INSTITUTE OF MANAGEMENT STUDIES

GHAZIABAD

A Project report on

INDIAN FISCAL POLICY

Submitted in the partial fulfillment of

POST GRADUATE DIPLOMA IN MANAGEMENT

Submitted to Submitted by-

Prof. Tapan Kumar Nayak 1. Isha Saxena (BM-09085)

2. Karishma Tiwari (BM-09092)
3. Neha Gulati( BM-09117)
4. Neha Sahni (BM-09120)
5. Nikhil Singh (BM-09124)
6. Nupur Sharma (BM-09132)

Page 1 of 26
 CERTIFICATE

This is to certify that this is a report on “INDIAN FISCAL POLICY”

submitted by Nupur Sharma, Nikhil Singh, Karishma Tiwari, Neha Gulati,
Neha Sahni, Isha Saxena as a part of the PGDM curriculum for the
second trimester. The work has been undertaken and completed under
the guidance of Prof. TAPAN KUMAR NAYAK and is satisfactory.

Prof:

Date:

Page 2 of 26
 ACKNOWLEDGEMENT

Perseverance, inspiration and motivation have always played a key role in the
success of any venture. A successful and satisfactory completion of any
project is the outcome of the invaluable aggregate contribution of different
persons fully in radical direction, explicitly or implicitly.

Whereas vast, varied and valuable reading efforts leads to

substantial acquisition of knowledge via books and allied information sources.
True expertise excludes from collateral practical works and experiences.

Words have never seemed as inadequate as now, when we are

endeavoring to express our heartfelt gratitude at the culmination of the project,
to all those made it possible. Even the best effort is waste without proper
guidance and advice. We highly solicit to PROF. TAPAN KUMAR NAYAK for
launching us into this foray. At the same time we are indebted to
PROF. TAPAN KUMAR. NAYAK for giving time-to-time suggestion and their
valuable guidance, co-operation, inspiration and keen supervision to our
project.

Last but not the least; we are grateful to God, our Parents, Elders and Friends
for encouraging us to take up this challenging task.

Page 3 of 26
 INSTITUTE OF MANAGEMENT STUDIES
GHAZIABAD

CERTIFICATE

We hereby certify that content presented in the project entitled “INDIAN

FISCAL POLICY” in the partial fulfillment of the requirement for the award of
the degree of POST GRADUATE DIPLOMA IN MANGEMENT from IMS,
GHAZIABD is an authentic record of our own work, carried out under the
guidance of our project guide, Dr.TAPAN KR. NAYAK. The matter embodied
in the project has not been copied by us from any resources.

DATE:10-12-09 Nupur Sharma-09132

PLACE: GHAZIABAD Karishma Tiwari-09092
Neha Gulati-09117
Neha Sahni-09120
Nikhil Singh-09124
Isha Saxena-09085

This is to certify that above statements made by the students are true to
the best of my knowledge.

PROF. TAPAN KUMAR NAYAK

(project coordinator)

Page 4 of 26
 PREFACE

The primary objective of this report is to provide the readers the

insight into the core of National Economic Planning and an
understanding of Fiscal Policy & its importance in relation to Indian
Economy.

We hope that the report has made the text interesting and lucid. In
writing this report, we have benefited immensely by referring to many
publications and articles. We express my gratitude to all such authors
and publishers.

Any suggestions to improve this report in contents or in style are

always welcome and will be appreciated and acknowledged.

Page 5 of 26
 DECLARATION

We hereby declare that all the information that has been collected, analyzed and
documented for the project is authentic possession of us.

We would like to categorically mention that the work here has neither been
purchased nor acquired by any other unfair means. However, for the purpose of the
project, information already compiled in many sources has been utilized.

