Documentos de Académico
Documentos de Profesional
Documentos de Cultura
LIST OF FIGURES.................................................................................................5
LIST OF ABBREVIATIONS.....................................................................................6
1. Introduction....................................................................................................8
1.1 Economics an introduction...........................................................................8
1.2 Indian Economy- Background.......................................................................9
1.2.1 Measures taken by government at times of crisis...................................10
1.3 Current Problems with Indian Economy......................................................12
1.4 Concept of fiscal deficit..............................................................................13
1.4.1 Benefits of budget...................................................................................14
1.4.2 Formation of deficit.................................................................................14
1.5 Aim of the research....................................................................................15
1.6 research design..........................................................................................15
2. Literature review..........................................................................................17
2.1 Fiscal deficit an overview...........................................................................17
2.2 Various effects of fiscal deficit....................................................................18
2.2.1 Effect of fiscal deficit on inflation............................................................18
2.2.2 Effect of Fiscal deficit on growth.............................................................20
2.2.3 Effect of Fiscal deficit on trade deficit.....................................................21
2.2.5 Democracy and subnational effect on fiscal deficit.................................22
2.2.5.1 Is a strong central government a solution for fiscal deficit in
subnational governance?.................................................................................23
2.2.5.2 Subnational governance in Indian context...........................................23
2.3 Sustainability of fiscal deficit......................................................................24
2.3.1 Sustainability of global fiscal deficit........................................................25
2.3.2 Sustainability of Indian fiscal deficit........................................................25
2.4 measures to achieve sustainable fiscal deficit...........................................27
2.4.1 Fiscal decentralization.............................................................................28
2.4.1.1 Problems with fiscal decentralization...................................................28
2.4.2 Tax reforms.............................................................................................29
2.6 Summary of literature review.....................................................................30
1
3. Methodology.................................................................................................32
3.1Research methodology................................................................................32
3.2Research design..........................................................................................33
3.3 Sample.......................................................................................................35
3.4 Data collection...........................................................................................37
3.5 Data analysis..............................................................................................38
3.7 Ethical Issues..............................................................................................39
3.8 Limitations..................................................................................................40
4. Findings and Analysis...................................................................................41
4.1 Fiscal deficit of centre, state, combined fiscal deficit and GDP................44
4.2 Receipts of government.............................................................................46
4.3 Expenditure of the government..................................................................51
4.4 Financing of deficit.....................................................................................54
4.4 findings from Qualitative analysis (interviews)...........................................56
4.5 Major findings................................................................................................60
4.6 Discussion..................................................................................................64
4.6 Conclusion..................................................................................................66
4.7 Further studies...........................................................................................67
5. References...................................................................................................68
5.1 General References....................................................................................68
5.2 Institutional reports and publications.........................................................80
Appendix 1. Inflows, outflows in a budget & Formation of Fiscal Deficit..........81
Appendix 2. FISCAL DEFICIT OF INDIA AND HOW IT IS FINANCED..................82
Appendix 2. RECEIPTS OF CENTRAL GOVERNMENT FROM VARIOUS TAXES....83
Appendix 3. CAPITAL RECEIPTS FROM MAJOR HEADINGS.................................85
Appendix 4. MAJOR HEADS OF EXPENDITURE OF CENTRAL GOVERNMENT......85
Appendix 5. GROSS FISCAL DEFICIT OF STATE.................................................87
Appendix 6. PATTERN OF RECEIPTS BY STATE GOVERNMENT.........................87
Appendix 7. TOTAL EXPENDITURE OF STATES AND % PAID IN AS A PART OF
INTEREST..........................................................................................................88
Appendix 8. COMBINED DEFICIT OF CENTRE AND STATE IN CRORES INR........88
Appendix 9. GROSS BORROWING OF CENTRE AND STATE..............................89
Appendix 10. LIABILITIES ON CENTRE AND STATE...........................................89
2
Appendix 11. FISCAL INDICATORS OF THE CENTRAL GOVERNMENT, STATE
GOVERNMENT AND COMBINED ALONG WITH GDP GROWTH AND ACCEPTABLE
FISCAL DEFICIT AND DIFFERENCE FROM ACCEPTABLE.....................................90
Appendix 11. FISCAL INDICATORS OF THE CENTRAL GOVERNMENT,
STATE GOVERNMENT AND COMBINED ALONG WITH GDP GROWTH AND
ACCEPTABLE FISCAL DEFICIT AND DIFFERENCE FROM ACCEPTABLE
LIST OF FIGURES
Figure 4.2 Comparative graph of gross fiscal deficit of centre, state, combined (state and
centre) and GDP growth at factor cost from 1971 to 1980……………………………….42
Figure 4.3 Comparative graph of gross fiscal deficit of centre, state, combined (state and
centre) and GDP growth at factor cost from 1981 to 1990………………………..….…..42
Figure 4.4 Comparative graph of gross fiscal deficit of centre, state, combined (state and
centre) and GDP growth at factor cost from 1991 to 2000………………………..………43
Figure 4.5 Comparative graph of gross fiscal deficit of centre, state, combined (state and
centre) and GDP growth at factor cost from 1971 to 1980…………………………………43
Figure 4.7 Breakdown of average revenues (1980-2010) from various sources of central
government…………………………………………………………………………………….….47
Figure 4.8 Breakdown of average tax revenues (1980-2010) from various sources of central
government…………………………………………………………………………………….…..47
Figure 4.9 Comparative Graph of revenues collected from non-tax revenues and capital
receipts……………………………………………………………………………………….…….48
Figure 4.11 figure showing share of states in the taxes collected by the central
government…………………………………………………………………………………….….. 50
Figure 4.13 a) average of revenue expenditures under major headings from year 1980-2010
b) average of capital expenditure under major headings from year 1980-2010……………52
3
Figure 4.14 graph showing % of central government’s expenditure on interest payments
compared with total expenditure………………………………………………………………….53
Figure 4.15 Graph showing interest payment and subsidies of central government compared
to % of GDP…………………………………………………………………………………………54
Figure 4.16 Graph showing borrowings of centre and state governments to finance
debts………………………………………………………………………………………………….54
Figure 4.17 Graph showing the various sources of central government of financing
debt…………………………………………………………………………………………………..55
Figure 4.18 sustaining fiscal deficit by corrective measures, programme level logic
model….................................................................................………………………………63
LIST OF ABBREVIATIONS
1 CRORE 10 MILLION
4
5
ABSTRACT
Indian economy had continuously faced fiscal deficit (its current fiscal deficit is among the
highest in world (Srinivasan, 1996), more than 90 % of the budgets presented in the
parliament were fiscal deficit budgets. The continued problem of fiscal deficit had deep
negative impact on Indian economy 1) when the expenditure is more debt finance is needed
to full fill the requirements, and debt finance is mostly available at high interest rates, in this
way a major portion of revenues goes out in form of interest payment. 2) when a major
portion of revenues are spent on arrangement of finance certainly their comes pressure on
other expenditure heads, mainly on the infrastructure development human resource
development, which gets retarded due to lack of funds, this is the reason why only five out of
ten five year plans met success in the history of post-independence Indian economy. 3)
Fiscal deficit gives birth to other secondary effects like inflation, retarded growth, trade deficit
and even political instability. Fiscal deficit has the potential to seriously harm any economy
in the world, leave apart a developing economy like India. Actually fiscal deficit problem
compound its affect in presence of other problems. With the advent of global slowdown the
growth rate of Indian GDP declined from 9% to around 6% (RBI data, 2009). This is the time
to be cautious because growth reduces the effects of fiscal deficit but when growth declines
fiscal deficit becomes more potent to harm the macroeconomic environment of the country.
It is very important for a nation to check the problem of fiscal deficit at right time. To solve a
problem one needs to understand the problem first. This research looked into the basic
factors which are causing fiscal deficit. These factors were categorised under two major
budgetary headings, expenditure and revenue. The research further analysed the sources
contributing in revenue generation and activities acting as revenue eaters (black holes of the
economy). The analysis is done by exploratory data analysis tools which clearly separates
the revenue eaters from the other budgetary headings. Also the analysis helped in finding
potential revenue generators.
The next level was to find some solutions or corrective measures to fill the gap between
receipts and expenditure. For this the research employed programme level logic model of
analysis. As the research shows the budgetary economics is made up numerous
components if these components fall in right place the programme would work in a positive
way and if not the programme would work in negative way. So if corrective measures are
applied at right places and at right time the system programme would function in a positive
manner and give better results.
The main aim of the research was twofold first to find why fiscal deficit is continuing to
increase in Indian context and then how this could be brought to sustainable limits. The
research found that certain taxes are not contributing to their potential. The research also
found that subsidy and interest payments are consuming a huge portion (almost 50%) of
revenues.
