19
FISCAL POLICY STRATEGY STATEMENT
A. FISCAL POLICY OVERVIEW
1. Global economic situation during 2008-09 and
2009-10 impacted the performance of emerging
market economies and India was no exception. The
swift revival during 2010-11, wherein Indian economy
grew at 8.4 per cent on the base of similar growth in
2009-10, showed that resilience of Indian economy
in steering through difficult international scenarios
have further improved. However, continuance of the
financial crisis in Euro Zone coupled with exogenous
shocks like increase in the international crude prices
brought out the vulnerability of Indian economy
towards global events back to the forefront. Growth
in Indian economy is estimated to moderate to 6.9
per cent in 2011-12 as against the earlier estimate of
9 per cent at the time of presentation of Budget 2011-
1 2 . De ta i l s o f t h e g r owt h s c e n a r i o h a v e b e e n
enumerated in the Macro-economic Framework
Statement.
2. The moderation in growth coupled with sticky
inf lat ion at much higher than the comfor t level
necessitated a change of stance in fiscal policy of the
government. The process of fiscal consolidation which
resumed in 2010-11 had to be paused once again
during 2011-12. However, this change in policy would
be temporary in nature and government is committed
to get back to the path of fiscal consolidation. While
the economy is estimated to register growth of about
7.6 per cent during 2012-13 which is lower than the
potential growth rate, yet government has come up
with a revised fiscal roadmap with gradually reducing
fiscal deficit in coming yea`
3. The change in fiscal policy stance during 2011-
12 should be seen against the backdrop of some
s i g n i f i c a n t c h a n g e s i n t h e m a c r o - e c o n o m i c
parameters in the Indian and world economy during
2011. First is the issue of international crude prices;
while it was hovering around US $ 85 to 90 per barrel
at the time of presentation of Budget 2011-12, it went
up sharply and remained sticky at about US $ 110 to
115 per barrel during most part of the calendar year
2011. Presently, it is well above US $ 120 per barrel.
In tandem with high crude price, prices of most of the
petroleum products in the international market went
u p s h a r p l y. A s I n d i a imp o r ts b u l k o f i ts c r u d e
requirements and the pricing of petroleum products
by oil marketing companies (OMCs) for the purpose
of calculating under-recoveries are benchmarked to
the international prices, there was significant increase
in the estimated under-recovery of OMCs. With high
level of prevailing inflation, it was felt that pass through
of high international prices to retail level would
compound the problem of inflation. The government
therefore decided to lower the tax incidences on these
products. Along with partial increase in retail prices of
petroleum products during June 2011, the underrecoveries of the OMCs were reduced to some extent.
T h o u g h t h i s i n t e r v e n t i o n r e d u c e d t h e u n d e r -
recoveries of OMCs, government had to give tax
concession to the extent of `36,750 crore for the
remaining part of fiscal 2011-12. After factoring in
States' Share in Central Taxes, the net revenue loss
for the Central Government was of the order of
`26,000 crore. Even with this relief, government had
to provide additional `45,000 crore in RE 2011-12 for
the compensation to OMCs for under-recoveries. Thus
the total slippage on account of petroleum sector alone
was of the order of `71,000 crore amounting to 0.8
per cent of GDP.
4. Secondly, high inflation scenario persisting in
the domestic economy had influenced the decision to
keep the input prices for farmers under check and
accordingly provision for fertiliser subsides have been
increased by `17,201 crore in RE 2011-12 over BE
2011-12. Provision for food subsidy has also been
increased by `12,250 crore during the year. The above
three subsidy items taken together had a combined
impact of `1,00,451 crore accounting for slippage of
1.1 per cent of GDP in fiscal deficit during 2011-12.
5. Thirdly, growth in economy which was robust
at 8.4 per cent during 2009-10 as well as 2010-11,
started showing signs of moderation as it grew at 7.7
per cent, 6.9 per cent and 6.1 per cent in the first
three quarters of 2011-12 respectively. It is estimated
that Indian economy would grow at 6.9 per cent during
2011-12. This drop in growth rate has impacted the
direct tax collection and there is estimated shortfall of
`32,000 crore from the BE 2011-12 level in RE 2011-
12. This would result in shortfall of about `22,800 crore
in the net tax revenue for Centre amounting to 0.3
per cent of GDP. Lastly, while Indian economy was
already showing signs of moderation, the grim outlook
for world economy and the prevailing uncertainty in
Euro Zone added volatility to the Indian capital market.
Government had to recalibrate its disinvestment
programme and accordingly `13,895 crore has been
estimated in RE 2011-12 as against BE of `40,000
crore.
1920
6. The above items taken together would have
resulted in overall slippage of about `1,49,356 crore
amounting to 1.7 per cent of GDP. However, with
savings in other expenditure and better than estimated
receipts from Service Tax, fiscal deficit is estimated
to increase by 1.3 per cent of GDP to 5.9 per cent of
GDP in RE 2011-12. Revenue deficit is estimated to
increase by 1 per cent of GDP from the earlier
estimated level of 3.4 per cent of GDP in BE 2011-12
to 4.4 per cent of GDP in RE 2011-12.