(KARISHMA TIWARI)

(NEHA GULATI)

(NEHA SAHNI)

(ISHA SAXENA)

(NIKHIL SINGH)

(NUPUR SHARMA)

Page 6 of 26
 CONTENTS

• Executive Summary ………………………………………………………. Pg.7

• Introduction................................…………………………………………. Pg. 8

• Connotation of Fiscal Policy …..........………………………………....... Pg. 12

• INDIAN FISCAL POLICY ………………………………..……………..… Pg. 13

• Relevance of Indian Fiscal Policy ……………………..………… …….. Pg. 26

• Budget 09' – 10' : A Glance ……………….……………………………… Pg. 31

• Biblography ……………………….....……………....…………………….. Pg. 26

Page 7 of 26
 EXECUTIVE SUMMARY
Fiscal policy have great impacts on growth of a country. The sustained strengthening
of domestic economic activity over the past few years has been underpinned by
proactive policy measures to improve the productivity and competitiveness of the
Indian economy. A number of steps covering the various sectors of the economy –
real, fiscal, external, monetary and financial sectors – were taken during the year to
sustain the current growth momentum, and make it more inclusive in an environment
of macroeconomic and financial stability.

Global economic activity remained buoyant for the fourth successive year during
2006 and available information suggests that the growth momentum is likely to
continue during 2007, albeit with some moderation. Global economic growth
accelerated from 4.9 per cent during 2005 to 5.5 per cent during 2006, and has
averaged 4.9 per cent per annum during the four-year period 2003-2006. A positive
feature of the global economic activity during 2006 was the broadening of growth
across major regions/countries. The rising global activity is, however, leading to
closing of output gaps in many countries; strong demand, in conjunction with strong
gains recorded by global commodity prices, was reflected in inflationary pressures in
major economies. With headline inflation crossing the targets/comfort zones in major
countries, many central banks pursued monetary tightening to contain inflationary
expectations.

In an environment of strong global growth, the Indian economy continued to exhibit

robust growth during 2006-07. Real GDP growth accelerated to 9.4 per cent in 2006-
07 from 9.0 per cent in 2005-06, boosted by the double-digit growth in the services
and industrial sectors. Real GDP growth, thus, averaged 7.6 per cent per annum
during the Tenth Five Year Plan period (2002-03 to 2006-07) – the fastest pace of
expansion in any Plan period so far – significantly higher than that of 5.7 per cent per
annum during the 1980s and the 1990s. Growth in per capita income (i.e., per capita
net national product at factor cost) accelerated from 7.4 per cent in 2005-06 to 8.4
percent during 2006-07. Per capita income growth averaged 6.1 per cent per annum
during the Tenth Plan period and 7.1 per cent per annum during the last four years
(2003-04 to 2006-07), more than double of 3.4 per cent per annum recorded during
the 1980s and the 1990s. The acceleration of economic activity is being supported
by a significant rise in domestic savings and investment, and productivity gains. A
notable feature of the economic growth during 2006-07 was the further strengthening
of the manufacturing activity. Consequently, in view of the sustained high growth
since 2003-04, capacity utilization has risen in a number of industries which, along
with supply shocks from primary articles, were reflected in a rise in the various
measures of inflation during 2006-07. The Reserve Bank, accordingly, took a series
of pre-emptive monetary measures to contain inflationary expectations. The
monetary measures were also accompanied by fiscal and supply side measures.

Page 8 of 26
 Introduction
Fiscal policy basically means by which a government adjusts its levels of
spending in order to monitor and influence a nation's economy. It is the sister
strategy to monetary policy, with which a central bank influences a nation's
money supply. These two policies are used in various combinations in an
effort to direct a country's economic goals.

Fiscal policy is based on the theories of British economist John Maynard Keynes.
Also known as Keynesian economics, this theory basically states that governments
can influence macroeconomic productivity levels by increasing or decreasing tax
levels and public spending. This influence, in turn, curbs inflation increases
employment and maintains a healthy value of money.

It refers to the union government's use of its annual budget to affect the level of
economic activity, resource allocation and income distribution. The budget strategy
can also influence the achievement of the government's objectives of internal and
external balance and economic growth.
The two main instruments of fiscal policy are government spending and taxation.
Changes in the level and composition of taxation and government spending can
impact on the following variables in the economy:
Aggregate demand and the level of economic activity;
1. The pattern of resource allocation; and
2. The distribution of income.