6
1. Introduction
As the word economics flashes subconsciously our minds start thinking about stock
matter of fact economics is a social science, though it differs a lot from other social
scarcity” (Hall and Lieberman, 2008). Mankiw, 2008 opines that management of
society’s resources are important because resources are limited. Therefore society
cannot give every individual highest standard of living but to give an individual best
management of limited resources is important and this is what economics all about.
Ragnar Frisch. Under Microeconomics the prima focus is on individual units like
consumer, firm, an industry, even a group for example market demand curves
7
On the other hand in macroeconomics, economic problems are studied from the
“Study of the overall average and aggregate of the system”. (Trehan et al, 2008)
Even before India got independence there was a broad consensus on national level
that after getting independence India should follow planned development and the
centre should play a dominant role to achieve the planned growth (Srinivasan,
extremely tedious and it was hard to come out of the strong administrative system to
1996). This policy of centre did not failed completely neither it did any wonders for
Indian economy. During the period 1950-80 the growth rate of Indian economy was
meagre 3.75%. The ill effect of licence era was not only it stalled growth rate but also
This growth in GDP was not overnight but was due to the efforts being made in trade
and industrial liberalization and also tax reforms. In fact it started to become clear
from 1970s that cost of state intervention which earlier was considered to be the
8
vehicle for growth of Indian economy were far out of proportion to the benefits. The
state intervention not only prevented competition but also constrained efficiency and
With the start of eighties Indian economic started to change tracks from fiscal
were primarily aids from World Bank and International Monetary Fund and
( India statistics handbook, 2010) during this decade, but as mentioned this growth
was primarily pillared on foreign aid and debt as a result macroeconomic balances
The starting of the new decade saw the start of serious economic problem for India,
the reason could be the debt driven economic growth of the eighties. As a result
there were serious macroeconomic imbalances, the economy was in shattered state
and it needed leadership, framework and determination and not just the piecemeal
economic reforms of the past to bring it out the economic crisis and then to put in
fast lane of economic growth. The leadership and determination came in form of
Man Mohan Singh. The governance realized that it would not be enough to take
immediate actions which are necessary in the short run to tide over the crisis and
return to the pre-crisis policy thereafter, the need was the formation of systemic
Zagha, 1994)
9
1.2.1 Measures taken by government at times of crisis
take control of the current situation and pave way for better economic future. This
included the devaluation of Indian national rupee (INR), fiscal deficit were cut and
special balance of payments were mobilized from the IMF and the World Bank. It
reforms. The list of major reforms undertaken by the government is given below:
Fiscal:
External Sector:
schemes
Industry:
Financial Sector:
10
• Reserve requirements for banks (CRR and SLR) were reduced
Public Sector:
• Greater autonomy and accountability for public enterprises was brought into
action
As mentioned earlier Indian economy showed growth and development right from
independence but earlier the growth was slow and it picked momentum after the
economic reforms of 1991-92. Still India is far away from being termed as a
find solution for certain problem which are discussed in the next section.
1. Infrastructure related
compared to requirement)
11
• Quality of roads is below standard
safe water, 65% of the population lacks access to essential drugs and
In many of these physical quality of life indicators, India’s Record is worse than that
of sub-Saharan Africa.
2. Fiscal deficit
Out of the above listed five problems first four are related with infrastructure and
human resources. In fact these problems are the characteristic of any developing
nation, as a matter of fact fiscal deficit too is one of the problems faced by a
developing nation (it is also seen in developed countries). The point that seperates
fiscal deficit from all these problems is the fact that firstly it is an economic problem
secondly it gives rise to numerous other problems which hinders the normal
development of the developing nation (Lal et al, 2003). Fiscal deficit if handled
12
properly gives a nation an opportunity to plan and develop accordingly. The next
related with budget as fiscal deficit is a budgetary term. To an extent the success of
list of all planned expenses and revenue of the state (Sullivan and Sheffrin, 2004).
• It could be said that budget is an aid to management and not a substitute for
Keeping in mind all these factors it becomes very important for a country to
If a budget of any country is scanned the first thing which one sees is the receipts or
the revenues earned by the government. Next to follow is the expenditure by the
government. If the revenue is more than the expenditure then it is budget surplus, if
13
the revenue earned is less than the expenditure of the government then it is a case
of budget deficit. Deficits are of different type 1) revenue deficit, which is equal to the
difference between revenue expenditure and revenue receipt. 2) Fiscal deficit, which
is equal to the difference between total expenditure and sum of revenue and capital
receipts (except borrowings and liabilities) 3) primary deficit, which is the difference
between fiscal deficit and interest paid (interest is paid on the money which the
education, health, agriculture and water supply so that the nation could transform
into a developed country.If the country is spending more than it is earning year after
year this would bring cumulative pressure on macroeconomic stability of the country
borrowing leads to a situation analogous to atomic chain reaction, this chain reaction
worked on fiscal deficit, though work solely on fiscal deficit is less and on indian
fiscal deficit is perhaps more less. The purpose of this research is to start the
The main objective of this research is to find answers of two main questions.
14
(this question would look in to various aspects of the receipts collected by the
government that is the various sources, contribution % by each source, where the
(This question would try to find the ways how can the holes which are draining the
Thisresearch is divided into five Chapters. Chapter one provides a brief discussion
of fiscal deficit. A detailed literature review is presented in Chapter two which looks
into various aspects of fiscal deficit, which forms the basis of further research and
why case study approach is used, why both quantitative as well as qualitative
method have been applied for this research. Chapter four presents the analysis,
findings, discussions and implications from the research conducted. Conclusions will
15
2. Literature review
The budget deficit is nothing more than the difference between the expenditures of
the government and the tax revenues that government receives (Galbraith and
Darity, 1995), similarly fiscal deficit too is termed as the difference between
government’s spending and earnings, the difference between budget deficit and
fiscal deficit is that in fiscal deficit the earnings from borrowings and liabilities is not
16
important for country’s overall competitiveness in global spectrum (Fischer, 1993
GDP, inflation, trade balance, current account balance, foreign exchange reserves,
In spite of having such importance it is easy to ignore fiscal deficits because they do
not have immediate effects, it is just like obesity. In case of obesity there is no
immediate concern except the clothing size gets increasing, but in long turn obesity
increases the risk of chronic heart attack or diabetes (Feldstein, 2004). Like obesity
deficit is also caused by self-indulgent living that is governments spending more than
its revenues. Another similarity of fiscal deficit with obesity is that severe the problem
(obesity/fiscal deficit) more difficult is to correct it. (Feldstein, 2004). One of the
biggest problems with running fiscal deficits is that it curtails the government’s ability
economic activities in a country) and this in turn increases economic and political
overall growth, trade deficit, capital deficit. Certain economic factor like crowding out
effect is also associated with fiscal deficit. Apart from these factors fiscal deficit has
strong connection with political and administrative factors like democracy and
subnational governance. This section would look into these factors critically.
17
2.2.1 Effect of fiscal deficit on inflation
relation to the overall economy increase money supply which in turn leads to
Macroeconomic theory states that persistent fiscal deficits are inflationary (Catao
and Terrones, 2005). Sargent and Wallace, 1981 support the fact that fiscal deficit
increase inflation theory and add that a government facing persistent deficit has to
sooner or later finance these deficits with money creation ‘Seinorage’ thus producing
18
inflation. Alesina and drazen,1991; Cukierman et al. 1992, Calvo and Vegh,1999
further added to this theory of fiscal deficit and inflation especially for developing
countries because these countries are less tax efficient, less politically stable and
have limited access to external borrowing all these factors lower the relative cost of
Seinorage and thus increase dependence on the inflation tax. Monitiel, 1989 and
Dornbusch et al. 1990 have a slight variation in their view they suggested that fiscal
deficits makes room for inflation rather than playing the driving force. Blanchard and
Fischer, 1989 in his paper mentioned that empiricaly little success has been met in
finding a significant relationship between fiscal deficit and inflation however later
fisher et al, 2002 using a panel of ninety four countries were successful in breaking
his dilemma and proved that fiscal deficits is among the main drivers of high
inflations. He further proved from his work that one percentage point improvement or
decline in the ratio of fiscal balance to Gross Development Product typically raise or
Apart from the above studies trying to find a link between fiscal deficit and inflation
few more studies have been done to obtain empirical support for cyclically recurring
such study for Indonesia Aghelvi and khan 1978 for Brazil. Later Sarma 1992
followed the Aghelvi khan model and did a similar study for India and came to a
similar result that deficit induce inflation and vice versa. Heller 1980 differed from
these studies while doing a case study of 24 developing countries; his study found
that cyclic recurring of fiscal deficit is not always true. Naastepad, 2003, not only
regarded fiscal deficit as the main cause of inflation but also with balance of payment
19
Although many economist have successfully linked fiscal deficit with increasing
inflation, other economist have doubts regarding the above said relation although
none of the doubting researchers were able to prove their point by their researches.
On the whole it could be said that fiscal deficit has a strong direct relation with
inflation.