7. Though fiscal deficit increased by 1.3 per cent
of GDP, debt and liabilities of the Central Government
is estimated to reduce marginally to 45.7 per cent in
RE 2011-12 from 46.0 per cent in 2010-11. This
r e d u c t i o n i s l a r g e l y o n a c c o u n t o f h i g h e r t h a n
estimated growth in nominal GDP during 2011-12.
Also, the comparison with last year's performance
when fiscal deficit was 4.9 per cent of GDP may be
seen in the context of government having the benefit
of higher than estimated non-tax revenue of about
0.9 per cent of GDP from auction of 3G & BWA
spectrum during 2010-11. The fiscal deficit, net of this
additional receipt, would have been at 5.8 per cent of
GDP in 2010-11.
8. The windfall gain in the form of auction proceeds
from 3G and BWA spectrum during 2010-11 had not
only helped in bringing down the fiscal deficit for 2010-
11, it also helped in taking certain decisions which
resulted in avoidance or reduction of debt by `48,218
crore. This mainly includes (a) reduction in market
borrowings through dated securities by ` 20,000 crore,
(b) buy back of fertilizers bonds amounting to ` 11,795
crore issued in lieu of subsidy, (c) redemption of liability
to National Small Savings Fund (NSSF) by ` 9,000
crore, and (d) reduction in estimated loans from IBRD
for recapitalization of Public Sector Banks by `5,400
crore. This avoidance or reduction in debt works out
to 68 per cent of the receipts in excess of estimates
from the auction of 3G and BWA spectrum.
9. The decline in tax to GDP ratio coupled with
higher expenditure brought out the problems of
structural imbalance in fiscal account. Though part of
this imbalance is cyclical in nature, however a large
proportion of the increase in fiscal deficit could be
attributed to structural problems. The Medium Term
Fiscal Policy Statement brings out in detail the strategy
of the government to reduce the fiscal deficit gradually
closer to the existing mandated level under the FRBM
Act and Rules. However, the revenue deficit as
percentage of GDP is estimated to remain well above
the present mandated level. This must however be
seen in the context of bringing in all subsidy related
expenditure into the government's fiscal accounting.
It may be recalled that the Government had made a
c o n s c i o u s e f f o r t t o a v o i d i s s u i n g Go v e r nme n t
securities in lieu of cash subsidies to oil and fertiliser
companies. This trend of extending Government
subsidy in cash rather than by way of bonds has been
continued despite adverse fiscal situation.
10. Government is determined to bring the deficit
down to a more sustainable level and at the same
time re-orient government expenditure towards priority
sectors like health, education, irrigation with added
focus on inf rast ructure and investment related
activities. The fiscal policy of the government for the
ensuing year would be guided by the above principle.
To r e i n f o r c e i t s c o m m i t m e n t t o w a r d s f i s c a l
consolidation with reorientation in resource allocation
as mentioned above, Government is bringing out
amendment in the FRBM Act, 2003 as part of Finance
Bill, 2012.
FRBM Act Amendment
11. It may be recalled that government had outlined
its intention to bring out amendment in the FRBM Act
during 2011-12. The rule based legislation for fiscal
consolidation had helped India in achieving lower
deficit and in turn lower debt as percentage of GDP
d u r i n g 2 0 0 4 - 0 5 t o 2 0 0 7 - 0 8 . Ga i n i n g f r om t h i s
experience, the present set of amendments further
aim to br ing out consistency in the conduct of
government's fiscal policy with shifting of priority
towards quality of expenditure and not only reduction
of deficit. The most important part of the proposed
amendment is to give statutory recognition of the
concept of ef fect ive revenue def ici t which was
introduced in the Budget for 2010-11. This is defined
as the difference between revenue deficit and grants
for creation of capital assets.
12. Effective Revenue Deficit reflects the structural
component of imbalance in the revenue account. In a
federal set up like India, large amount of transfer of
resources from the Central Government takes place
to States, local bodies and other scheme implementing
agencies who are mandated to provide cer tain
services. All of such transfers are shown as revenue/
c u r r e n t e x p e n d i t u r e i n t h e b o o k s o f C e n t r a l
Government. However, significant proportion of such
transfers is specifically meant for creation of capital
assets which are public goods in nature. In the present
scheme of things, most of the public goods are being
provided by States and sector specific bodies. Central
Go v e r nme n t 's r o l e i s l imi t e d t o a u gme n t i n g o r
providing resources to these institutions as it can't
create these infrastructures directly (e.g. State or rural21
roads; irrigation infrastructure; power generation,
t r a n s m i s s i o n a n d d i s t r i b u t i o n f a c i l i t i e s ;
telecommunication networks, major ports or airports
etc.). Since the Central Government does not own
these assets, the resources transferred even for
creation of physical infrastructure are shown as
revenue expenditure.