Example of Fiscal Policy

Suppose that an economy has slowed down. Unemployment levels are up,
consumer spending is down and businesses are not making any money. A
government thus decides to fuel the economy's engine by decreasing taxation,
giving consumers more spending money while increasing government spending in
the form of buying services from the market such as building roads or schools. By
paying for such services, the government creates jobs and wages that are in turn
pumped into the economy.
The three possible stances of fiscal policy are neutral, expansionary and
contractionary.
1. A neutral stance of fiscal policy implies a balanced budget where G = T
Government spending = Tax revenue. Government spending is fully funded
by tax revenue and overall the budget outcome has a neutral effect on the
level of economic activity.
Page 9 of 26
 2. An expansionary stance of fiscal policy involves a net increase in
government spending (G > T) through a rise in government spending or a fall
in taxation revenue or a combination of the two. This will lead to a larger
budget deficit or a smaller budget surplus than the government previously had
a balanced budget. Expansionary fiscal policy will lead to an increase in
economic activity. Expansionary fiscal policy is usually associated with a
budget deficit.
3. Contractionary fiscal policy (G < T) occurs when net government spending
is reduced either through higher taxation revenue or reduced government
spending or a combination of the two. This would lead to a lower budget
deficit or a larger surplus than the government previously had, or a surplus if
the government previously had a balanced budget. Concretionary fiscal policy
is usually associated with a surplus
The government’s handling of its own spending, taxation and government
borrowings are the key components of fiscal policy.

Government Spending
Government spending can be broken down into three main categories:
1. General government expenditure - consists of the combined capital and
current spending of central government including debt interest payments to
holders of government debt
2. General government final consumption - is government expenditure on
current goods and services excluding transfer payments
3. Transfer payments – transfers are transfers from taxpayers to benefit
recipients through the working of the social security system.

Expenditures

Government expenditure comprises expenditure on economic, social and general

services. The pattern in government expenditure since the Eighties has been mainly
influenced by a change in role of the government in the growth process, financing
pattern of the deficits (debt and interest payments) and the need for fiscal
consolidation.

Main areas of expenditures-

1. Interest payments:-

The widening of fiscal deficit and consequent rise in debt stocks during last
two decades have resulted in mounting expenditure on interest payments.

Page 10 of 26
 2. Subsidies: -

Expenditure on subsidies is a crucial element of government expenditure

particularly in the light of targeting poverty alleviation and the growing need to
rationalize expenses for fiscal consolidation. The total burden of subsidies on
government finances should take into account, in addition to the explicit subsidies,
several implicit subsidies in the form of lower user charges for economic and social
services provided by the government.

3. Wages, Salaries and Pensions:-

The rising bill in respect of wages, salaries and pensions is considered to be

an important element in the fiscal health of the government, particularly in the recent
years. These components partly represent the committed expenditure obligations of
the government.

4. Capital Outlays:-

Capital outlays represent the expenditure undertaken by the government to

build its investments. These investments enhance the productive capacity of the
economy through provision of the infrastructure and capital goods. The actual impact
of these investments on the growth process is magnified by the “crowding-in” impact
on private investment.

5. Defense :-

The central government also undertakes revenue and capital expenditures for
defense purposes which act as a public good at the national level.

Methods of Raising Funds

Governments spend money on a wide variety of things, from the military and police
to services like education and healthcare, as well as transfer payments such as
welfare benefits.

This expenditure can be funded in a number of different ways:

1. Taxation
2. Seignorage, the benefit from printing money
3. Borrowing money from the population, resulting in a fiscal deficit.

Page 11 of 26
Taxation

1. Income Tax:-

It is a tax levied on the financial income of persons, corporations, or other legal

entities. Various income tax systems exist, with varying degrees of tax incidence.
Income taxation can be progressive, proportional, or regressive. When the tax is
levied on the income of companies, it is often called a corporate tax, corporate
income tax, or profit tax. Individual income taxes often tax the total income of the
individual (with some deductions permitted), while corporate income taxes often tax
net income (the difference between gross receipts, expenses, and additional write-
offs).

2. Payroll Tax:-

It generally refers to two kinds of taxes: Taxes which employers are required to
withhold from employees' pay, also known as withholding, Pay-As-You-Earn (PAYE)
or Pay-As-You-Go (PAYG) tax; or taxes directly related to employing a worker paid
from the employer's own funds: these may be either fixed charges or proportionally
linked to an employee's pay

3. Capital Gain Tax:-

It is a tax charged on capital gains, the profit realized on the sale of an asset that
was purchased at a lower price. The most common capital gains are realized from
the sale of stocks, bonds, precious metals and property.