Great degree of attention has been devoted in both theoretical as well as empirical
literatures towards possible impact of different fiscal measures on growth (Adam and
Bevan, 2005). While theoretical aspect points out the constraint in government
Empirical literature clearly supports the fact that variations in subset items are
growth neutral (gemmel, 2001). Eminent group of economists like Easterly et al.
(1994),Kneller et al. (2000) and Miller and Russek (1997) assume that relation
between deficit and growth is linear. Although Giavazzi et al. (2000) found their study
to oppose the linear relationship of deficit and growth. Adam and Bevan, 2005
worked on the lines of Giavazzi and found that linear representation between deficit
and growth reasonably fits the case of developing countries. At low levels of fiscal
deficit the non-linearity is masked. They also found that for low and middle income
Fiscal deficit had been linked with trade deficit by certain researchers (Rosensweig
and Tallman, 1991 1992) and these two are referred as twin deficits. Milne (1977) in
20
her study of 38 countries finds a positive statistical relation between trade deficit and
fiscal deficit. Arunro and Ramchandar,1998 have gone one step ahead and added
that current account and fiscal deficits have important policy implications on a nation
and they effect long term viability of economic progress of a nation, this implies that
if the basic reason for rising trade deficit is the increasing central government
budget deficit then the trade deficit cannot be corrected until the government deficits
are put in place. However if such a view (role of budget deficit in trade deficit) is not
correct then reductions in government budget deficit would not resolve the problem
of trade deficit (Belongia and Stone, 1985). Enders and lee, 1990 and Abell, 1990
slightly differed from this point and suggested that there is a casual effect of
movement in government deficit on trade deficit and contrary to all these Evan
(1986) provides empirical evidence that there is no relation between the two deficits
In a democratic nation divided governments and alternating governments are the two
main factors of a political system that generate myopic and inefficient policies (Rumi,
2009). Political competition assures that the current ruling party can lose in the next
government knows this fact and thus can induce an excessive expenditure because
future costs are not completely internalized. The incumbent government strategically
misbalances its count to improve its probability of re-election (Alsina and Tabellini,
1990).
21
In democracy a political bias exists in favour of deficit finance. (Buchanan and
budgetary policies can enhance or retard the likelihood of their remaining in office.
of support contrarily If the politician increases tax and reduction in expenditure this
will tend to weaken his base. It is noticed that politician use budgetary policy to
strengthen their electoral base this in turn increases state expenditure and reduces
taxes (Wagner and Tollison, 1980), which harms the fiscal stability and give rise to
deficit. (Buchannan and Wagner, 1977) are of the view that balanced budget which
has mix of deficit budget and budget surplus is better for macroeconomic stability of
any country.
Rodden (2002) states the fact that the fiscal deficits are greater in nations where sub
nations are more dependent on national transfers for financing their spending and
where they have freedom of borrowing from capital markets. Wibbels, 2003 also
supports the statement and his work shows fiscal deficits are larger in federal
governments with the authority to impose hard budget constraints on sub nations by
is a single majority government then the national party leaders can force the sub
stability( Samuel, 2000; Treisman, 1999) Khemani, 2007 summarises this by stating
22
the fact that a dominant national party leading the centre as a favourable condition
for fiscal discipline in a federation. Wibbels, 2003 argues to the above discussed
statement he opines that if the central authority is strong enough to impose discipline
on subnational governments then there are chances of the central government itself
found that if the government in centre and state is of same political party then the
The reason behind this could be the financing of the deficit of these states is by
means of subsidized credit taken from financial markets. These financial markets are
The 1991 economic liberalization policies not only specifically reduced central
control over industrial policy and public sector investments but also increased
prominence of state level regulations. This increased competition among states for
private investment (Sinha, 2004). From 1960 to present, state governments are
responsible for 50 per cent to 60 per cent of total government expenditure in India
( Rao and Singh, 2005). While seeing the revenues it was found by Rao and Singh,
2005 that state governments collect nearly 30 per cent of the total revenue. The
reason behind this discrepancy is the fact that revenue generation power of state
government.
State deficits are financed majorly by direct loans from central government
(constituting about 60 per cent of total borrowing by major states) and the rest is
23
financed by borrowings from financial markets. These market sources are heavily
regulated by the centre (Khemani, 2007). State also gets finances by means of
borrowings from state owned public enterprises. The burden of these borrowings
2008 found in a study that voters support parties in expectation of benefiting from
state expenditure on public service. When state lacks the fiscal space necessary to
provide public services, voters have little to re-elect these parties and look forward to
alternative choices.
leads a nation to serious economic problems. Several countries in past have ignored
fiscal and as a result have faced severe problems. Therefore it becomes of prime
effort to control the economy of the country. In long run these policies should be
feasible so that various macroeconomic indicators do not clash among each other;
this is known as sustainable fiscal policy. To analyse the sustainability of fiscal policy
two approaches have been used by Uctum and Wickens, 2000 (1) testing the
staionarity of debt or deficit (2) other studies looking at the cointegration relationship
24
Blanchard et al 1990 using sustainability indicator find that most OECD countries
have sustainable policies in the medium term. European stability and growth pact
has made two important implications for fiscal policy. First it puts limit 3% of GDP as
the maximum budget deficit and secondly it imposes fines on those counties who
have excess to this percentage (Hallet and Mcadam, 2003). The idea behind these
implications is that random shock or cyclical movement should not take deficit
are found in fiscal sustainability consequently programmes are run in these countries
to counter the problem of fiscal deficit. Interestingly experiences have shown that
such programmes aiming to reduce fiscal deficit usually fail to restore price stability
and reduce current account deficit in short run (Buti et al, 1998; Perotti, 1999)
India has faced both current account deficits and budget deficits since 1960s (in fact
from the very first union budget but the phenomenon of fiscal deficit became more
prominent from the sixties). Economists have considered these twin deficit problems
as two unrelated problems (Parikh and Rao, 2006). Virmani, 2001 was among first
methods of financing budget deficit have implications for current account deficits, so
these two are inter related. Similar conclusion was reached by Cerra and Saxena,
2002. Anuro and Ramchander, 1988 found using granger casualty test that unlike
many developed countries causations in India seems to runs from current account
25
India has one of the highest overall national fiscal deficits in the world (Buiter and
patel, 2006) and India’s inflation depends on both domestic supply and world
inflation (Minford and Walters, 1989). In Indian context many economist have
expressed their concern over the building governments deficit and mounting debt,
solvency condition seems to be violated in Indian case and there are chances that
with existing trend the public sector may become bankrupt in finite times (Buiter et al
1993)
Many studies have tested sustainability of public debt in Indian context. Buiter and
Patel (1992) tested sustainability of debt of various public sectors (centre, state
government and public sector units) and found that Indian public debt was
on aggregate public debt series of the central and state government between
periods 1952 to 1980 found that debt- GDP ratio is on unsustainable path. Contrary
to these studies Goyal et al , 2004 conducted a series of tests on central, state and
combined finances and found that individually the finances of both the central and
the state are unsustainable, the second of the their test conclude that combined
finances of centre and state are sustainable when structural break is taken into
account. The reason behind these findings could be that India is a vast country and
has twenty eight states and seven union territories. The state government have
independent executive, legislative and judicial wings and this fact makes
sustainable path Indian government passed the Fiscal Reforms and Budget
26
to ensure fiscal prudence and support for macroeconomic balance. According to the
Rules framed under the Act the target was to eliminate revenue by 31 March 2009,
and fiscal deficit to be reduced to no more than 3% (much on the lines of European
stability and growth pact) of estimated GDP by March 2009 (11th five year plan
The legitimate size of a sustainable fiscal deficit is debatable but it is beyond any
question that India’s fiscal deficit is not on the higher side but on the danger level,
will pose as a serious threat both on the broader reform processes as well as ability
and creditability of the government to meet prioritized infrastructure and other social
expenses (Shirazi and Zagha, 1994). The major factor that have added to the growth
of fiscal deficit in India and many other developing nation are subsidies, public
The causes and consequences of rising government deficit had received attention in
both developed countries and less developed countries( Blanchard, 1985; Buiter and
Patel, 1992) .Recordance equivalence (re) theorem had been widely discussed in
that whether the budget debt is financed by debt issue or tax increase it is
as tomorrow’s tax liabilities (Ghatak and Ghatak, 1996). Also as discussed earlier
the association of fiscal deficit with sub nation governance has some serious
27
setbacks. There in order to look for sustainable fiscal deficit policy both these issues
public spending and revenue collection from central to local government (Neypati,
programme because of certain points (1) since local governments have better local
chances are there of it matching with the preferences of citizens (Oates, 1972,
goods (De Mello 2000a) (3) tax payers are more comfortable with accountable local
governments (Wasylenko, 1987) with all these factors it appears that fiscal
But contrary to this Neypati, 2004 and king and Maa 2001, both find negative relation
between fiscal decentralization and inflation (one of the main characteristics of fiscal
deficit). Jin and Zou, 2002 found in their research that although expenditure
decentralization has the opposite effect. De Mello 2000b did research on number of
debt, especially in low income countries. Zang, 2006 and Bouton et al, 2008 said
that without a proper central redistribution system fiscal decentralisation may give
28
rise to more unequal income redistribution if revenue bases vary across regions.