13. In the present Act, when it is mandatory to
eliminate revenue deficit, the pressure is to reduce
revenue expenditure which also includes the above
me n t i o n e d t r a n s f e` Wi t h t h e s t r u c t u r a l r i g i d i t y
associated with certain components of revenue
expenditure namely, salary and pension payments,
interest payment, statutory grants to States; reduction
or squeeze on revenue expenditure in the medium
term will most likely be on discretionary items like
transfer for creation of capital assets. This approach
may lead to overall reduction in investment related
expenditure in the economy and certainly this is not
the desired objective of the existing Act.
14. With the introduction of the concept of effective
revenue deficit and by mandating its elimination by
March 2015, government would address the structural
component of imbalance in the revenue account,
namely, consumptive expenditure, in the right earnest
without sacrificing development related expenditure.
Coupled with fiscal deficit target, this fiscal indicator
would ensure allocation of borrowed resources in
productive sector through creation of capital assets
and at the same time would bring the debt and
liabilities as percentage of GDP to a more sustainable
level. The emphasis to eliminate effective revenue
deficit by 2014-15, and generate adequate surplus
thereafter would help in augmenting resources for
f i n a n c i n g i n v e s t m e n t a n d c a p i ta l e x p e n d i t u r e
(including grants for creation of capital assets). In the
r o l l i n g ta r g e ts f o r s e l e c t f i s c a l i n d i c a t o r s , t h i s
component has been included in the Medium Term
Fiscal Policy Statement.
15. The second important feature of the proposed
amendment is the int roduct ion of Medium- term
Expenditure Framework Statement along with the
existing three FRBM statements. This new statement
would provide certainty of allocation to Ministries and
Departments over three year time frame. This would
help Ministries/Departments in undertaking de-novo
exercise for al locat ing resources on pr ior i t ized
schemes and weeding out such schemes which have
outlived their utility. This statement would set forth a
three year rolling target for expenditure indicators with
specification of underlying assumptions and risk
involved.
16. The Budget 2012-2013 is being presented when
the growth scenario for the world economy is still
uncertain and problems of high crude prices have
further aggravated due to geo-political situation in
some of the oil producing countries. Notwithstanding
the above uncertainties, government has made efforts
in BE 2012-13 to once again kick start the growth
revival without losing sight of fiscal consolidation. On
one hand the government has to ensure that the
revival of economy is aided through policy actions and
at the same time the fiscal policy has to be balanced
with concerns on inflation and high policy rates
impacting investment. With 2012-13 being the first
year of the Twelfth Five Year Plan, efforts have been
made to provide adequate resources for health,
education, irrigation and other infrastructure secto`
A t t h e s a m e t i m e , g r o w t h i n s u b s i d y r e l a t e d
expenditure is proposed to be contained within
sustainable levels.
B. FISCAL POLICY FOR 2012-13
17. The fiscal policy of 2012-13 has been calibrated
with two fold objectives – first, to aid economy in
growth revival; and second, to bring down the deficit
from 2011-12 level so as to leave space for private
sector credit as the investment cycle picks up. Being
the first year of the 12
th
Five Year Plan, an ambitious
outlay which is 22.1 per cent higher than RE 2011-12
has been provided. Even with higher increase in plan
allocation, fiscal deficit has been reduced from 5.9
per cent of GDP in RE 2011-12 to 5.1 per cent in BE
2012-13. With policy measures, it is estimated that
non-plan expenditure could be controlled with a growth
of 8.7 per cent in BE 2012-13 over RE 2011-12. This
would result in overall expenditure increase of 13.1
p e r c e n t i n B E 2 0 1 2 - 1 3 o v e r RE 2 0 11 - 1 2 . A s
percentage of GDP, total expenditure is estimated to
marginally reduce to 14.7 per cent in BE 2012-13 from
14.8 per cent in RE 2011-12.
18. Thus most of the correction in fiscal deficit has
been targeted through revenue augmentation. It may
be recalled that gross tax revenue as percentage of
GDP declined sharply from high of 11.9 per cent in
2007-08 to 9.7 per cent in 2009-10. It is now estimated
to increase from 10.1 per cent of GDP in RE 2011-12
to 10.6 per cent in BE 2012-13 (reflecting growth of
19.6 per cent over RE 2011-12). This level of growth
may look ambitious if seen in isolation. However, after
n e t t i n g o f f t h e i m p a c t o f a d d i t i o n a l r e s o u r c e
mobilization proposed in indirect taxes, BE 2012-13
is estimated at a growth of 15.0 per cent over RE
2011-12.22
19. In order to keep the overall expenditure under
the estimated level, government has taken certain
decisions to control the growth of expenditure in
subsidies and other related items. Decision of the
Government on move towards nutrient based subsidy
(NBS) regime in fertiliser is expected to reduce
expenditure on this component of fertilser subsidy
during 2011-12. At the same time, NBS regime is
also expected to promote balanced use of fertilizer
leading to increase in agricultural productivity.