4. Value Added Tax:-

Value Added Tax (VAT), or Goods and Services Tax (GST), is tax on exchanges. It
is levied on the added value that results from each exchange. It differs from a sales
tax because a sales tax is levied on the total value of the exchange. For this reason,
a VAT is neutral with respect to the number of passages that there are between the
producer and the final consumer. A VAT is an indirect tax, in that the tax is collected
from someone other than the person who actually bears the cost of the tax (namely
the seller rather than the consumer). To avoid double taxation on final consumption,
exports (which by definition, are consumed abroad) are usually not subject to VAT
and VAT charged under such circumstances is usually refundable.

Page 12 of 26
 5. Sales Tax:-

A Sales Tax is a consumption tax charged at the point of purchase for certain goods
and services. The tax is usually set as a percentage by the government charging the
tax. There is usually a list of exemptions. The tax can be included in the price (tax-
inclusive) or added at the point of sale (tax-exclusive).

6. Stamp Duty:-

Stamp duty is a form of tax that is levied on documents. Historically, a physical

stamp (a tax stamp) had to be attached to or impressed upon the document to
denote that stamp duty had been paid before the document became legally effective.
More modern versions of the tax no longer require a physical stamp.

Seignorage:-

It is the net revenue derived from the issuing of currency Seignorage derived from
coins arises from the difference between the face value of a coin and the cost of
producing, distributing and eventually retiring it from circulation. Seignorage is an
important source of revenue for some national banks Seignorage derived from notes
is the difference between the interest earned on the government's securities
portfolio, and the costs of producing and distributing bank notes.

Funding of Deficits :-

A fiscal deficit is often funded by issuing bonds, like Treasury bills or Consols. These
pay interest, either for a fixed period or indefinitely. If the interest and capital
repayments are too great, a nation may default on its debts, usually to foreign
debtors.

Page 13 of 26
 Implication of Fiscal Policy

Fiscal policy is used by governments to influence the level of aggregate demand in

the economy, in an effort to achieve economic objectives of price stability, full
employment and economic growth.
During periods of high economic growth, a budget surplus can be used to decrease
activity in the economy. A budget surplus will be implemented in the economy if
inflation is high, in order to achieve the objective of price stability. The removal of
funds from the economy will, by Keynesian Theory, reduce levels of aggregate
demand in the economy and contract it, bringing about price stability.
Keynesian economics suggest that adjusting government spending and tax rates,
are the best ways to stimulate aggregate demand. This can be used in times of
recession or low economic activity as an essential tool in providing the framework for
strong economic growth and working toward full employment. The government can
implement these deficit-spending policies due to its size and prestige and stimulate
trade. In theory, these deficits would be repaid for by an expanded economy during
the boom that would follow the basis for the New Deal.

Despite the importance of fiscal policy, a paradox exists. In the case of a government
running a budget deficit, funds will need to come from public borrowing (the issue of
government bonds), overseas borrowing or the printing of new money. When
governments fund a deficit with the release of government bonds, an increase in
interest rates across the market can occur. This is because government borrowing
creates higher demand for credit in the financial markets, causing a higher aggregate
demand (AD) due to the lack of disposable income, contrary to the objective of a
budget deficit. This concept is called crowding out. Alternatively, governments may
increase government spending by funding major construction projects. This can also
cause crowding out because of the lost opportunity for a private investor to
undertake the same project. However, the effects of crowding out are usually not as
large as the increase in GDP stemming from increased government spending.
Another problem is the time lag between the implementation of the policy, and visible
effects seen in the economy. It is often contended that when an expansionary Fiscal
policy is implemented, by way of decrease in taxes, or increased consumption
(keeping taxes at old level), it leads to increase in aggregate demand; however, an
unchecked spiral in aggregate demand will lead to inflation. Hence, checks need to
be kept in place.

