Fiscal Reforms in India since

1991
BY:
Group 5, Section B

Astha Singh 2010057

Diptiman Guha 2010067
Himanshu Arora 2010078
Jyotirmoy Barman 2010088
Nirmal Modh 2010099
Prateek Chaturvedi 2010295
 Why reforms were needed?
• Large fiscal deficits and automatic monetization of deficits
leading to high inflation and high interest rates and crowding
out private investment.
• High and irrational tax rates, high tariff walls led to industrial
inefficiency
• Complicated tax structure, legal laws, rules and procedures
• Change in the role of the government from operator to
regulator, supplier of goods and services to facilitator
• Liberalization of trade, industry, investment
• Globalization and Regionalization of economic activities.
 Characteristics of Reforms
• Gradual and Step by Step Approach

• Democratic and political constraint

• Least sacrifice made by people

• No write-off or rescheduling of external debt

• Agency constraint and No backtracking

• Nationality constraint

• Ownership of reforms
 Revenue pattern of Central Government after
reforms
1990-95 1995-00 2000-04 2004-07 2007-08
Gross tax
revenue 10.3 9.0 8.8 10.4 12.5

Direct taxes 2.4 2.9 3.4 4.7 6.5

Corporate 1.2 1.4 1.9 3.0 4.0

Income 1.1 1.2 1.5 1.6 2.5

Indirect taxes 7.5 6.1 5.4 5.8 6.0

Customs 3.3 2.7 1.9 1.9 2.1

Excise 4.3 3.2 3.3 3.0 2.7

Service tax - 0.1 0.2 0.7 1.1

 Tax Reforms
•Direct Taxes:
• included rationalization of tax rates,
minimization of exemptions and concessions,
revamping of tax administration and computerization

1992-93 In 1997-98
Personal income tax slabs of 20, 30 and 40 per 10, 20 and 30 per cent
rates cent

1993-94 In 1997-98 2005-06

corporate income 40 per cent 35 per cent 30 per cent
tax
 Tax Reforms
• Direct Taxes
– a new dividend distribution tax was introduced and
levied on firms.
– a minimum alternative tax (MAT) was introduced
in 1997-98.
– other direct taxes have been introduced such as the
levy of fringe benefit tax on companies
 Tax Reforms
• Indirect Taxes
– In 1999-2000, almost 11 tax rates were merged into three
– These were further merged into a single rate in 2000-01 to be called a
Central VAT (CenVAT). 

1991-92 1995-96 1997-98 2002-03 2003-04 2005-06

Custom 150% 50% 40% 30% 25% 15

duties

– Quantitative restrictions on imports have virtually been done away with.

– the service tax was introduced in 1994-95, aim to eventually unify the
tax rates on goods and services in the form of a full scale Value Added
Tax (VAT).
 Expenditure Pattern and Policy
1990-95 1995-2000 2000-04 2004-07 2007-08
Total
expenditure
(plan + non-
plan) 17.9 16.1 16.3 14.7 15.1
Revenue
expenditure 13.3 12.8 13.4 12.3 12.5
Capital
expenditure 4.6 3.4 3.0 2.4 2.6

Total expenditure declined

the share of capital expenditure in total expenditure declined sharply from 25.7 per cent
in 1990-98 to 17.0 per cent in 2004-07, though this happened partly because of the
cessation of loans from the central government to states, which were classified as
capital expenditures. 
 Non discretionary expenditure
1990-95 1995-2000 2000-04 2004-07 2007-08
Interest
payment 4.4 4.6 4.7 3.8 3.7
Grants to state
and UTs   0.5    0.4  0.6 0.7   0.8
Loans and
advances to Stopped since
states and Uts**   1.0          0.9  0.8 0.6 2005-06
Defence 2.6 2.4 2.3 2.2 2.0
Food subsidy 0.5 0.5 0.8 0.7 0.7
Other subsidy 1.3 0.7 0.1 0.1 0.1
Police 0.3 0.3 0.3 0.3 0.3
Pensions 0.4 0.5 0.6 0.6 0.5
Broad View on the Outcome of
Fiscal Reforms
• Deficit indicators
• While there was some reduction in fiscal deficit in the
first half of the 1990s, progress was reversed in the
late 1990s mainly due to the impact of implementation
of the Fifth Pay Commission’s awards.
• fiscal consolidation underway has been some
qualitative progress, as reflected in the reduction in
the proportion of revenue deficit to gross fiscal
deficit. 
 Table 6: Deficit Indicators of Centre, States and Combined finances
(Per cent of GDP)
1990-95 1995-00 2000-04 2004-07
Item (Avg.) (Avg.) (Avg.) (Avg.) 2007-08 RE
1 4 5 6 7 8
  RD 3 3.1 4.1 2.3 1.4
Centre GFD 6.3 5.5 5.5 3.9 3.1
  PD 2.2 1.1 0.9 0.1 -0.6
  MD 0.8 0.6 -1 -0.4 -
  RD 0.7 1.6 2.4 0.5 -0.3
States* GFD 2.8 3.4 4.3 2.9 2.3
  PD 1.1 1.4 1.5 0.4 0.1
  RD 2.9 2.5 6.5 2.9 1.3