20. With respect to rationalization of petroleum
subsidy, government has already decontrolled the
pricing of petrol. With the help of AADHAAR (unique
identity programme), it would be possible to attempt
a direct cash transfer mechanism in phased manner
for LPG and kerosene which in turn may reduce the
subsidy requirement. States have been given this
option to opt for direct cash transfer mechanism.
Though in principle decision regarding decontrol of
diesel price has been taken, the implementation of
this decision has not yet not taken place in view of
prevailing high international prices.
Tax Policy
21. During the fiscal consolidation period, the taxGDP ratio improved significantly from 9.2 per cent in
2003-04 to 11.9 per cent in 2007-08. This was
achieved through rationalisation of the tax structure
(moderate levels and a few rates), widening of the
tax base and reduction in compliance costs through
improvement in tax administration. The extensive
adoption of information technology solutions and reengineering of business processes have also fostered
a less intrusive tax system and encouraged voluntary
c omp l i a n c e . T h e s e me a s u r e s h a v e r e s u l t e d i n
increased buoyancy in tax revenues till 2007-08 and
helped in fiscal consolidation. However, due to the
stimulus measures undertaken during the crisis period
of 2008-09 and 2009-10 to insulate Indian economy
from the adverse impact of global economic crisis and
lower growth in economy, the gross tax revenue as
percentage of GDP declined sharply to 9.7 per cent
in 2009-10.
22. On the positive side, however, the results of
these stimulus measures have helped in swift and
broad based recovery, particularly in manufacturing
a n d s e r v i c e s s e c t o r d u r i n g 2 0 1 0 - 11 . W i t h t h e
moderation in growth in 2011-12 and prevailing high
inflation situation, government had to further reduce
taxes/duty on petroleum products. During 2011-12,
gross tax receipts as percentage of GDP is estimated
to decline to 10.1 per cent from 10.3 per cent in 2010-
11 . Howe v e r, wi t h pa r t i a l r o l l b a c k o f s t imu l u s
measures in indirect taxes, it is estimated that tax
receipt as percentage of GDP would improve to 10.6
per cent.
Indirect taxes
23. In keeping with the overall thrust of fiscal policy,
in the realm of indirect taxes too, the stance during
2 0 1 2 - 1 3 w o u l d b e i n f a v o u r o f f u r t h e r f i s c a l
consolidation. This agrees with the medium term
objective of enhancing the tax-GDP ratio both through
b a s e e x pa n s i o n a s w e l l a s a d m i n i s t r a t i v e
improvement. Among the latter, the emphasis is on
more intense deployment of Information Technology
in business processes so that physical interface
between the taxpayer and the Department is reduced
and return data critical for developing compliance
strategies and interventions is captured and updated
seamlessly.
24. In the medium term, the most significant step
from the point of view of broadening the tax base and
i m p r o v i n g r e v e n u e e f f i c i e n c y t h r o u g h b e t t e r
compliance is the introduction of Goods and Services
Tax (GST). As far as Central taxes viz. Central Excise
duties and Service Tax are concerned, a fair amount
of integration has already been achieved, especially
through the cross-flow of credits across the two taxes.
Further measures such as adoption of a common
return format are proposed in the Budget. It would be
possible to realise full integration of the taxation of
goods and services only when the State VAT is also
subsumed and a full-fledged GST is launched. The
Constitution Amendment Bill to put in place the
enabling legal framework has already been introduced
in the Lok Sabha and is currently being examined by
t h e Sta n d i n g C o m m i t t e e o n F i n a n c e . I n t h e
meanwhile, the dialogue with the State Governments
for finalizing the structure, design and roadmap for
the implementation of GST would continue.
25. There are several specific proposals in the
Budget 2012-13 to recalibrate the tax effort on indirect
taxes so that fiscal consolidation may be achieved in
the short term. The important and revenue significant
proposals include:
Shift from a "positive" list approach to a
"negative" list approach in the taxation of
services;
Review and withdrawal of several exemptions
from service tax;
Enhancement in the standard rate of Service
Tax from 10% to 12%;23
Increase in the standard rate of excise duty
from 10% to 12% by way of partial roll back
of the fiscal stimulus (provided in 2008-09);
Increase in the merit rate of excise duty from
5% to 6% and lower merit rate from 1% to
2% (except coal, fertilisers and precious metal
jewellery);
Increase in excise duty on cars –both small
and large, MUVs, SUVs etc.;
Increase in excise duty on "demerit" goods
such as cigarettes, bidis, and other tobacco
products;
Rationalisation of the scheme of levy/ rate
s t r u c t u r e a p p l i c a b l e t o p r e c i o u s m e ta l
jewellery and chassis for automobiles;
Increase in the rate of cess on indigenously
produced crude petroleum from `2500 per
tonne to `4500 per tonne.