Page 14 of 26
 Indian Fiscal Policies
India was a latecomer to economic reforms, embarking on the process in earnest
only in 1991, in the wake of an exceptionally severe balance of payments crisis. The
need for a policy shift had become evident much earlier, as many countries in east
Asia achieved high growth and poverty reduction through policies which emphasized
greater export orientation and encouragement of the private sector.

India took some steps in this direction in the 1980s, but it was not until 1991 that the
government signaled a systemic shift to a more open economy with greater reliance
upon market forces, a larger role for the private sector including foreign investment,
and a restructuring of the role of government. India’s economic performance in the
post-reforms period has many positive features.

The average growth rate in the ten year period from 1992-93 to 2001-02 was
around 6.0 percent, which puts India among the fastest growing developing
countries in the 1990s. This growth record is only slightly better than the
annual average of 5.7 percent in the 1980s, but it can be argued that the 1980s
growth was unsustainable, fuelled by a buildup of external debt which
culminated in the crisis of 1991. In sharp contrast, growth in the 1990s was
accompanied by remarkable external stability despite the east Asian crisis. Poverty
also declined significantly in the post-reform period, and at a faster rate than in the
1980s according to some studies (as Ravallion and Datt discuss in this issue).

However, the ten-year average growth performance hides the fact that while the
economy grew at an impressive 6.7 percent in the first five years after the reforms, it
slowed down to 5.4 percent in the next five years. India remained among the fastest
growing developing countries in the second sub-period because other developing
countries also slowed down after the East Asian crisis, but the annual growth of 5.4
percent was much below the target of 7.5 percent which the government had set for
the period. Inevitably, this has led to some questioning about the effectiveness of the
reforms. Opinions on the causes of the growth deceleration vary. World economic
growth was slower in the second half of the 1990s and that would have had some
dampening effect, but India’s dependence on the world economy is not large enough
for this to account for the slowdown.

This paper examines India’s experience with gradualist reforms from this
perspective. We review policy changes in five major areas covered by the reform
program: fiscal deficit reduction, industrial and trade policy, agricultural policy,
infrastructure development and social sector development. Based on this
review, we consider the cumulative outcome of ten years of gradualism to assess
whether the reforms have created an environment which can support 8 percent GDP
growth, which is now the government target.

Page 15 of 26
Reforms in Industrial and Trade Policy
Reforms in industrial and trade policy were a central focus of much of India’s reform
effort in the early stages. Industrial policy prior to the reforms was characterized by
multiple controls over private investment which limited the areas in which private
investors were allowed to operate, and often also determined the scale of
operations, the location of new investment, and even the technology to be used. The
industrial structure that evolved under this regime was highly inefficient and
needed to be supported by a highly protective trade policy, often providing
tailor-made protection to each sector of industry.

Industrial Policy
Industrial policy has seen the greatest change, with most central government
industrial controls being dismantled. The list of industries reserved solely for the
public sector – which used to cover 18 industries, including iron and steel, heavy
plant and machinery, telecommunications and telecom equipment, minerals, oil,
mining, air transport services and electricity generation and distribution -- has been
drastically reduced to three: defense aircrafts and warships, atomic energy
generation, and railway transport. Industrial licensing by the central government has
been almost abolished except for a few hazardous and environmentally sensitive
industries. The requirement that investments by large industrial houses needed a
separate clearance under the Monopolies and Restrictive Trade Practices Act to
discourage the concentration of economic power was abolished and the act itself is
to be replaced by a new competition law which will attempt to regulate
anticompetitive behavior in other ways. The main area where action has been
inadequate relates to the long standing policy of reserving production of certain items
for the small-scale sector. About 800 items were covered by this policy since the late
1970s, which meant that investment in plant and machinery in any individual unit
producing these items could not exceed $ 250,000. Many of the reserved items such
as garments, shoes, and toys had high export potential and the failure to permit
development of production units with more modern equipment and a larger scale of
production severely restricted India’s export competitiveness.

Trade Policy
Trade policy reform has also made progress, though the pace has been slower than
in industrial liberalization. Before the reforms, trade policy was characterized by high
tariffs and pervasive import restrictions. Imports of manufactured consumer goods
were completely banned. For capital goods, raw materials and intermediates, certain
lists of goods were freely importable, but for most items where domestic substitutes
were being produced, imports were only possible with import licenses. The economic
reforms sought to phase out import licensing and also to reduce import duties.

