The Fiscal Mechanism of the government and its challenges to meet the fiscal deficit in the year 2015.

1. Fiscal Mechanism of the Government of India.
Topic- Challenges to meet the Fiscal Deficit
Presented by:-
Sri Deepak Kr
Roll No - 14

2. Meaning of Fiscal Mechanism –
• System – Resources are obtained (Revenue & Capital)
Scale and Pattern for allocation is determined.
• It is based on Federal Constitution of India, which assigns the powers in 3 list -
• The FM is defined by its Working capacity – Components : rules, procedures,
technical, political, legislative etc.
• Components are important part of Budgetary process because of the relations
between different Taxes .
i) Union List ii) State List iii) Concurrent List.
It has 97 items, on
which the central
government has the
power to legislate.
It has 66 items,
legislated by State
government.
It has 47 items, on
which both the central
and state government
have the power to
legislate.
E.g. – Defence,
Railway, Currency,
Foreign exchange ,
Foreign trade,
Industries etc.
E.g. – Police and
Justice administration,
Public health,
Education, Fisheries,
Forest etc
E.g. – Labour disputes,
social security,
Charity, social
planning, etc.

3. Tax - main source of Revenue , it is shown in
- Budget - Financial bill - Revenue receipt.
Budget - Department of Economic affairs on the basis of Economic Survey.
- Arbind Subramanian – the Chief Economic advisor
- IMF : ‘WORLD ECONOMIC OUTLOOK’
- The Vol-1 gives the Future Out look and the Vol-2 shows the previous
year’s data and present Situation.
- The Fiscal Policy can be read in vol-2: Ch-2 and Vol-1: Ch-2 and 10.
• The Budget contains :–
3 Documents –
i) Annual financial statement-(last years Income & expenditure, Future Plans)
ii) Financial Bill-(any tax to be imposed is after parliament accepts it)
iii) Appropriation Bill-(Any amount to be spended is to be approved by parliament)
3 Funds –
i) Consolidated fund of India –( Direct & Indirect Revenue collected, any Loan raised or
given)
ii) Contingent fund of India-(It is accidental circumstance and natural calamities)
iii) Public Accounts - (National Investment fund, Small saving fund & Contigency fund)
Vote on Account & Interim Budget.

4. Fiscal Mechanism is based on Tax part of the Budget.
Central government
State government Direct and Indirect Tax Revenue Reciept.
(e.g.) 12% Surcharge - Consolidated fund of India’
2+1=3% as CESS charge on Education goes to the ‘Public a/c’.
- Since Deductions and Exemptions are allowed , It gives rise to :
Merits Demerits
• Progressive in Nature – (it is collected
from richer section as 10%, 20%, 30% and
12% surcharge on super rich) and is again
re invested in the economy for the poor
people development.
• It is certain. (10% tax before 31st
march)
• Elasticity. (Rises from 10% to 20% on
basis of Income.)
• The valuation can be seen in tax
collection
• Tax is excempted – (due to staff salary,
data base management)
• It has a narrow base – (if Re-1 is taken
against Rs 10,000/= in place of 10% on
above 2.5 lakh) more fund can be raised.
• Externality is not counted –(Tata V/s Film
Star, both pay 30% tax)
• Hardship is not counted-(Carpanter &
Landlord pays 10% on calories.)

5. • The government allows DEDUCTIONS and EXEMPTIONS from Taxes, also maintains
the MACRO-ECONOMIC Stability.
- the govt. plans its expenditure and shows in
a budget : -
i) Surplus Budget .
ii) Balanced budget .
iii) Deficit budget .
• The current budget of the government of
India is a DEFICIT BUDGET. And in Fiscal
Mechanism, the FINANCE COMMISION
plays an important role. How ?
- Finance Commission is constituted for 5 yrs – to recommend allocation to States from
Central govt. e.g. Tax allocation was 32%, now it will be 42%, on basis of GSDP of the
States.(UTTAR PRADESH, BIHAR, ASSAM, GOA and SIKKIM)
- If 42% of tax will be returned – Borrowing will have to be done. (FD by S. Chakroborty )
2014 2015
Budget Deficit = 0 0
(+) Market borrowing = 512628 555649
(=) Fiscal Deficit = 512628 555649
GDP = 12653762 14108945
FD as % of GDP = 4.1% 3.9%

6. • My topic is “ the Challenges to be meet , to control the FISCAL DEFICIT”
Arun jatley says – he will reduce the FD to :- 3.6% in 2016 and 3% in 2017.
Where as 14th
Finance Commission , wants it to be reached by 2016. Q is HOW?
It is by cutting down the Expenditure and Increasing the Income.
BUT it can't be done . Why?
Because there are problems -
The problems in Increasing the Income are –
• Revenue shortfall - (due to huge tax relief to Corporate sectors for Make in India and others)
• Railway is not making sufficient profit.
• Pubic sector units are in loss.
• Poor market response in Dis-investment –(no buyers so less fund is raised)
• Less loan recovery fron the State government.
The Challenges in reducing the Expenditures are – because expenses will increase.
• The 7th
Pay Commission – (Justice A.K. mathur will present report on October 2015)
• Large Subsidy Bill – (total 2.5 lakh crore as Subsidy)
• Implenentation of GST-(25 Thousand crore as compensation to state government)
• 14th
Finance Commision implenentation-(42% tax to be returned to state government)
The Government has adopted and Implemented some Mechanisms –

7. Like -
• The CSS-Central Sponsored schemes have been reduced from 122 to 66.
• The price of Petrol and Diesel was Deregulated –(means no subsidy paid and excise duty
increased for raising the govt. fund)
• Direct benefit transfer, DBT –( for LPG)
• JAM Trinity – (Jan dhan Yojna, Aadhar card and Mobile are being used to reduce the expences)
• NFSA- National food security act - (to cover 40% of population in place of 67%) it will reduce
food subsidy i.e. purchasing on Ration Card at low price.
• Rich Public Sector Enterprises are asked to pay more Dividend – (ONGC, OIL INDIA LTD etc,
but how long a cow will give milk)
Some Mechanism, which are yet to be Implemented are: -
• GST – 1/4/2016.
• GAAR 1/4/2017 –(General anti avoidance rule- for telecom companies like Vodafone etc.)
• PDMA – Public Debt management agency to see after the, laws are implemented.
• Coal Block Auction – Just has been started.
• Effective Monitoring – to keep an eye on every Rupee.
• The Pay Commission to be renamed as – Pay and Productivity Commission.
• The Government to Shift to Accrual based Accounting.
• MIS – Management base Information system for monitoring both Central and States accounts.
• New laws for Black Money
And many more mechanism has been put forward by the Finance commission and Finance
Ministry for raising income to meet the expenditure of the Government and Achieve the
target of Fiscal Deficit.
THANK YOU.