but an ongoing process of keeping a gender perspectiv
implementation and review.
Zero BasedBudgeting All expenses are evaluated each time a budget is made and expenses must be justified
Sunset Budgeting Scheme are announced with deadline, designed to self-destruct within a prescribed tim
FISCAL POLICY
FISCAL POLICY MONETARY
The use of Government Taxation and Expenditure policies like tax policy,
expenditure policy, investment or disinvestment strategies and debt or surplus
management to obtain the macro-economic goals.
Use of change
goals.
Set by the government Set by the RBI
No specific targets Inflation target
5. TYPES OF FISCAL POLICY:
Expansionary Fiscal Policy Contractionary Fiscal Policy
It seeks to increase the economic activity by putting
more money into the market.
It seeks to decrease the economic activity by taking
money from the market.
Adopted in response to contractions in the business
cycle and prevent economic recessions.
It is designed to combat rising inflation.
Measures-Lowering of taxes and increased
government spending are the components of
expansionary fiscal policy
Measures- reduction in government spending or a
in the rate of monetary expansion by a central bank
raising taxes by the government.
DEFICIT FINANCING
Deficit financing means generating funds to finance the deficit which results
from excess of expenditure over revenue.
Sources of Deficit financing are External Aids, External Grants, External and
Internal Borrowings, Printing of currency.
Printing new currency notes increases the flow of money in the economy.
Leads to increase in inflationary pressures which leads to rise of prices of goods and
services in the country.
MONETISATION OF THE DEFICIT
Monetisation of deficit happens when RBI buys government securities directly
from the primary market to fund government’s expenses.
In Simple terms, monetisation of deficit means printing more money.
This is resorted to only when the government cannot borrow from the market (Banks
and other Financial Institutions like LIC).
6. The money printed by the RBI is called high powered money or reserve money or
monetary base.
There are two types of monetisation: Direct and Indirect Monetisation
1. Direct Monetisation– Reserve Bank of India directly funds the Central government’s
deficit against government bonds or securities. Until 1997, the government used to
sell securities directly to the RBI. This allowed the government to technically print
equivalent amounts of currency to meet its budget deficit. However, this practice was
stopped over its inflationary impact and in favour of fiscal prudence. State Bank of
India (SBI) has recommended direct monetisation as a possible way of funding the
Centre’s deficit at lower rates, without increasing inflation and affecting debt
sustainability.
2. Indirect Monetisation– RBI does when it conducts the Open Market Operations
(OMOs) and/ or purchases bonds in the secondary market.
Issues with monetization the
deficit
It triggers a spike in inflation rate May increa
WAYS AND MEANS ADVANCES
WMA are temporary loan facilities provided by RBI to the governments of both
Centre and States to enable it to meet temporary mismatches between revenue and
expenditure.
The rate of interest is the same as the repo rate.
The tenure is 3 months.
FISCAL CONSOLIDATION
It is the process for reducing the fiscal deficit of the country.
Vijay Kelkar Committee presented a roadmap for fiscal consolidation.
Steps Taken For Fiscal Consolidation:
Implementation of the FRBM ACT,2003, GST, Insolvency and Bankruptcy Bill.
Better targeting of Government subsidies through Direct Benefit Transfer,
Through Improving Tax Collections by better compliance mechanisms, increasing the
tax base and Tax to GDP ratio of the country
The government pegged disinvestment target for 2020-21 at Rs 1.20 lakh crore etc.
7. WMA TYPES
SPECIAL DRAWING RIGHTS
INTEREST RATE IS REPO RATE MINUS 1%
NORMAL WAYS AND MEANS ADVANCES
INTEREST RATE=REPO RATE
Expenditure Management Commission (EMC)
The constitution of Expenditure Management Commission (EMC) of India was announced in
the Budget Speech by Finance Minister of India Arun Jaitley in the budget of 2014–15. The
Commission will be a recommendation body with the primary responsibility of suggesting
major expenditure reforms that will enable the government to reduce and manage its fiscal
deficit at more sustainable levels.
FRBM ACT, 2003
Aim– Transparency, equitable distribution of debt, fiscal stability.
To reduce fiscal deficit, to eliminate revenue deficit and a major step towards Fiscal
Consolidation.
It limited the fiscal deficit to 3% of the GDP.
The NK Singh committee (set up in 2016) recommended that the government should
target a fiscal deficit of 3% of the GDP in years up to March 31, 2020 cut it to 2.8%
in 2020-21 and to 2.5% by 2023.
The Act made it mandatory for the government to place the following along with the
Union Budget documents in Parliament annually: Medium Term Fiscal Policy
Statement + Macroeconomic Framework Statement + Fiscal Policy Strategy
Statement.
The FRBM rules mandate four fiscal indicators to be projected in the medium-term
fiscal policy statement. These are:
1. Revenue deficit as a percentage of GDP
2. Fiscal deficit as a percentage of GDP.
3. Tax revenue as a percentage of GDP.
4. Total outstanding liabilities as a percentage of GDP.
8. The latest provisions of the FRBM act – to limit the fiscal deficit to 3% of the GDP by
March 31, 2021, and the debt of the central government to 40% of the GDP by 2024-
25.
DEBT / GOVERNMENT BORROWINGS
Government liabilities against the Consolidated Fund of India are defined as Public
Debt.
Other Liabilities include liabilities on account of Provident Funds, Reserve Funds and
Deposits, Other Accounts, etc.
DEBT TO GDP RATIO: Debt-GDP ratio is an important indicator of medium and
long-term sustainability of any country. It indicates how likely the country can pay off
its debt.
India’s public debt to gross domestic product (GDP) is likely to increase to a record
high of 89.3 per cent in 2020, breaking the previous high of 84.2 per cent in 2003.
The ratio was 72.3 per cent in 2019 and 68.8 per cent five years ago in 2015,
according to the data from the International Monetary Fund’s World Economic
Outlook (WEO).
CROWDING OUT EFFECT
When governments borrow, they compete with everybody else in the economy who
wants to borrow the limited amount of savings available.
It causes a decrease in the quantity of funds that is available to meet the investment
needs of the private sector.
As a result of this competition, the real interest rate increases and private investment
decreases. This is phenomenon is called crowding out.
N K SINGH COMMITTEE/ FRBM REVIEW COMMITTEE
It proposed to replace the FRBM Act, 2003 with a Debt Management and Fiscal
Responsibility Bill, 2017.
Escape Clause was introduced.
9. ESCAPE CLAUSE
It refers to the situation under which the central government can
stipulated fiscal deficit target during special circumstances.
GOI used escape clause this year as COVID 19 is a national cal
Under Section 4(2) of the Act, the Centre can exceed the annual
Ø National security, war
Ø National Calamity
Ø Collapse of Agriculture
Ø Structural Reforms
Ø Decline in real output growth of a quarter by at least three percentage poin
TRENDS
As per this trend- Gross Tax receipt, Direct Tax and Indirect Tax all are varying in the
last decade.
Overall Direct tax is more than the indirect tax.
According to Budget 2020-2021:
Non tax revenue- Dividend and profit >> interest receipts.
Capital Receipt- Debt Receipt >> Market Loans >> Small Savings and state provident
funds.