Page 16 of 26
Import licensing was abolished relatively early for capital goods and intermediates
which became freely importable in 1993, simultaneously with the switch to a flexible
exchange rate regime.
Import licensing had been traditionally defended on the grounds that it was
necessary to manage the balance of payments, but the shift to a flexible exchange
rate enabled the government to argue that any balance of payments impact would be
effectively dealt with through exchange rate flexibility. Removing quantitative
restrictions on imports of capital goods and intermediates was relatively easy,
because the number of domestic producers was small and Indian industry welcomed
the move as making it more competitive. It was much more difficult in the case of
final consumer goods because the number of domestic producers affected was very
large (partly because much of the consumer goods industry had been reserved for
small scale production).

Quantitative restrictions on imports of manufactured consumer goods and

agricultural products were finally removed on April 1, 2001, almost exactly ten
years after the reforms began, and that in part because of a ruling by a World Trade
Organization dispute panel on a complaint brought by the United States.

Foreign Direct Investment

Liberalizing foreign direct investment was another important part of India’s reforms,
driven by the belief that this would increase the total volume of investment in the
economy, improve production technology, and increase access to world markets.
The policy now allows 100percent foreign ownership in a large number of
industries and majority ownership in all except banks, insurance companies,
telecommunications and airlines.
Procedures for obtaining permission were greatly simplified by listing
industries that are eligible for automatic approval up to specified levels of
foreign equity (100 percent, 74 percent and 51 percent).

• Potential foreign investors investing within these limits only need to register
with the Reserve Bank of India.
• For investments in other industries, or for a higher share of equity than is
automatically permitted in listed industries, applications are considered by a
Foreign Investment Promotion Board that has established a track record of
speedy decisions. In 1993, foreign institutional investors were allowed to
purchase shares of listed Indian companies in the stock market, opening a
window for portfolio investment in existing companies.
• These reforms have created a very different competitive environment for
India’s industry than existed in 1991, which has led to significant changes.
Indian companies have upgraded their technology and expanded to more
efficient scales of production.
• India’s success in this area is one of the most visible achievements of trade
policy reforms which allow access to imports and technology at exceptionally
low rates of duty, and also of the fact that exports in this area depend
primarily on telecommunications infrastructure, which has improved
considerably in the post-reforms period.

Page 17 of 26
Reforms in Agriculture
A common criticism of India’s economic reforms is that they have been excessively
focused on industrial and trade policy, neglecting agriculture which provides the
livelihood of 60 percent of the population. Critics point to the deceleration in
agricultural growth in the second half of the 1990s (shown in Table 2) as proof of this
neglect.5 However, the notion that trade policy changes have not helped agriculture
is clearly a misconception. The reduction of protection to industry, and the
accompanying depreciation in the exchange rate, has tilted relative prices in favor of
agriculture and helped agricultural exports.
The index of agricultural prices relative to manufactured products has increased by
almost 30 percent in the past ten years. The share of India’s agricultural exports in
world exports of the same commodities increased from 1.1 percent in 1990 to 1.9
percent in 1999, whereas it had declined in the ten years before the reforms. These
and other outdated laws need to be changed if the logic of liberalization is to be
extended to agriculture.

Infrastructure Development
Rapid growth in a globalized environment requires a well-functioning infrastructure
including especially electric power, road and rail connectivity, telecommunications,
air transport, and efficient ports. India lags behind east and Southeast Asia in these
areas.

• These services were traditionally provided by public sector monopolies but

since the investment needed to expand capacity and improve quality could
not be mobilized by the public sector, these sectors were opened to private
investment, including foreign investment.
• The flaws in the policy have now been recognized and a more comprehensive
reform is being attempted by several state governments. Independent
statutory regulators have been established to set tariffs in a manner that
would be perceived to be fair to both consumers and producers.
• Several states are trying to privatize distribution in the hope that this will
overcome the corruption which leads to the enormous distribution losses.
However, these reforms are not easy to implement.
• Rationalization of power tariffs is likely to be resisted by consumers long used
to subsidized power, even though the quality of the power provided in the pre-
reform situation was very poor. The establishment of regulatory authorities
that are competent and credible takes time.
• Private investors may not be able to enforce collection of amounts due or to
disconnect supply for non-payment without adequate backing by the police.
For all these reasons, private investors perceive high risks in the early stages
and therefore demand terms that imply very high rates of return. Finally, labor
unions are opposed to privatization of distribution.