Tanzi 2000 adds that effectiveness of fiscal decentralisation depends upon factors
creates stable and predictable environment for the markets to function (Rao, 2005).
Ahmad and stern, 1991 are of the view that in many developing countries tax policy
is directed towards the correctness of fiscal imbalances. Bird, 1993 observed tax
reforms in many countries and said that “fiscal crisis has been proven to be mother
of tax reform”
Kurian (1999) stated that failure to contain wasteful expenditure and reluctance to
raise additional resources is the main reason afflicting most of the state finance. He
further added that tax wars among the states governments to attract private
led to starvation of funds of states. Chelliah et al (2002) discussed in their paper that
one of major reasons behind below par revenue receipt is the fault in tax
(2002) discussed about the cause of fiscal indiscipline at state level and cited weal
states.
29
2.6 Summary of literature review
Catao and
Terrones,
2005
Adam and
Bevan, 2005
30
deficit ? helps in reducing fiscal 2003
deficit
Khemani,
2007
Blanchard et
al, 1990
Parikh and
Rao, 2006
Buiter and
Patel, 2006
Zang, 2006
31
Tax reforms Tax reforms could be the Bird,1993 Would be
key in funding the fiscal analysed in
deficit, this section looks Ahmad and this research
into the literature about this Stern, 1991
aspect Rao, 2005
The research would progress with the main aim of finding ‘why’ fiscal deficit
continues to increase and ‘how’ it can be brought to sustainable limits. The research
along with the main research question would also look on some of the factors which
came out from the literature review and are stated above in the summary.
3. Methodology
3.1Research methodology
and 2) post positivism. Under positivism a researcher collects the facts and then
32
(Finch, 1986). While under post positivism the researcher’s aim is not to gather facts
and measure how often patterns occurs, but the focus is on to study different
constructions and meanings that people place upon their experience (Easterby-smith
et al, 1991). Noor, 2008 placed positivism under quantitative method of analysis and
researchers. This type of research is used in every field of life like clinical,
sociological and business research (Adam et al, 2007). Qualitative research uses
This research is looking into ‘why’ and ‘how’ of Indian fiscal deficit therefore it
requires use of both quantitative (to analyse the degree of various factors playing
role in fiscal deficit) and qualitative research (to analyse the possible interventions
3.2Research design
The research design is the overall plan or structure used to answer the research
question. (Tharenouet al, 2007). As a matter of fact research designs typically vary
in terms of the extent of researcher interference (Sekaran, 1982). The case study is
(Tharenou et al, 2007) they further add that a case study is an in depth, empirical
33
investigation of a single instance or setting to explain the process of a phenomenon
in context.Sommer and Sommer, 1991 are of the view that a case study is an in
depth detailed investigation of a single instance or one setting, although more than
The design chosen for a research should suit the particular research question.
affords highly in depth analysis of specific empirical issues. (Tharenou et al, 2007).
circumstances in context using a variety of data source (Baxter and Jack, 2008). Yin,
2003 is of the view that a case study gives the researcher a prospect to explore
points and the research question case study approach becomes an obvious choice
for this research. What makes case study the most appropriate way for this research
is discussed below:
Used
The aim of the research is to find The focus of this research is to find why
answers for question ‘how’ and ‘why’ fiscal deficit isincreasing and how
fiscal deficit.
behaviour of those involved in the study phenomenon and the figures and facts
34
case study approach becomes suitable
for research
The researcher wants to cover set of This research looks into various factors
particular event because the researcher also looking into possible interventions
Hartley, 1994 and McCutcheon Meredith, 1993 have suggested that case study
(2) Data comes basically from two sources (a) primary source like observations or
(3) Focussing on a current condition but using historical data primarily to understand
(4) The researcher does not have the compatibility to manipulate events
All these characteristics were found in this research and this makes case study
Case studies are often associated with a qualitative research design although
(Eisenhardt, 1989) suggested that case studies can be used with both qualitative
and quantitative data. In this research paper too both of these approaches are used.
35
Quantitative data is used to see theoretical predictions with precise measure of
variables and qualitative analysis is used to get into details, process and sensitivity
of fiscal deficit. (Tharenou et al,2007). The unit of analysis in a case study is the
3.3 Sample
The ultimate test of a sample design is how well the sample represents the purpose
of the research question (Cooper and Schindler, 2003). Since the research is about
fiscal deficit of India, the interviewee group should be those who are directly related
with the 1) forming policies of governance at central as well as at state level 2) the
are operated. This research paper has chosen a small group of interviewees.
Although the sample size is small in this research but still it represents the purpose
of this research. Researchers can never be hundred per cent certain how a sample
reflects its population (Cooper and Schindler, 2003), but the sample chosen for this
research supports the purpose in every aspect. To represent the research question
the researcher made four groups and interviewed at least one person in every group.
group)
36
country’s financial status
The base of this research is the budgetary data of Indian government, from this data
a clear picture of fiscal deficit emerges out. The data which is collected by someone
and used by the researcher is known as secondary data. It is easily available from
sources like book, libraries and web. It could be both used as main source for
secondary data is the main source of research. Since the data is mainly concerned
with fiscal deficit of India the source for data is from different government
37
budget website 3) Finance Ministry of India 4) Planning Commission of India. (Adam
et al, 2007) are of the view that while collecting secondary data PROD is very
important. PROD can be written as plan, read, observe, document. First as per the
requirement of the research large number of data from various sources were
examined, then the relevant data were chosen and stored for further analysis.
Internal secondary data is the data that already exists within the organisation in
some form or other (Lancaster, 2005). The data may be scattered like different
departments. In this research too the data was voluminous and scattered in different
• The secondary data helped in identifying the problem and thereby setting the
• Secondary data gave a clear insight of the problem and therefore developed
(Lancaster, 2005)
developing summaries so that it becomes easy to look for patterns (Cooper and
38
Schindler, 2003). Further these patterns are interpreted by the researcher in the light
of research question. The research should be problem oriented rather than tool
driven (Cooper and Schindler, 2003). As the research aim of case study is to find
why and how. 1) Why fiscal deficit occurs (why these factors play such an important
role on the ever increasing fiscal deficit of India) 2) And how interventions (corrective
Exploratory data analysis (EDA) is both a data analysis perspective and a set of
techniques (Cooper and Schindler, 2003). Therefore in this research paper EDA is
used to analyse the secondary data collected from various sources. One major
techniques over summary statistics, Cooper and Schindler, 2003 are of the view that
summary statistics may obscure conceal or in some cases even misrepresent the
underlying structure of data and this could lead the research in possibly wrong
direction. Therefore in this researchEDA would bring out various component factors
To further analyse the findings from the quantitative section logic models would be
used. Whaley, 1979 who is considered to be one of the pioneers of this technique
The events are staged in repeated cause-effect-cause-effect path yin, 2003. To find
suitable effects to stop or enhance the chain the findings from the interviewees
would be used and analysed. Logical model analyses are mainly of three types 1)
individual level logic model (ILLM) 2) firm or organisation level logic model (FLLM or
39
OLLM) 3) program-level logic model (PLLM) Yin, 2003. Since the research is about a
country’s fiscal deficit ILLM model does not fit the analysis. FLLM or OLLM are
organisation based logic levels and although nation works like an organisation but
the results of the programme could be changed) therefore PLLM fits this analysis. So
this research would use PLLM to analyse the intervention in fiscal deficit.
The interviews were conducted with the high profile policy makers and bureaucrats’
considering this it was important to ensure that data provided by them be used
cautiously. Since qualitative open end interviews enters into greater details with the
interviewees (Punch, 2005), therefore It was agreed with the interviewees before
conducting the interviews that their names and designations would not be disclosed
and only the information provided by them would be used in the research.
3.8 Limitations
Since research is concerned with fiscal deficit of India, interviews had to take place
with policy makers and bureaucrats. Getting an access to this group in itself was a
time consuming process. Time constraint was a major aspect in this research. Since
fiscal deficit is a vast topic, in fact fiscal deficit have numerous sub components and
component levels, this needed a thorough study of literature. The materials available
on fiscal deficit especially Indian fiscal deficit are not much and often fiscal deficit is
40
dealt with other macroeconomic related problems, the availability of literature was
scarce.
sustainable fiscal deficit, this required interviewing of policy makers and bureaucrats.