26. Measures proposed to contain the Current
Account Deficit such as enhancement in customs duty
on standard gold bars and platinum bars from 2% to
4% may also have a favourable impact on revenue
collections in the immediate future.
Direct Taxes
27. The policy in the case of direct taxes has been
to achieve growth while maintaining moderate rates
of tax. To this end, the initiative has been to reduce
the tax revenue foregone on account of exemptions
and deductions. This has been attempted primarily
t h r o u g h t h e g r a d u a l p h a s e o u t o f p r o f i t l i n k e d
deductions and the levy of Minimum Alternate Tax
(MAT) on all companies to ensure a minimum level of
tax contribution by all sectors. The other aspect of
this policy has been to use information technology to
widen the reported tax base, e.g., electronic filing of
annual information returns regarding third party
transactions, in order to ensure the reporting of major
financial transactions for tax purposes. Electronic
filing of income tax returns and tax deduction at source
statements as well as e-payment of taxes is also a
part of this strategy in order to more effectively monitor
ta x p a y e r c o m p l i a n c e , b e s i d e s r e d u c i n g t h e
compliance burden of tax payers The current direct
tax legislation is proposed to be simplified and
consolidated through the Direct Taxes Code Bill 2010
which was introduced in Parliament in August 2010.
The Standing Committee on Finance has recently (on
9th March 2012) submitted its report on the Bill which
will now be examined for appropriate action.
28. The major policy proposals in the Union Budget
2012-13 intended to broaden the tax base are:
Introduction of Alternate Minimum Tax (AMT)
at the rate of 18.5 per cent on all persons
(other than companies) claiming profit linked
deductions;
Introduction of a General Anti-Avoidance Rule
to deter aggressive tax avoidance schemes;
I n t r o d u c t i o n o f c o m p u l s o r y r e p o r t i n g
requirement in case of assets held abroad;
Allowing for reopening of assessment upto
16 years in relation to assets held abroad;
Tax collection at source on purchase in cash
of bullion or jewellery in excess of ` 2 lakh;
Ta x d e d u c t i o n a t s o u r c e o n t r a n s f e r o f
immovable property (other than agricultural
land) above a specified threshold;
Tax collection at source on trading in coal,
lignite and iron ore;
Increasing the burden of proof on closely held
c o m p a n i e s f o r f u n d s r e c e i v e d f r o m
shareholders as well as taxing share premium
in excess of fair market value;
Taxat ion of unexplained money, credi ts ,
investments, expenditures etc., at the highest
rate of 30 per cent irrespective of slab of
income;
St r e n g t h e n i n g p e n a l t y p r o v i s i o n s f o r
undisclosed income found during search;
Streamlining and strengthening of prosecution
provisions under the Income Tax Act.
29. The administrative and information technology
initiatives are:
C e n t r a l i s e d P r o c e s s i n g C e n t r e f o r t h e
computerised processing of tax deduction at
source (TDS) statements. This initiative
fol lows f rom the Cent ral ised Processing
Centre at Bengaluru which currently processes
all electronically filed income tax returns.
Besides the 50 taxpayer help centres called
Aayakar Seva Kendras (ASKs) functional in
t h i s y e a r, a n o t h e r 1 0 0 A S K s w i l l b e
commissioned in the coming financial year.24
Payment of taxes through Automatic Teller
Machines (ATMs) and all India coverage of the
Refund Bankers Scheme for refund of direct
taxes has already been introduced in the
current year.
30. The direct tax buoyancy in the last four years
has been less than one mainly on account of higher
inflation. The major challenge, therefore, for direct tax
collections in the medium term is to maintain buoyancy
in the face of lower profitability of companies owing
to higher rate of inflation while maintaining moderate
rates of tax.
Contingent and other Liabilities
31. T h e F R B M A c t m a n d a t e s t h e C e n t r a l
Government to specify the annual target for assuming
cont ingent l iabi l i t ies in the form of guarantees.
Accordingly the FRBM Rules prescribe a cap of 0.5
per cent of GDP in any financial year on the quantum
of guarantees that the Central Government can
assume in the particular financial year. The Central
Government extends guarantees primarily on loans
from multilateral/bilateral agencies, bond issues and
o t h e r l o a n s r a i s e d b y v a r i o u s P u b l i c S e c t o r
Undertakings/Public Sector Financial Institutions.
32. For better management of contingent liabilities,
government guarantee policy had been released
during 2010-11. It enumerates various principles which
need to be followed before new contingent liabilities
in the form of sovereign guarantees are undertaken.