Page 18 of 26
Financial Sector Reform
India’s reform program included wide-ranging reforms in the banking system and the
capital markets relatively early in the process with reforms in insurance introduced at
a later stage. Banking sector reforms included:

(a) Measures for liberalization, like dismantling the complex system of interest rate
controls, eliminating prior approval of the Reserve Bank of India for large loans, and
reducing the statutory requirements to invest in government securities;

(b) Measures designed to increase financial soundness, like introducing capital

adequacy requirements and other prudential norms for banks and strengthening
banking supervision;

(c) Measures for increasing competition like more liberal licensing of private banks
and freer expansion by foreign banks.

These steps have produced some positive outcomes. There has been a sharp
reduction in the share of non-performing assets in the portfolio and more than 90
percent of the banks now meet the new capital adequacy standards. However, these
figures may overstate the improvement because domestic standards for classifying
assets as non-performing are less stringent than international standards. India’s
banking reforms differ from those in other developing countries in one important
respect and that is the policy towards public sector banks which dominate the
banking system. The government has announced its intention to reduce its
equity share to 33-1/3 percent, but this is to be done while retaining
government control. Improvements in the efficiency of the banking system will
therefore depend on the ability to increase the efficiency of public sector
banks.

Privatization
The public sector accounts for about 35 percent of industrial value added in India,
but although privatization has been a prominent component of economic reforms in
many countries, India has been ambivalent on the subject until very recently. Initially,
the government adopted a limited approach of selling a minority stake in public
sector enterprises while retaining management control with the government, a policy
described as “disinvestment” to distinguish it from privatization. The principal
motivation was to mobilize revenue for the budget, though there was some
expectation that private shareholders would increase the commercial orientation of
public sector enterprises. This policy had very limited success. Disinvestment
receipts were consistently below budget expectations and the average realization in
the first five years was less than 0.25 percent of GDP compared with an average of
1.7 percent in seventeen countries reported in a recent study. There was clearly
limited appetite for purchasing shares in public sector companies in which
government remained in control of management. In 1998, the government
announced its willingness to reduce its shareholding to 26 percent and to transfer
management control to private stakeholders purchasing a substantial stake in all
central public sector enterprises except in strategic areas.
Page 19 of 26
Social Sector Development in Health and
Education

India’s social indicators at the start of the reforms in 1991 lagged behind the levels
achieved in Southeast Asia 20 years earlier, when those countries started to grow
rapidly. For example, India’s adult literacy rate in 1991 was 52 percent, compared
with 57 percent in Indonesia and 79 percent in Thailand in 1971.
The gap in social development needed to be closed, not only to improve the welfare
of the poor and increase their income earning capacity, but also to create the
preconditions for rapid economic growth. While the logic of economic reforms
required a withdrawal of the state from areas in which the private sector could do the
job just as well, if not better, it also required an expansion of public sector support for
social sector development.
Much of the debate in this area has focused on what has happened to expenditure
on social sector development in the post-reform period. Dev and Moolji (2002) find
that central government expenditure on towards social services and rural
development increased from 7.6 percent of total expenditure in 1990-91 to 10.2
percent in 2000-01. As a percentage of GDP, these expenditures show a dip in the
first two years of the reforms, when fiscal stabilization compulsions were dominant,
but there is a modest increase thereafter.
However, expenditure trends in the states, which account for 80 percent of total
expenditures in this area, show a definite decline as a percentage of GDP in the post
reforms period. Taking central and state expenditures together, social sector
expenditure has remained more or less constant as a percentage of GDP. Closing
the social sector gaps between India and other countries in Southeast Asia will
require additional expenditure, which in turn depends upon improvements in the
fiscal position of both the central and state governments. However, it is also
important to improve the efficiency of resource use in this area. Saxena has
documented the many problems with existing delivery systems of most social sector
services, especially in rural areas. Some of these problems are directly caused by
lack of resources, as when the bulk of the budget is absorbed in paying salaries,
leaving little available for medicines in clinics or essential teaching aids in schools.
There are also governance problems such as nonattendance by teachers in rural
schools and poor quality of teaching
Part of the solution lies in greater participation by the beneficiaries in supervising
education and health systems, which in turn requires decentralization to local levels
and effective peoples’ participation at these levels. Nongovernment organizations
can play a critical role in this process. Different state governments are experimenting
with alternative modalities but a great deal more needs to be done in this area. While
the challenges in this area are enormous, it is worth noting that social sector
indicators have continued to improve during the reforms. The literacy rate
increased from 52 percent in 1991 to 65 percent in 2001, a faster increase in
the 1990s than in the previous decade, and the increase has been particularly
high in the some of the low literacy states such as Bihar, Madhya Pradesh,
Uttar Pradesh and Rajasthan.