The first major problem was reaching these people. These people are always loaded
with responsibilities and work so there was a big time limitation constraint during all
As mentioned earlier India is vast nation and the problem of fiscal deficit is a
combined problem of both centre and states (twenty eight states). It would have
been better if the interviewing of representatives from all major states was possible
but because of time constraint it was not possible to do so. Although the state
selected for this research Uttar Pradesh is the biggest state in terms of population
and considered to be a political hub of India had problems which are universal for
Figure4.1: fiscal deficit of India from 1970-71 to 2009-10. Source: Reserve bank of
India.
Figure4.2: Comparative graph of gross fiscal deficit of centre, state, combined (state
and centre) and GDP growth at factor cost from 1971 to 1980. Source: Reserve
bank of India.
41
Figure4.3: Comparative graph of gross fiscal deficit of centre, state, combined (state
and centre) and GDP growth at factor cost from 1981 to 1990. Source: Reserve
bank of India.
Figure 4.4: Comparative graph of gross fiscal deficit of centre, state, combined (state
and centre) and GDP growth at factor cost from 1991 to 2000. Source: Reserve
bank of India.
Figure4.5: Comparative graph of gross fiscal deficit of centre, state, combined (state
and centre) and GDP growth at factor cost from 1971 to 1980. Source: Reserve
bank of India.
Going through the financial data gathered from various sources like reserve bank of
India, union budget official website the researcher collected data (secondary data).
The finding of these data are discussed and analysed in this section.
needs expenditure and to expend a nation needs revenue. In case of India more
than often expenditure have surpassed revenue collection; this imbalance gives rise
to deficit.
This financial (budgetary) data of India had been used and the above graphs show
gross fiscal deficit of India from year 1970 to 2010 (fig. 4.1). For purpose of
convenience this period has been divided into four parts. Part 1(fig. 4.2): period 1970
to 1980, during this period average growth rate of Indian economy was less than 3%.
The analysis shows that average fiscal deficit for this period was 3.78% of GDP. In
fact the fiscal deficit surpassed the average economy growth and this could be
42
termed as one of the numerous reasons of snail speed development in that era,
which was notoriously termed as Hindu growth rate (Kochhar et al, 2006) (fig. 4.3).
The eighties saw Indian policy makers making some piecemeal reforms. Fruits of
these efforts were seen as growth in various sectors this lead to an accelerated
growth of 5.8% in GDP in eighties. The growth in this period was basically supported
by debt finance (srinivasan, 1996). Gross fiscal deficit grew simultaneously and was
6.75% of the GDP. Because of the cyclic effect of loans and interests taken in the
eighties to boost growth the start of new decade was not good for Indian economy
and Indian economy entered into serious economic problems. The nation faced its
worth economic crisis till date, from fig. 4.4 it is clearly visible that the GDP in 1990-
91 was just above 5% and the combined deficit of centre and state was close to
10%, when such conditions happen economic crisis is bound to take place. These
economic problems made the government to start thinking and adopting real
economic reforms which had been mentioned as liberalisation policies earlier in this
paper. Because of these measures the economy grew with an average of 5.69% of
GDP in nineties, the reason could be the recovery from a serious economic
showdown. The good thing was this time it was not debt driven growth but the driver
of this growth was increased trade (as trade barriers were lowered) and tax reforms
which were enforced after the recommendations of tax reform committee of 1991
(TRC, 1991), which in turn increased revenue and the result was evident in reduced
), still gross fiscal deficit was more than the average growth in GDP. The economic
measures which were undertaken at the start of 1991 bore better results in the next
decade which showed a remarkable growth of average 7.21% in GDP, for the first
43
time in its independent history India’s growth surpassed the fiscal deficit which was
The above discussed and analysed part is just one aspect of Indian fiscal deficit. The
picture is incomplete without the reference of states. India is a union of states and
these states run like independent governments. Every state has its own budget,
expenditure, revenue and also the fiscal deficit. If the data for state deficits are
analysed it is found that during seventies it was 2% of GDP, 2.83% during eighties,
3.09% during nineties and this figure rose to 3.22% in the first decade of 21st
century. A steep rise is seen in state fiscal deficit after the liberalisation of nineties
(fig 4.4), the possible reason could be that many MNC’s entered India as trade
barriers were lowered, to promote business the states needed better infrastructure
and thus they began to invest more on development, this is one of the reasons of
The shocking fact which comes out from the analysis is the combined state and
central deficit. This figure has continuously been soaring high. On average during
seventies it was 7.95% of GDP(fig. 4.2), during eighties it was 7.71% of GDP (fig.
4.3) and during the current decade it is 7.45% of GDP(fig. 4.5). This combined fiscal
deficit puts Indian economy under pressure of searching resources to fund the
deficit. This increase in fiscal deficit diminishes the effect of growing GDP. Even
India managed to sustain the growth pattern in GDP but still the swelling combined
44
Figure 4.6 Revenue collections by central government of India from different
sources. Source: Reserve Bank of India
Figure 4.8 Breakdown of average tax revenues (1980-2010) from various sources of
central government. Source: reserve bank of India
Figure 4.9 Comparative Graph of revenues collected from non-tax revenues and
capital receipts. Source: Reserve bank of India.
To carry out various function any government needs finance, this finance is arranged
are revenue receipt and capital receipts. Revenue receipts are broadly of two types’
tax revenue and non-tax revenue. On functionary basis tax revenue is again divided
into two categories indirect and direct. The direct tax is collected mainly from two
major sources personal income tax and corporate tax. On the other hand indirect tax
The analysis found that the major source of government’s income is by means of
revenue receipts this (average from year 1980-10) forms sixty two percent of the
major collections by the central government (direct tax 20%, indirect tax 27% and
non-tax revenue 15%) figure 4.7. By breaking the different components of revenue
receipt it is found that indirect tax makes up 27% of total receipts. Because of the
45
liberal economic policies adopted in the early nineties (TRC, 1991) (which included
major tax reforms) it is found that direct taxes grew by six folds during nineties and
around five times during the 2000 to 2010. On further analysing direct taxes it was
found that on average income tax contribute to 17% and corporate tax to about 32%
(fig. 4.8). Though over the years income tax have increased about sixty folds, though
the situation is far from satisfactory. Even today only less than 1% of people come
under tax cover. The reason behind this could be the fact that about 60% of the
population of India is employed in agriculture and this sector is still free from majority
With the capital inflow in the country from FDI’s had increased after the economic
liberalization of early nineties it is found that the industries are doing good progress
and therefore corporation tax has increased about 35 folds from the pre liberalisation
era, the easing of investment norms in India after liberalisation had played an
important role in this rise. The same could not be said about excise and custom
which have shown a growth of six and three fold respectively from pre liberalization
period. Since these taxes are linked with the trade, better the trade conditions better
could be the contribution from these two sources, it could be said that trade barriers
2)
Figure 4.10 comparative graphs of receipts of states and centre. Source: Reserve
bank of India.
46
Figure 4.11 figure showing share of states in the taxes collected by the central
government. Source: Reserve bank of India.
When analysing the receipts of state governments it was found the way the states
contributed in increasing gross fiscal deficit similarly they contributed in the revenue
collection also (fig. 4.1). In fact it was found in analysis that the average total receipts
of centre from period 1990 to 2009 was 345936 Crore INR which was lower
compared to 363327 Crore INR for central government. The interesting fact found in
the research was that out of the tax collected by the centre a percentage is
considered to be the share of the state and this is placed in the receipts under the
heading tax share of states in central taxes, the average tax collected under this
heading averages 59358 Crore INR for this period. This amount approximately
equals around 15% of all receipts of the state government. Also a major percent of
the revenues of the state comes from sales tax, with the advent of the Value added
tax this would be affected and the revenues of the states could go down. (Fig. 4.11)
47
Figure 4.13 a) average of revenue expenditures under major headings from year
1980-2010 b) average of capital expenditure under major headings from year 1980-
2010. Source: Reserve bank of India.
It is evident from the above chart that the main heading for expenditure of the central
government is revenue expenditure (fig. 4.12). On further evaluating the main fields
of revenue expenditure it was found that the main black holes of expenditure are
interest payment and subsidies. As it is evident from the very beginning that the
receipts of the government are less than its expenditure, as a result the government
has to fund from various sources. To avail these loans the government has to give
certain amount of interest, greater is the amount of loan more the government has to
pay as interest. Even in capital expenditure category it was it was found that on
average 33% of the capital expenditure is on loans and advances, again this has
The second biggest revenue eater was found to be subsidies given by the
major portion of government expenditure. Since the rule of democracy is better the
party performs or promises to perform better are its chances to get elected or re-
subsidises and capital expenditure on loans and advances accounted for 34% of the
total expenditure by the central government. This brings up the fact that more than
one third of all expenditure of the government gets utilised in compensating for the
48
Figure 4.14 graph showing % of central government’s expenditure on interest
payments compared with total expenditure. Source: Reserve bank of India.
