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Fiscal system of a country refers to
the revenue and capital resources
that can be raised by government,
the procedure to be observed in
raising and spending funds and in
case of a federation such as ours the
provision that governs the
relationship of the constituent unit
of federation. It includes with in its
purview taxation, expenditure, debt
management and inter-
governmental fiscal relation.
• Indian fiscal system is based on the
constitution of India which is federal
in character. The constitution
envisages two layers 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.
Division and functions
The constitution distributes the legistative function
and resources into three lists
(ii) The Union list
(defence, foreign relation, railway, currency )
(iv) The state list
(education ,medical public health, police, law & order)
• The concurrent list
( Trade union, planning & price policy)
The taxes over which there is legislative jurisdiction of
centre extends fall under four groups
The taxes which are levied and collected by the union and the
proceed are retained by it. These are corporation tax, custom
duties, taxes on capital value of asset .of individual.
The taxes levied and collected by the union but the proceed of
which are shared with the states. These are Income tax and
The taxes which are levied and collected by the
union and the proceed are assigned to states
with in which they are leviable. These are succession
and estate duties in respect to property other then
agriculture land ,taxes on goods and passenger
carried railway ,sea and air.
The taxes which are levied by the union but the proceed are
of which are collected and retained by state. These are stamp
duties and duties on excise on medicine and toilet
preparation containing alcohol.
The total expenditure consist of
revennue expenditure(83%) and
capital expenditure(27%) The total
expenditure may also be classified
plan(26%) and non plan
Non Plan expenditure
• Interest payment
• Defense expenditure
• Grant to state and UT government
• Grant to foreign government
• Other non plan expenditure
General Service+ Organ of state + tax collection + Police +
Pension + Write off loan +others
Social Service + Edu. Sports & Youth affairs + Health and
family welfare +water supply +housing+ Information and
broadcasting+ Labour and employment +Welfare of ST,SC &
Economic Services + Ag. & Allied activities +Rural
development+ Irrigation and flood control +energy + Industry
& minerals +Transport+Communication +Science Tech.&
Loan + advances
Receipt of Central Government
Tax Revenue ( Corporation tax +Tax on income on other then
Corporation Tax +Interest tax +Expenditure Tax +Custom +Union
Excise Duties + Wealth Tax +Gift Tax +Other Tax +Taxes on UT +
Non tax revenue : Fiscal Service +Interest Receipt +Dividend and
profit + Other general service +Social service +Economic Service
+UT without Legislature + Grant–in–aid and contribution.
Capital Receipts : International debt Market +External assistance
+Recovery of Loan +Small saving +State provident fund +Special
deposit + Disinvestment +Others
Budget Deficit = Total Expenditure – Total Revenue
( The excess of revenue expenditure over revenue receipts.It shows the
deficit of government on current account)
Revenue Deficit = Revenue Expenditure – Revenue
( The excess pf all expenditure over all types of receipts
Fiscal Deficit = Revenue Deficit + Capital expenditure
( The excess of expenditure over revenue receipts and non debt
capital receipts. It represent the total borrowing requirement of the
central government )
Primary Deficit = Gross Fiscal deficit – Interest Payments
( Fiscal deficit net of interest payments. It is the non interest deficit
and reflects the current fiscal of the government.)
Monetised Deficit : The part of fiscal deficit which is financed by
RBI through printing of notes.
What is the fiscal deficit?
The fiscal deficit (FD) measure the shortfall in
government ability to fund its expenditure through
Sources of funds for a government are of to kind-
revenue and capital
The fiscal deficit is a measurable number which occurs in
the government statement.
To get more technical , FD is what you take
away the total expenditure from the sum of
revenue receipt (T& NT), recoveries of loan
and other receipt
In case you are wondering what revenue expenditure
is, it is administrative expenditure, and capital
expenditure goes towards capital or asset formation.
FD is important to annual budget. The budget is the
government annual report, which differs from corporate
annual report in one key area-a budget gives projection
Or next year’s number alongside its performance for a
How is FD bridged ?
FD represent the extent to which the government
needs fund, but does not have them.
One simple way getting funds you don’t have is to
GoI is the largest borrower in India. Annual borrowings
Of Govt. are probably larger then that of entire
Besides, borrowing the govt. has another way of finding
funds it does not have.
Being the law maker of the land gives the govt. the
power to create money which is simply printing
additional notes .This is called monetization.
How to make sense of FD number ? Is it good
FD to some extent is fine. One typically looks
at ratio of FD to gross domestic product. This
ratio should ideally remain around 4% for a
country like India. So says the IMF.A much
higher number is bad news.
Typically many nation and definitely developing
nation, will run FD as govt, has the government
has large role to play in the economy in areas
like infrastructure, education, social support
( India does not have this), defense, Civil admn.
and so on. Government, Needs are likely
to more then its income in a growing
Why is FD so important?
FD has a lot of impact on govt. policy. For example,
if it turns out to be very high in a year the govt will
have to either borrow a lot or print a lot of money.
Borrowing a lot will push up interest rate their by
making the economy costlier and reducing
Competitiveness of goods produced Vis-à-vis
those made by other country.
Printing lots of money breeds inflation, which is also
bad beyond a point. Sustained high deficits can lead to
very high accumulation of debt by the govt. leading to
what is called internal debt trap.
How to keep FD in control?
It is important keep FD within a limit for this there
are obvious ways
Increase revenue or cut expenses or both. Revenue can
be increased in three fashion- increase tax rate or tax
more things or reduce tax evasion.
One example of tax more things is taxing agricultural income,
currently free from levy in India.
In cutting expenses GoI has traditionally taken easier
route. Like cutting infrastructure spending instead harder
ones like cutting subsidies or freezing recruitment.