Page 20 of 26
 RELEVANCE OF INDIAN FISCAL POLICY

To prove a relevance of anything depends upon few important factors which show
the core of it.

Similarly, for a Fiscal Policy to prove its correct it needs to show the following few
factors:

1. To Grow.
2. To Grow with all Sectors of Economy.
3. To Grow with the People of the Country.
4. To become self sufficient &
5. To Serve the World.

Indian Fiscal Policy has been able to satisfy all the above factors up to the mark or
almost there. This can be clearly seen from the below Statistics & Growth Graphs.

1. GDP GROWTH RATE:

9.4 (Re)

6.9
5.7

Page 21 of 26
2. Sector-wise Growth

11 (Re)

-7.2

3. Poverty Reduction:

26

16

Page 22 of 26
4. Literacy Rate:

80

52

5. Developmental Expenditure:

Rs. 345878 (Cr.)

Page 23 of 26
6. Providing Business Opportunities to the World.

26524 (US Million $)

7. Investing in Other Countries of the World:

11008 (US Million $)

Page 24 of 26
Few other Facts to be known
• 12TH Largest Economy in the World as per GDP in US DOLLARS
• 3RD Largest Economy in the World as per GDP in US DOLLAR
(PURCHASING POWER PARITY)
• 2ND Fast G largest paramilitary force in the world.
• Indian Army is the third-largest army in the world.
• Indian Air Force is the fourth-largest air force in the world.
• Indian Navy is the fifth largest in the world.
• India is ranked the 6th Country in the World in Terms of Satellite Launches.
• Of the Fortune 500 companies, 220 outsource their Software-related work to
India.
• There are over 70,000 Bank Branches in India - among the highest in the
World.

THE BENCH SETTER:

• Indian Railways is the Largest Railway Network in the World under Single
Management employing just over 1.6 million employees – Making it
LARGEST EMPLOYER.

BUDGET ESTIMATE 2009-10

1. Fiscal deficit as a percentage of GDP is projected at 6.8 per cent compared to 2.5
per cent in B.E. 2008-09 and 6.2 per cent as per provisional accounts 2008-
09.
2. Increase in Non-plan expenditure is mainly due to implementation of Sixth Central
Pay Commission recommendations, increased food subsidy and higher
interest payment arising out of larger fiscal deficit in 2008-09.
3. Interest payments estimated at Rs.2,25,511 crore constituting about 36 per cent of
Non-plan revenue expenditure in B.E. 2009-10.
4. Subsidies up from Rs.71,431 crore in B.E. 2008-09 to Rs.1,11,276 crore in B.E.
2009-10.
5. Outlay for Defence up from Rs.1,05,600 crore in B.E. 2008-09 to Rs.1,41,703
crore in B.E. 2009-10.

Page 25 of 26
 BIBLOGRAPHY

www.indiabudget.nic.in

www.indiastat.com

www.wikipedia.org

www.google.com

http://planningcommission.nic.in

http://www.censusindia.gov.in

www.rediff.com

Books:-

1. Introductory Micro Economics and Macro Economics –

Jain T.R , Ohri V.K (2007-2008)
2. Modern Economic Theory – Dewett K.K (2005-2006)

Magazines (4P, Business India, Business Today )

Page 26 of 26