On examining the pattern of spending by the state government the same trend of
central government is evident. The state governments too spend on average 14%
(fig. 4.14)of their revenue on paying interest to loans which they have availed from
various sources (appendix 7). If these black hole of centre and state are counted
together it could add up to 50% of the expenditure done combinely by centre and
state just gets used up in paying loan interest, subsidies and some part of capital
loan. The year after year occurrence of this situation is giving rise to slow pace of
development in India. Because any country whose almost 50% of the expenditure is
Figure 4.15 Graph showing interest payment and subsidies of central government
compared to % of GDP. Source: Reserve bank of India.
Figure 4.16 Graph showing borrowings of centre and state governments to finance
debts. Source: Reserve bank of India.
Figure 4.17 Graph showing the various sources of central government of financing
debt. Source: Reserve bank of India.
49
Analysing the sources of finance for last 15 years it is evident that the central
government is financing the gross fiscal deficit by means of various sources (fig.
4.17). Maximum financing till now had been done by means of market borrowings.
These borrowing are in form of bonds and securities which are kept with the central
bank, nationalized banks and other financial institutes. On these bonds government
has to pay certain amount of interest year after year. The research has already
looked in that aspect under the heading of interests paid by government (appendix
2)
From the above analysis few findings which stand out are 1) the problem of fiscal
deficit has played a role of hidden obstruction in Indian economic growth. Through
decades it had been affecting the development process because fiscal deficit puts
pressure on planning. As evident from the study the cause of fiscal deficit is the
expenditure more than earnings of the state. To correct it two ways could be chosen
increasing the revenue. To look into these factors structured interviews were
conducted. And the information gathered from these interviews has been used in
program level logic model to analyse the ways and obstructions which are coming in
The question stated to both group A and B was how the revenue receipts of the
50
Group B’s response is quoted below (appendix 6)
51
When Group C and D were asked about the administration lapses which cause loss
in revenue, they gave almost the same answer which is quoted below (fig. 4.7)
(appendix 3)
When group A was asked the question about the underperformance of non–tax
52
When the same question was asked to group B they responded:
When group D was countered with question about slackness in administration, they
responded:
53
Group A were asked “Although the capital receipts contribute 38% of all taxes
collected but still with the ever increasing middle class and salary hikes what is the
When group A was asked about the impact of large number of regional parties
54
When the same question was asked to group B they responded:
Although the major findings have been analysed along with the analysis this section
would summarise the findings. It has been found that the after the economic reforms
of 1991 revenues receipts of both centre and state have increased numerous folds
but along with it expenditure have also increased in fact have surpassed revenue
receipts in all years. Looking at the revenue sources individually it was found that tax
revenues (indirect and direct) form on average 47% of all taxes collected, non-tax
revenue 15% and capital receipts 38%. Investigating components of tax revenues it
was found that indirect taxes (custom and excise) need to further improvement, the
government should look into the possibilities of further decreasing the trade barriers
to improve further tax collection. The excise collection of states could yield much
better results if the administration is made more efficient, indirect taxes need tax
reforms in custom section and administrative reforms in excise section. Direct tax
55
collections are on the lower side comparative to other tax collections but it is evident
from the analysis that category has risen many folds after the reform of 1991. The
major concern in this field is the numbers of tax payers which are just 1% of the
population (this percentage is low even after considering the fact that India a poor
In non-tax revenue the situation is far from satisfaction, the PSU’s or central public
sector enterprises (CPSE’s) are not contributing up to its potential. Profit turnover is
less than 9% in 2006 only 157 out of 231 CPE’s are profit making. The condition of
states is even worse, total of 1129 state level public enterprises were functional in
2004 and they incurred a loss of 60517 Crore INR in 2004. The data regarding
CPSE and SLEP’s is not revised that often, the only source is the five year plan and
these plans come only after every five year, that is the reason why data till 2006 in
regards with centre and 2004 for state had been considered. (11th year plan, 2008).
Capital receipts are the leading tax generator for the government but it has potential
the collection.
Another fact which came out analysis was that both centre and state governments
are spending a high percentage ( almost 50% of the expenditure) is on subsidy and
again because of debt finance, which government undertakes to cover up the gap
As the purpose of doing EDA and then logic level was not only to find the causes of
fiscal deficit but also to find corrective measures to achieve a sustainable fiscal
deficit.
56
After interviewing the four groups certain key facts came out, these facts when
considered with the factors playing prominent part in increasing fiscal deficit as
brought out by exploratory data analysis of quantitative data gives rise to corrective
1) Direct taxes (particularly income tax) should try to cover more people under tax
cover.
2) Trade barriers need to be revised again to increase more trade and thus
increasing taxes.
employees under various schemes; this would increase capital receipts of the
government.
keep national interest in mind rather than only focussing on regional issues.
9) States should perform an performance appraisal of sick PSU’s and close it down,
57
10) States should look on taking severe measures with state electric board as this
If these measures are applied the steeply increasing fiscal deficit could transform
into sustainable fiscal deficit. The following figure shows the adaptation of these
measures in programme level logic model and resulting in sustainable fiscal deficit.
58
Figure 4.18 sustaining fiscal deficit by corrective measures, programme level logic
model
4.6 Discussion
The research has aimed to look into two basic questions ‘why’ fiscal deficit is a
regular phenomenon in Indian economy and ‘how’ this fiscal deficit could be reduced
several factors related with fiscal deficit and found its implication in Indian context.
1) Effect of fiscal deficit on inflation and neutrality (Catao and Terrones, 2005) are
not covered in this research because they are secondary effects of fiscal deficit and
2) Fiscal deficit has strong linkage with trade deficit ( Rosenweig and Tallman, 1991
& 1992) again this issue is not looked into this research because of its secondary
nature and dealing with this topic was beyond the scope of this research. However
effect of trade barrier on fiscal deficit is examined. Similarly fiscal deficit has a
crowding out effect (Ramirez, 1994) this aspect was overlooked as it of pure
statistical in nature and did not have direct relation with the ‘why’ and ‘how’ of fiscal
deficit.
2) Effect of fiscal deficit on growth has linked by numerous economists (Adam and
Bevan, 2005) Kneller, 2000. It was found that fiscal deficit has impact on GDP.
Figures ( ) show this effect. The research looked into data from both centre and state
perspective and linked it with growth of Indian GDP although the extent of effect on
59
3) the literature showed effect of subnational governance on fiscal deficit (Person
and Taelliniu, 2000) this aspect was examined in this research primarily because
india is vast nation of twenty states, it was found that states are participating actively
between these two. The research also looked into the relationship between
democratic government and increasing fiscal deficit and found that the increase
subsidy is one of major causes of fiscal deficit and this is happening year after year
as subsidised items are lower in prices and this helps in gaining popular votes during
elections. The research also found that fiscal decentralisation (Neypati, 2010) is an
effective way for tax collection as administrating people from local level is easier
than administrating from central level. It was found during interview of state policy
makers that since all states are not equal in resources so states with fewer
resources should get some tax collection benefits from the centre.
4) Fiscal deficit has an important relationship with tax reforms (Bird, 1993 and Rao,
2005), in this research an in depth study was done to understand the various
sources of revenue receipts and was found that there is a scope of further
improvement in all major tax categories like tax revenues, non-tax revenues or
capital tax, certain recommendation on basis of analysis and interviews are also
mentioned.
The aim of the research was to bring out the factors related with fiscal deficit. The
research uses EDA to analyse quantitative budgetary data and programme logic
levels to analyse the fiscal deficit of India and also to find out methods by which this
could be checked. The approach in this research is not statistic based as in case of
60
most economic related researches, the focus is on finding the direct factors
4.6 Conclusion
Fiscal deficit is not an overnight grown problem for India, from its first budget (1947-
48) fiscal deficit had always been a prominent factor in Indian budget. Although
being such an important macroeconomic factor still it was overlooked for decades. In
fact the debt of 1980’s caused the economic crisis of 1991. Corrective measures
were taken which gave economy a new lease of life. But the problem continued to
ponder over. In fact it is curtailing Indian economy and not letting it grow with a pace
which it should have, it is eating up the expenditure which in turn are causing
numerous problems which were mentioned in the introduction. The purpose of the
research was to look into major issues why fiscal deficit kept on occurring in case of
India and how this ever increasing fiscal deficit could be corrected or brought to
sustainable limits.
The research started from the basics of budget, and figured that fiscal deficit is
caused when the expenditure of the nation increases more than various sources of
revenues. Firstly various sources of revenues were explored and was found that the
main source of revenue are different taxes levied by the government both in central
as well as at state level, the research analysed various taxes under different
headings and found that there has been reform in direct taxes but still there is further
scope of improvement. Same was applicable with indirect taxes which needed some
61
strict administrative reforms to raise its contribution in the overall tax collection.