These principles inter alia include assessment of risk
and probability of devolvement, institutional limits on
guarantees for limiting exposure towards select
sectors and requirement of guarantee vis a vis other
forms of budgetary support or comfort. Additional
me a s u r e s t o f u r t h e r s t r e aml i n e t h e p r o c e s s o f
assuming risk could include charging of risk based
premia, disincentive for wilful default, only part sharing
of risk by the government and insisting on guaranteed
debt cost to be near the bench marked government
securities rate.
33. The stock of contingent liabilities in the form of
guarantees given by the government has increased
i n a b s o l u t e t e rms f r om `1 , 0 7 , 9 5 7 c r o r e a t t h e
beginning of the FRBM Act regime in 2004-05 to
`1,51,292 crore at the end of 2010-11. However, as a
percentage of GDP, it has reduced from 3.3 per cent
in 2004-05 to 2.0 per cent in 2010-11. The disclosure
statement on outstanding Guarantees as prescribed
in the FRBM Rules, 2004 is appended in the Receipts
Budget as Annex 5 (iii).
34. During the year 2010-11, gross addition in
guarantees was `22,745 crore amounting to 0.30 per
cent of GDP which was well below the mandated
target of 0.5 per cent of GDP set under the FRBM
Rules. Further, net addition in guarantees during 2010-
11 was `13,428 crore amounting to 0.2 per cent of
GDP.
Government Borrowings, Lending and
Investments
35. With the objective of improving transparency in
dissemination of information related to public debt,
the second edition of Status Paper on Government
Debt was brought out in March 2012. Government is
committed to implement prudent debt management
strategies so as to ensure that the public debt remains
within sustainable limits and does not crowd out private
b o r r o w i n g f o r i n v e s t m e n t . T h e p o l i c y o f t h e
Government is driven by the principle of gradual
reduction of public debt to GDP ratio so as to further
reduce debt servicing risk and create fiscal space for
developmental expenditure. On the financing side, the
Government policy continues to remain anchored on
the following principles, namely (i) greater reliance
on domestic borrowings over external debt, (ii)
preference for market borrowings over instruments
carrying administered interest rates, (iii) consolidation
of the debt portfolio and (iv) development of a deep
and wide market for Government securities to improve
liquidity in secondary market.
36. One of the key public debt management reforms
under implementation is the establishment of a Debt
Management Office (DMO) in the Ministry of Finance.
It is proposed to introduce necessary legislation in
this regard in the Budget session for 2012-13. Middle
office, which was established as a prelude to functional
DMO, is bringing out various reports and information
wi th respect to publ ic debt . The debt issuance
calendar along with selection of instruments for
issuance is now being done in consultation with Middle
Office and RBI.
37. C o m m i t t e e o n S m a l l S a v i n g s w h i c h w a s
c o n s t i t u t e d i n J u l y 2 0 1 0 h a s g i v e n i t s
recommendations regarding review of the existing
parameters for the small saving schemes in operation
and recommended mechanisms to make them more
flexible and market linked. The Committee also
reviewed the existing terms of the loans extended from
the NSSF to the Centre and States and recommended
changes in the ar rangement of lending the net
collection of small savings to Centre and States along
with other possible investment opportunities for the
net collections from small savings and the repayment25
proceeds of NSSF loans extended to States and
Centre. The recommendations of the Committee were
considered in detail and certain decisions were taken
which would change the administration of NSSF in
coming yea` Based on the recommendation of the
a b o v e C o m m i t t e e , t h e r a t e s o n s m a l l s a v i n g
instruments have been aligned with the prevailing
market rates with effect from 1
st
December, 2011.
38. During 2011-12, there was a significant shortfall
in small savings collection when compared to Budget
Estimates 2011-12. Lower collection during the latter
part of 2010-11 created a cash shortfall in NSSF and
impacted Government's closing cash balance in
March 2011. Due to the above shortfall, government
deficit financing was impacted during 2011-12. The
estimated shortfall would be `34,484 crore in financing
from National Small Savings Fund (NSSF) in RE 2011-
12 when compared to BE 2011-12. Further, `20,000
crore which was estimated as cash draw-down in the
financing of deficit for 2011-12 is not available as
NSSF ended in cash deficit.
39. Due to the combined impact of above shortfalls
and increase in fiscal deficit by `1,09,163 crore in
absolute terms in RE 2011-12 over BE 2011-12,
G o v e r n m e n t h a d t o i n c r e a s e t h e n e t m a r k e t
borrowings through dated securities and auction
treasury bills by `93,000 crore and `1.01 lakh crore
respectively. This level of additional borrowing would
also take care of emerging cash requirements during
the first quarter of ensuing year (2012-13) when the
redemptions of existing debt stock is of higher level.
