Government Budgeting & Fiscal Policy 04 Daily Class Notes PDF
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These notes cover government budgeting and fiscal policy, focusing on expenditure patterns in India before 2017, outlining planned and non-planned expenditures, and the role of the Fiscal Responsibility and Budget Management (FRBM) Act.
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Economy Ch04: Government Budgeting and Fiscal Policy. L04: Expenditure Pattern of GOI Expenditure Pattern of Government of India: Till 2016-2017 government of India used to divide the expenditures into plan and Non- Planned Expenditures Planned Expenditu...
Economy Ch04: Government Budgeting and Fiscal Policy. L04: Expenditure Pattern of GOI Expenditure Pattern of Government of India: Till 2016-2017 government of India used to divide the expenditures into plan and Non- Planned Expenditures Planned Expenditure: Planned expenditures refer tothe spending on programs outlined in the country's five-year plan. This includes building hospitals and roads. ○ Government Incurred around 25-30% of total costs for planned expenditure ○ Planned Expenditure refers tospending that is pre-determined and included in the government’s five-year plandocument to achievespecific developmental goals and objectives. ○ This type of expenditure is usually associated withlong-term planning and aims to promote economic growth, social welfare, and infrastructure development, healthcare, education and rural development Non Planned Expenditure: Expenditures on projects not included in the country's current five-year plan. Non-Plan expenditures are allocated for the government's routine operational PW Web/App:https://smart.link/7wwosivoicgd4 expenses and new projects which are adopted by the government in between five year plans.For Example:Revenue Expenditures like Defence expenditures, interest payments, administrative expenditures, pensions etc. ○ Government incurred around 70-75% of total costs for Non-Planned Expenditures, thus less amount was spent in new projects or asset creation Major Expenditure of Government of India Interest Payment on Outstanding Loans Subsidies (Food and Fertilizers) Defence Note: The Government of India was taking more loansfor revenue expenditures like pensions and salaries and not for capital creation like Roads or dams. When the government takes loans for revenue expenditure or consumption, the borrowing cost of the government increases and the people of the country lose trust in the government. Planning Commission: The Planning Commission is used to formulatefive-yearplans. The Commission has prepared twelve five-year plans so far. The tenure of the last five-year plan was2012-17. The Government of India replaced the Planning Commission with NITI (National Institution for Transformation of India) Aayogin2015. NITI (NationalInstitutionforTransformationofIndia)Aayogwasgiventheresponsibility of making long-term planning for the country. For this, NITI (National Institution for Transformation of India) Aayog prepares avision documentfor a duration of15 years. NITI (NationalInstitutionforTransformationofIndia)Aayogpreparedadocumentnamed “India at 75”. Public Debt: Public debt means theborrowings of the Central Government. The combined debt of the Central and State Governments is known as General Government debt. PW Web/App:https://smart.link/7wwosivoicgd4 In the case of anycountry,thegovernment'spublicdebtcanbesplitintointernaldebt (moneyborrowedwithinthecountry)andexternaldebt(fundsborrowedfromnon-Indian sources). The Government of India prefers to borrow more from internal sources than from external sources. The majority of government borrowings are forday-to-day expenditure. Fiscal Responsibility and Budget Management (FRBM) Act: Introduction of the FRBM Act (2003):In 2003 governmentof India passed FRBM Act 2003 to bring efficiency in the government spending and said by adopting fiscal consolidation measures, the revenue deficits of the government will be reduced to 0% BY 2008-2009 and fiscal deficits below 3% Fiscal consolidation refersto policies aimed at reducing government deficits and public debts to ensure long term financial stability It involves cutting public spending, increasing revenues through taxation or a combination of both Separation of Expenditures: From 2017-2018 Government of India started providing expenditures in the form of revenue expenditure and capital expenditure Purpose:The FRBM act was introduced to improve India’sFinancial discipline and ensure sustainable economic growth. It sets rules for the government to reduce fiscal deficits, manage public debt and avoid excessive borrowings. ○ The act requires the government to present transparent financial statements and adopt responsible spending practices. ○ While limiting fiscal deficits, the aim is to prevent the country from falling into debt trap, promote economic stability and encourage long term growth. Accountability:It holds the government accountablefor maintaining fiscal discipline while ensuring the essential public spending is not compromised. Amendments in the Act: In 2008-2009 when the government of india was not able to achieve the targets, then in 2012 an amendment was made to the act and the targets were postponed to 2015 and in 2015 targets were postponed to 2018 and then later on targets were shifted to 2025-2026 PW Web/App:https://smart.link/7wwosivoicgd4 Background:The Government in 2003 appointed theBimal Jalan Committeeand the committee recommended 3E’s ( Economy, Efficiency and Effectiveness) to reduce the fiscal deficit of the government. ○ For instance, the committee suggested a halt on purchasing new cars for government officers below the secretary level. ○ Stoppage of chartered flights for Ministers and giving them Business class tickets Target:The Fiscal Responsibility and Budget Management (FRBM) Act, introduced in 2003, set ambitious debt reduction goals, targeting a reduction of general government debt to 60% of GDP by the fiscal year 2024-25. Reasons for Not achieving targets set by the Fiscal Responsibility and Budget Management Act: Inflated Salaries: In 2006, sixth pay commission was appointed and it raised the salary of all the government employees by 100 percent which cost the government an additional 1 lakh crores in salaries. Rising Unemployment: Implementation of Mahatma Gandhi National Rural Employment Guarantee Act in 2006. Increase in Public Expenditure by government:After the 2008 global financial crisis, the investment coming from foreign countries dried up and the government had to increase public investment to spur the economy. Delaying In achieving targets:The government couldn't achieve the targets in the year 2012. 2015 and 2018. Now the government has shifted the targets till 2026 Finance Commission: The Finance Commission is constituted by thePresidentunderArticle 280of the Constitution, mainly to give its recommendations on thedistribution of tax revenues between the Union and the Statesand amongst theStatesthemselves. The Commission is constitutedonce every five years. The Commissiondetermines its procedureand has suchpowers in the performance of its functions as Parliament may by law confer on them. PW Web/App:https://smart.link/7wwosivoicgd4 Functions of the Finance Commission (Terms of Reference):There are four important functions assigned to the Finance Commission under the Constitution of India. These functions are: Distribution oftax revenue between the Centre andstates. Providinggrants-in-aid to state governments underArticle 275of the Constitution of India. Supplementing state government revenue forthe functioning of Panchayats and Municipalities. Anyother financial matters. Distribution of Revenue between the Union and the States: The Finance Commission is required torecommend the distribution of the net proceeds of taxes between the Union and the states(commonlyreferred to as vertical devolution), as well as theallocation of the respective sharesof such proceeds among the states (commonly known as horizontal devolution). Regardingvertical devolution or distribution, the 15th Finance Commission recommended, by a majority decision, that the state's share in the net proceeds ofUnion tax revenue be 41%. The 14th Finance Commission's recommendations forvertical devolution were at 42%. The 15th Finance Commissionreduced the devolution by 1% due to the creation of 2 new Union Territories. For horizontal devolution, the following mechanisms need to be followed: Note: The central government launched manySocial WelfareSchemes.These schemes are of two types; 1. Central Sector Schemes:These schemes are 100% fundedby the Union government and implemented by the Union government machinery. 2. Centrally Sponsored Schemes:In these schemes, a certain percentage of the funding (90:10 or 75:25 ratio) is borne by the state governments and the central government gives funds in the form of grants-in-aid, etc., and implemented by the state governments. PW Web/App:https://smart.link/7wwosivoicgd4 PW Web/App:https://smart.link/7wwosivoicgd4