Another revenue generator capital receipts (the front runner in tax collections) could
further increase its base with innovative schemes at centre and state. Once different
sources of revenue were analysed the focus shifted to various expenditure of the
government and it was found that the black holes of the expenditures are mainly
subsidy, interest and military expenses although the latter is out of scope of this
research focus was set on the first two, close examination gave a shocking
revelation that almost 50% of the expenditure by the government is on subsidies and
on interest payment. This cycle is continuing year after year and if not corrected
would lead India into a second economic crisis in near future. The research also
gives few important recommendations to increase tax base like reducing subsidy in a
phased out manner. As stated in the introduction that economics is the study of how
to use limited resources the aim of this research is to bring expenditure at par with
revenue or revenue at par with expenditure so that nation gets out of fiscal deficit
loop and use all of its revenues on real development rather than paying taxes.
Although the result looked into causes of fiscal deficit it overlooks secondary effects
associated with fiscal deficit like level of impact of rising fiscal deficit on growth, to
emphasise on the dangerous side of fiscal deficit. Crowding out effect was also not
taken into account which too has a deep impact on macroeconomics of a nation.
Although data have been taken for whole country including all states but still if
interviewee were from each 28 states the results would have been more broad and
universal.
62
5. References
Abell, J.D. (1990) Twin deficits during the 1980s: an empirical investigation, Journal
Aghevli, B. B. & Khan, M. (1978) Government deficits and the inflationary process in
Adams, J. & Khan, A. T. H. (2007), Research Methods for Graduate Business and
Ahmad et al (1991), Theory and practice of tax reform in developing countries, 1st
Alesina, A., Drazen, A. (1991) Why are stabilizations delayed? American Economic
63
Alesina, A. &Tabellini, G. (1990) A positive theory of fiscal deficits and government
Amin, M. (2009) Labor regulation and employment in India’s retail stores, Journal of
from five developing economies of Asia, Journal of Asian Economics, Vol. 9, No. 3,
pp. 487-501.
Ashra, S., Chattopadhyay, S. &Chaudhuri, K. (2004) Deficit, money and price: the
Barro, R.J. (1974) Are government bonds net wealth? Journal of Political Economy,
Belongia, M. T. & Stone, C. C. (1985) Would Lower Federal Deficits Increase U.S.
Farm Exports? Federal Reserve Bank of St. Louis Review, Vol. 67(November), pp.
5-19
64
Blanchard, O. (1985) Debt, deficits and aggregate demand, Journal of Political
Baxter, P. & Jack, S. (2008), Qualitative case study methodology: study design and
implementation for novice researchers, The Qualitative Report, Vol. 13, No.4, pp.
544-559
Press.
Bryman, A. & Bell, E. (2007), Business Research Methods, 2nd edition, New York:
Buiter, W. & Patel U. (1992), Debt, deficits and inflation: An application to the public
financial system, and fiscal rules.India Policy Forum, Vol. 2, pp. 1–54,Brookings
65
Buiter, W., Corsetti, G. &Roubini, N. (1993) Excessive deficits: Sense and nonsense
Buti, M., Fanco, D. &Ongena, H. (1998) Fiscal discipline and flexibility in EMU: the
Implementation of the stability and growth Pact, Oxford Review of Economic Policy,
Chelliah, R. J. (1986) Change in the tax structure: a case study of India, Paper
Greece.
pp. 1531–1614.
Cerra,V. & S. C. Saxena S. C. (2002), What Caused the 1991 Currency Crisis in
closed and open economies, Economics and Politics, Vol. 9, pp. 27-54
66
De Mello, L. (2000). Fiscal decentralization and intergovernmental fiscal relations: a
Dornbusch, R., Sturzenegger, F. & Wolf, H. (1990) Extreme inflation: dynamics and
Easterly, W., Rodriguez, C. & Schmidt-Hebbel, K. (Eds.) (1994) Public sector deficits
Eisenhardt, K.M. (1989). Building theories from case study research, The Academy
Enders, W. and Lee, B. S. (1990) Current Account and Budget Deficits Twins or
Evans, E. (1986) Is the dollar high because of large budget deficits? Journal of
Finch, J. (1986) Research and Policy : the uses of qualitative methods in social and
67
Fischer, S., Sahay, R. &Veigh, C. (2002) Modern hyper—and high inflations, Journal
Feldstein, M. S., & Eckstein, O. (1970). The fundamental determinants of the interest
no. 84
Giavazzi, F., Japelli, T.& Pagano, M. (2000). Searching for non-linear effects of fiscal
Goyal R., Khundrakpam, J K., Ray P., (2004) Is India’s public finance
no. 401–420
Publications.
68
Hallet, A. J. H. &Mcadam P, (2003) Deficit Targeting Strategies: Fiscal Consolidation
and the Probability Distribution of Deficits under the Stability Pact, Journal of
Jin, J. &Zou, H. (2002) how does fiscal decentralization affect aggregate, national,
and subnational government size? Journal of Urban Economics,Vol. 52, pp. 270–
293
from the states of India, Comparative Political Studies, vol. 40, pp. 691-711
King, D.N. & Ma, Y.( 2001) Fiscal decentralization, central bank independence and
and the agenda ahead, The Coulambia Journal of World Business, Vol. 29, issue 1,
pp. 24-31
Kneller, R., Bleaney, M. &Gemmell, N. (2000) Fiscal policy and growth: evidence
from OECD countries. Journal of Public Economics, Vol.74, pp. 171– 190.
69
Lal et al (2003). “The Real Exchange Rate, Fiscal Deficits and Capital Flows India:
Butterworth-Heinemann
Lee, A.S. (1989) A scientific methodology for MIS case studies", MIS Quarterly, vol.
cengage learning.
assessed 4/09/2010
Mankiw, N. G., Romer, D., & Weil, D. N. (1992). A contribution to the empirics of
pp. 407–437
McCutcheon, D.M. & Meredith, J.R. (1993). Conducting case study research in
70
McCarten, W. (2003).The challenge of fiscal discipline in the Indian states. In
Brazil, and Israel, IMF Staff Papers, no. 36, pp. 527–549
Miller, S. &Russek, F., (1997) Fiscal structures and economic growth: international
Neyapti, B., (2004) Fiscal decentralization, central bank independence and inflation:
Volatility in the Indian states, Comparative Political Studies, Vol.41, no. 8, pp. 1069-
81
71
Parikh, A. &Rao, B. (2006) Do Fiscal Deficits Influence Current Accounts? A Case
education
institutions and politics, Journal of Political Economy, vol. 102, pp. 799-821
Rakesh, M. (2000), Fiscal Correction for Economic Growth: Data Analysis and
Rao, G., & Singh, N. (2005) The political economy of federalism in India. New Delhi :
Rao, M. G. (2005) Tax system reform in India: Achievements and challenges ahead,
fiscal performance around the world. American Journal of Political Science, Vol. 46,
72
Rumi, C. (2009) Political alternation and the fiscal deficits, Economic Letters, no.
102, 138-140
pp.1310 – 1325
India (Working Paper). New Delhi: National Institute of Public Finance and Policy
1, pp.142-190.
Sinai, A. (2006) Deficits, expected deficits, financial markets, and the economy,
73
Sommer, B. &Sommer, R. (1991).A practical guide to behavioral research: Tools and
theoretic analysis. American Journal of Political Science, Vol. 43, pp. 488-517
the Deficits Really Twins? Federal Reserve Bank of Atlanta Economic Review
(May/June): pp.1-11
Uctum, M. and Wickens, M. (2000) Debt and deficit ceilings, and sustainability of
74
Virmani, A.(2001) India’s BOP Crisis and External Reforms, Myths and Paradoxes,
New Delhi
the constitution, Cato public policy research monograph, no. 1, cato institute, usa
federalism and lessons from the early United States, Comparative Political Studies,
Yin, R. K. (1994), Case Study Research, Design and Methods, 2nd edition, CA:
Sage Publications
implications for growth and inequality. Journal of Comparative Economics, Vol. 34,
pp.713–726
Feldstein M. (2004) Budget deficits and national dept, L. K. Jha memorial lecture
july, 2010)
75
http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of
Ministry of finance (1991) Interim Report of The Tax Reform Committee, New
Ministry of finance (1993) Tax Reform Committee, Final Report part 2, New Delhi
:Governmenment of India.