40. D u r i n g 2 0 11 - 1 2 , g r o s s a n d n e t m a r k e t
borrowings of the Central Government through dated
securities are at `5.10 lakh crore and `4.36 lakh crore
respectively as compared to `4.37 lakh crore and
`3.25 lakh crore respectively during 2010-11. The
weighted average maturity of dated securities issued
during 2011-12 at 12.66 years is higher than 11.62
years dur ing 2010-11. Ref lect ing the impact of
i n c r e a s e i n p o l i c y r a t e s a n d h i g h e r amo u n t o f
borrowing, the weighted average yield of issuance
during 2011-12 has increased to 8.52 per cent from
7.92 per cent during 2010-11.
41. The debt financing strategy for 2012-13 has
been formulated with continued reliance on domestic
dated securities market. Along with other components
of f inancing, f iscal def ici t of `5,13,590 crore is
proposed to be financed to the extent of `4,79,000
crore (amounting to 93.3 per cent of deficit) through
issuance of dated securities, `12,000 crore (2.3 per
cent of deficit) through net proceeds from State
Provident Funds, `9,000 crore through Treasury Bills
(1.8 per cent of deficit) and `10,148 crore through
external debt (2.0 per cent of deficit).
42. Propor t ion of external debt in the Cent ral
Government debt has declined consistently in the
recent years from 10 per cent in 2005-06 to 7.9 per
cent in 2010-11. With gradual decline in net inflow
from Multilateral Institutions in the coming years (in
view of their exposure norms and income norms),
government would have the option of exploring other
sources of external debt in the form of sovereign bond
issuance to maintain a reasonable mix of domestic
and external debt in its portfolio.
43. There is no balance estimated at the end of
financial year 2011-12 under Market Stabilisation
Scheme (MSS). Net accretion in MSS to the tune of
`20,000 crore is estimated for BE 2012-13.
44. With the above projected financing, debt and
liabilities of the Central Government is estimated to
decline to 45.5 per cent of GDP in BE 2012-13 from
45.7 per cent of GDP in RE 2011-12. In the medium
term outlook, as projected in the MTFP Statement,
debt and liabilities of the Central Government is
projected to decline to 44.0 per cent in 2013-14 and
41.9 per cent in 2014-15, well below the 13
th
FC
recommended target of 44.8 per cent for the year
2014-15.
45. R e c e n t e x p e r i e n c e i n s o v e r e i g n d e b t
management has shown that analysis of sovereign
debt sustainability should not be merely based on the
classical definition of principles related to Primary
deficit along with differential in interest and growth
rate. I t should factor in some of the impor tant
parameters of the debt and macro-economic situation
such as maturity profile, composition, carrying cost,
external or domestic investor base along with savings
rate, potential and realised tax to GDP ratio. The
characteristics of existing debt stock and economic
parameters in the case of India such as high domestic
savings rate, longer residual maturity, fixed rate of
interest on bulk of the existing stock, higher proportion
of domestic currency denominated debt and wide gap
between potential and realised tax to GDP ratio, put
India in a better position when compared to equally
or even lower level of indebted economies.
46. With regard to future financing scenario, an
analysis presented in the Debt Status Paper released
in March 2012, shows that Central Government would
be able to raise debt of the order of 4.9 per cent of
GDP in 2012-13 and in the range of 4.2 per cent to 4
per cent of GDP during the coming years through
dated securities. This augurs well as more resources26
could be released from the banking system towards
private sector, as the above financing analysis has
assumed gradual reduction in Statutory Liquidity Ratio
(SLR) requirement.
47. The shift in policy on the uses of disinvestment
proceeds from Central PSUs received under the
National Investment Fund (NIF) will continue for the
year 2012-13. The disinvestment proceeds estimated
at `30,000 crore in BE 2012-13 have been reckoned
as resources for the purpose of financing the social
sector programmes which are creating capital assets.
The income from investments made from proceeds
received upto 2008-09 under NIF would continue to
be used to finance social infrastructure and to provide
capital to viable public sector enterprises without
depleting the corpus of NIF. During 2010-11 and 2011-
12, when the ear l ier NIF modal i ty was kept in
a b e y a n c e , g o v e r n m e n t i s e s t i m a t e d t o r a i s e
disinvestment proceeds of `36,039 crore. Incidentally,
during the same period, Government is estimated to
invest `36,316 crore in capitalization of public sector
banks, regional rural banks and other f inancial
institutions including NABARD.
I n i t i a t i v e s i n P u b l i c E x p e n d i t u r e
Management
48. C e n t r a l P l a n S c h e m e M o n i t o r i n g S y s t e m
(CPSMS) is an initiative towards establishing a
suitable on-line management information and decision
support system. It is proposed to expand the Scheme
of Central Plan Scheme Monitoring System (CPSMS).
This would improve the tracking of funds released by
the Central Government and also ensure better
utilisation of borrowed resources. This MIS tracks
deployment/transfer of funds as well as their utilization
through all tiers of implementing agencies and in some
cases upto the end beneficiaries. The real time
availability of information on status of fund utilization
and balances in respective bank accounts will enable
better cash management system with timely release
of adequate funds and avoidance of parking of funds
without actual requirement. While ensuring reduced
cost of carrying borrowed fund, it would also improve
accountability as people can access information about
a particular scheme in their respective areas.