Combined GFD 7.8 7.7 9.4 6.8 5.5

  PD 3.7 4.7 3.1 1.1 0.1

*: State Governments' data for the year 2006-07 and 2007-08 relate to revised estimates and budget estimates, respectively.

RD: Revenue Deficit    GFD: Gross Fiscal Deficit   PD: Primary Deficit   MD: Monetised Deficit  
Avg.: Average   RE: Revised Estimate
Source: Handbook of Statistics on Indian Economy, 2006-7, RBI.
 Broad View on the Outcome of
Fiscal Reforms..contd
• Outstanding Liabilities
• The high level of fiscal deficits both at the Centre and the
States led to debt accumulation over the period resulting in
a rise in the debt to GDP ratio. 
• Contingent liabilities witnessed some decline in the recent
years
• under the FRBM Act, the annual increase in the stock of
contingent liabilities of the Central Government is limited
to a ceiling of 0.5 per cent of GDP.
 Table 7: Outstanding Liabilities of Centre and States
(Per cent of GDP)
Item 1990-95 1995-00 2000-04 2004-06 2006-07  2007-08 
(Avg.) (Avg.) (Avg.) (Avg.) RE BE
1 2 3 4 5 6 7
Central
Government 54.2 50.8 60.5 63.2 61.2 58.5
State
Government
s 22.1 22.5 30.9 32.6 30.6 29.3
Combined 64.1 63.2 77.2 80.9 77.1 73.8
Avg.: Average   RE: Revised Estimate  BE: Budget Estimate
Source: 
1. Handbook of Statistics on Indian Economy, 2006-07, RBI.
2. State Finances - A Study of Budgets of 2007-08, RBI.
              
 The Fiscal Responsibility and Budget
Management (FRBM) Act, 2003
• Targeting long term development by achieving sufficient revenue surplus
and removing fiscal impediments
• “The central government should take appropriate measures to reduce the
fiscal deficit and revenue deficit so as to eliminate revenue deficit by 31st
of March, 2008 and thereafter build up adequate revenue surplus”
• The revenue deficit as a ratio of GDP should be brought down by 0.5 per
cent every year and eliminated by 2007-08;
• The fiscal deficit as a ratio of GDP should be reduced by 0.3 per cent every
year and brought down to 3 per cent by 2007-08;
• The Union Government shall not give guarantee to loans raised by PSUs
and State governments for more than 0.5 per cent of GDP in the aggregate;
• The Union Government should place three documents along with the
budget, namely, the Macroeconomic Framework Statement, the Medium
Term Fiscal Policy Statement and the Fiscal Policy Strategy Statement
 Recent Trends in Fiscal
Development (Since FRBM act)
 Broad View on the Outcome of
Fiscal Reforms
• Deficit and Growth
– A high level of fiscal deficit tends to have a negative
impact on real GDP growth through ‘crowding out’
effects and/or rise in interest rates in the economy.  

– Low fiscal deficits also enable more effective

monetary policy.
Deficit and growth
 Broad View on the Outcome of
Fiscal Reforms
• Tax-GDP Ratio
– Decline in the gross tax-GDP ratio of the Central Govt
from 10.3 per cent in 1991-92 to 9.4 per cent in 1996-97
and further to a low of 8.2 per cent in 2001-02, attributed
to the initial effects of the reduction in tax rates.
–  The distorting impact of high and varied indirect taxes on
overall resource allocation has been reduced considerably,
enabling increased economy wide economic efficiency
– Improved corporate results during years have led to
significant rise in collection of corporate income tax . 
 Broad View on the Outcome of
Fiscal Reforms
• Fiscal Deficit and Public Sector Savings
– The reduction in fiscal deficits has helped in
turning around savings and investments in recent
years.
– Implementation of rule-based fiscal reforms has
helped in enabling the turnaround in the public
sector savings, in turn, gross domestic savings
along with the substantial increase in private
corporate sector savings
Thank You