http://www.weforum.org/en/initiatives/gcp/Global%20Competitiveness
The World Bank (2010) India Economic Update (June, 2010), , South Asia Region:
76
Appendix 1. Inflows, outflows in a budget & Formation of
Fiscal Deficit
INFLOWS
(1)Revenue Receipts (2+3)
OUTLAYS
(9)Non Plan Expenditure (10+12)
77
BUDGET BALANCE
(19) Revenue Deficit (17-1)
1970-71 1408
1971-72 1727
1972-73 2179
1973-74 1733
1974-75 2302
1975-76 3029
1976-77 3082
1977-78 3680
1978-79 5710
1979-80 6392
78
1984-85 1741 1452 4095 8124 3745
6
79
2001-02 1409 5601 90812 46038 -1496
55
Year Total Total Dir Persona Corpo Indi Exci Cust non- capit
recie expen ect l ration rect se om tax al
pts diture tax income tax tax Duti Dutie reven recei
tax es s ues pts
1980 2029 2276 18 438 1311 746 372 3409 3015 7918
-81 1 8 93 5 3
1981 2387 2526 25 459 1970 902 418 4300 3482 8849
-82 3 5 18 4 1
1982 2913 3079 27 438 2185 1029 456 5119 4417 1170
4
-83 5 1 23 7 1
1983 3411 3553 31 527 2493 123 616 5583 4270 1440
-84 7 4 31 10 5 6
80
1984 3988 4363 33 697 2556 142 662 7041 5815 1642
-85 7 2 75 76 5 1
1985 4735 5266 36 665 2865 174 733 9526 6895 1931
-86 0 6 98 42 1 5
1986 5465 6291 40 719 3160 202 816 1147 8764 2157
-87 5 6 23 96 4 5 2
1987 6244 6826 41 603 3433 239 942 1370 9022 2540
-88 5 1 00 15 3 2 8
1988 7346 7911 60 1492 4407 277 109 1580 9840 2987
-89 9 1 21 30 22 5 8
1989 8231 9290 60 1088 4729 323 130 1803 13947 3002
-90 6 8 28 21 96 6 0
1990 9395 1052 69 1250 5335 360 141 2064 11976 3899
-91 1 98 03 75 00 4 7
1991 1045 1114 10 1627 7853 399 160 2225 15961 3852
-92 58 14 10 66 17 7 8
3
1992 1103 1226 12 1831 8899 419 163 2377 20084 3617
-93 06 18 07 69 67 6 8
5
1993 1308 1418 12 1355 1006 409 172 2219 22004 5544
-94 93 53 52 0 27 24 3 0
2
1994 1597 1607 18 3468 1382 490 210 2678 23629 6869
-95 78 39 40 2 45 64 9 5
9
1995 1684 1782 22 4318 1648 596 221 3575 28191 5833
-96 68 75 28 7 52 76 7 8
7
1996 1878 2010 25 4715 1856 683 234 4285 32578 6154
-97 23 07 37 7 26 63 1 4
4
1997 2329 2320 27 3589 2001 685 255 4019 38214 9907
-98 63 53 17 6 00 16 3 7
2
1998 2795 2793 32 5760 2452 725 285 4066 44833 1300
81
-99 49 40 12 9 32 81 8 64
0
1999 2971 2980 41 9131 3069 868 349 4841 53211 1157
-00 89 53 43 2 36 44 9 07
6
2000 3267 3255 49 23766 2517 870 497 3416 55947 1341
-01 89 92 65 7 07 58 3 84
1
2001 3638 3623 47 22106 2513 858 544 2834 67774 1625
-02 06 10 70 3 28 69 0 00
3
2002 4113 4132 61 27779 3389 969 623 3189 72290 1805
-03 65 48 61 3 32 88 8 31
2
2003 4751 4712 76 30765 4570 110 702 3458 76831 2113
-04 46 03 59 6 392 45 6 33
0
2004 5063 4982 95 35443 6028 128 772 4181 81193 2003
-05 82 52 94 9 854 41 1 91
4
2005 5266 5057 12 45238 7518 149 866 4664 76813 1795
-06 26 38 06 7 572 42 5 49
92
2006 5833 5833 16 62707 1067 181 926 6281 83205 1490
-07 87 87 97 01 444 51 9 00
38
2007 7126 7126 23 86518 1446 209 959 7538 10231 1708
-08 71 71 15 60 615 92 2 7 07
09
2008 9009 9009 25 90118 1644 212 879 7766 96203 3387
-09 53 53 49 51 867 24 8 80
03
2009 1020 1020 27 77249 1934 198 860 6679 14027 4063
-10 838 838 10 33 835 52 2 9 41
47
82
tax income tax tax duti dutie reven recei
tax es s ues pts
83
2003-04 88870 4892 110 67165 16953 -
13488
year Reven defenc inter subsi capital loans cap defenc total
ue e est dies expend and ital e
expend expend pay iture adva outl expend
iture iture ment nces ay iture
1980-81 14410 3278 2604 2028 8358 5285 307 326 227
3 68
1981-82 15408 3844 3195 1941 9857 5658 419 485 252
9 65
1982-83 18742 4494 3938 2262 12049 7384 466 527 307
5 91
1983-84 22251 5189 4795 2902 13283 8053 523 642 355
0 34
1984-85 27691 6324 5974 4038 15941 9194 674 737 436
7 32
1985-86 33924 7021 7512 4796 18742 1108 765 967 526
7 5 66
1986-87 40860 9179 9246 5451 22056 1279 925 1298 629
7 9 16
84
1987-88 46174 8861 1125 5980 22087 1279 929 3107 682
1 3 4 61
1988-89 54106 9558 1427 7732 25005 1475 102 3783 791
8 0 55 11
1989-90 64210 10194 1775 1047 28698 1689 118 4222 929
7 4 0 08 08
1990-91 73516 10874 2149 1215 31782 1965 121 4552 105
8 8 2 30 298
1991-92 82292 11442 2659 1225 29122 1772 110 4905 111
6 3 3 43 414
1992-93 92702 12109 3107 1082 29916 1629 133 5473 122
5 4 7 85 618
1993-94 10816 14978 3674 1160 33684 2045 130 6867 141
9 1 5 4 89 853
1994-95 12211 16426 4406 1185 38627 2373 148 6819 160
2 0 4 6 91 739
1995-96 13986 18841 5004 1266 38414 2431 140 8015 178
1 5 6 6 99 275
1996-97 15893 20997 5947 1549 42074 2787 141 8508 201
3 8 9 8 96 007
1997-98 18033 26174 6563 1854 51718 3419 175 9104 232
5 7 0 3 26 053
1998-99 21646 29861 7788 2359 62878 4403 188 10036 279
1 2 3 7 41 340
1999-00 24907 35216 9024 2448 48975 2493 240 11855 298
8 9 7 8 37 053
2000-01 27783 37238 9931 2683 47753 2300 247 12384 325
9 4 8 8 45 592
2001-02 30146 38059 1074 3121 60842 3428 265 16207 362
8 60 0 4 58 310
2002-03 33871 40709 1178 4353 74535 3166 291 14953 413
3 04 3 8 01 248
2003-04 36207 43203 1240 4432 10912 2876 341 16863 471
4 88 3 9 8 50 203
85
2004-05 38432 43862 1269 4595 11392 2891 523 31994 498
9 34 7 3 0 38 252
2005-06 43937 48211 1326 4752 66362 1133 550 32338 505
6 30 2 7 25 738
2006-07 51460 51682 1502 5712 68778 8524 602 33828 583
9 72 5 54 387
2007-08 59443 54219 1710 7092 11823 1129 106 37462 712
3 30 6 8 8 940 671
2008-09 80344 73600 1926 1292 97507 1420 833 41000 900
6 94 43 2 05 953
2009-10 89723 86879 2255 1112 12360 1233 111 54824 102
2 11 76 6 9 267 083
8
86
1977-78 2038 1987- 11219 1997- 43474 2007- 10795
88 98 08 8
87
2001-02 249422 17541 74007 11571 36513
5 4 6
year total on
expenditur interest
e payme
nt
88
1997-98 223924 29799
89
4 96 06 0
90
2005-06 160018 21729
91
96 41 7
92
91
19 5.5 2.8 7 1.4 3 4 2001 6.1 4.1 9.9 5.8 3 6.94
91- 5 9 -02 9 4 4
92
19 5.3 2.7 6.9 5.4 3 3.96 2002 5.9 4.0 9.5 3.8 3 6.57
92- 4 8 6 -03 1 6 7
93
19 6.9 2.3 8.1 5.7 3 5.19 2003 4.4 4.3 8.5 8.5 3 5.51
93- 6 5 9 -04 8 8 1
94
19 5.6 2.6 7.0 6.4 3 4.05 2004 3.9 3.4 7.4 7.5 3 4.45
94- 8 9 5 -05 9 2 5
95
19 5.0 2.5 6.5 7.3 3 3.52 2005 4.0 2.5 6.6 9.5 3 3.68
95- 5 9 2 -06 8 1 8
96
19 4.8 2.6 6.3 8 3 3.33 2006 3.4 1.8 5.5 9.7 3 2.58
96- 4 5 3 -07 5 8 8
97
19 5.8 2.8 7.2 4.3 3 4.25 2007 2.6 2.2 5.2 9 3 2.25
97- 2 5 5 -08 9 9 5
98
19 6.4 4.1 8.9 6.7 3 5.97 2008 6.1 2.1 4.5 6.7 3 1.59
98- 7 9 7 -09 4 2 9
99
19 5.3 4.6 9.4 6.4 3 6.47 2009 6.8
99- 6 2 7 -10 5
00
me 7.6
dia 5
n
av 7.7
era 1
ge
Note all figure are in % except year
Reference
http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of
93
94