49. In order to have more effective monitoring of
deployment of resources and a robust Public Financial
Management System, a need has been felt to review
the present classification of government transactions.
Accordingly, a committee under the Chairmanship of
the Controller General of Accounts which was formed
to conduct a comprehensive review of the existing
system and suggest a new system keeping in view
the needs of better presentation of data across
national and sub-national governments and improved
reporting of transfer payments from one level of
government to another. The committee has submitted
its report. It has recommended to replace the existing
six tier hierarchical structure into separate logical
dimensions for depicting administrative responsibility,
functional classification for macro level planning,
recipient categories, intended beneficiaries and
geographical location. Government is examining the
proposed change in structure in consultation with
various stakeholders including State Governments.
50. The quarterly exchequer control based cash and
expenditure management system which inter alia
involves preparing a Monthly Expenditure Plan (MEP)
is being expanded from existing 23 Demands for
Grants during 2011-12 to additional 23 Demands for
Grants with effect from 2012-13. Initiatives have also
been taken with the MIS system from e-lekha to evenly
pace the plan expenditure during the year and also to
avoid rush of expenditure at the year end. The practice
of restricting the expenditure in the month of March
to 15 per cent of budget allocation within the fourth
quarter ceiling of 33 per cent is being enforced. The
emphasis is on right pacing plan expenditure by
e n s u r i n g a d e q u a t e r e s o u r c e s f o r e x e c u t i o n o f
budgeted schemes.
51. While designing programmes and schemes for
the XII
th
Five Year Plan, government would get benefit
from the recommendations of the Expert Committee
to streamline various Centrally Sponsored Schemes
and reduce their number only to the critical areas.
Further, the recommendation of the Expert Committee
on the issue of plan and non-plan classification is
being examined. Also, its recommendation regarding
direct releases to State Treasury merits consideration
for various Centrally Sponsored Schemes.
C. POLICY EVALUATION
52. Budget 2011-12 was presented against the
b a c k d r o p o f r o b u s t r e v i v a l o f g r owt h i n I n d i a n
economy. Indian economy was estimated to grow at
9 per cent over the then estimated growth of 8.5 per
cent in 2010-11. However, after budget presentation,
happenings around the globe including hardening of27
global crude prices and sticky high inflation scenario
in the domestic economy, forced the government to
make necessary changes in policy during 2011-12 to
address the emerging challenges.
53. Fiscal deficit which was estimated at 4.6 per cent
of GDP in BE 2011-12 has increased to 5.9 per cent
of GDP in RE 2011-12. This increase in deficit could
be attributed to moderation in growth, which impacted
direct tax collection and high inflation necessitating
additional expenditure on food, fertilizer and petroleum
subsidies. In the budget 2012-13, Government is
addressing the two main reasons of slippage by
controlling rise in subsidy related expenditure and
improving tax receipts as percentage of GDP through
additional resource mobilisation measures (ARM) in
indirect taxes. With ARM from indirect taxes, coupled
wi t h e s t ima t e d r e c e i p ts o f `4 0 , 0 0 0 c r o r e f r om
t e l e c o m m u n i c a t i o n s p e c t r u m a u c t i o n a n d
disinvestment proceeds of `30,000 crore, the fiscal
deficit for 2012-13 is estimated at 5.1 per cent of GDP.
The reduction in deficit has been estimated without
compromising on al locat ions for developmental
expenditure.
54. The strategy adopted for fiscal consolidation
over the medium term has to balance the need for
aiding the revival in growth without stoking inflationary
expectation through domestic policy actions. The
suggested roadmap of fiscal consolidation will help in
reducing the debt to GDP ratio from 46.0 per cent in
2010-11 to 45.7 per cent in RE 2011-12 and 45.5 per
cent in BE 2012-13. Gradually it is projected to decline
t o 4 1 . 9 p e r c e n t b y 2 0 1 4 - 1 5 a s a g a i n s t t h e
recommended debt level of 44.8 per cent of GDP by
the 13th FC.
55. The proposed amendment in the FRBM Act
would address the structural issue of imbalance in
t h e r e v e n u e a c c o u n t o f t h e Go v e r nme n t . Wi t h
mandated elimination of effective revenue deficit by
March 2015, more resources could be made available
f o r i n v e s t m e n t a n d c a p i t a l e x p e n d i t u r e . T h e
introduction of Medium-term Expenditure Framework
Statement along wi th the exist ing three FRBM
statements would provide certainty of allocation to
Ministries and Departments over the three year time
frame. With the introduction of three year rolling target
for expendi ture indicators wi th speci f icat ion of
underlying assumptions and risk involved, there would
be close monitoring of allocation of expenditure to
priority sectors thereby improving the quality of
expenditure.
अनिल बंसल 