Session 2A_PFM Architecture-1 PDF

Session 2 Financing Democratic Decentralisation A. Public Financial Architecture Prof Govinda Bhattacharjee  Session Structure Fiscal Architecture of the Centre; Powers of Taxation of the Centre and the States; Revenue and Expenditure Classifications;...

Session 2 Financing Democratic Decentralisation A. Public Financial Architecture Prof Govinda Bhattacharjee  Session Structure Fiscal Architecture of the Centre; Powers of Taxation of the Centre and the States; Revenue and Expenditure Classifications; Management of Revenue, Expenditure, Deficits and Borrowings; Decomposition and financing of deficits; Public Account Fiscal Responsibility and Budget Management Act (FRBMA); Case studies  Total receipts Consolidated Contingency Public Fund Fund Accounts Revenue A/c Capital A/c 1. Small Savings & PF Adj. Accounts 2. Reserve Funds Tax and 3. Deposits and Advances Non-Tax Borrowings revenues 4. Suspense Recoveries 5. Remittance Grants and ROI  Revenue Account Revenue Receipts Non-Tax External Tax Revenue Revenue Grants General, Social International Foreign Direct Taxes Indirect Taxes and Economic Financial Governments Services Institutions  Capital Account Capital Receipts Non-Debt Receipts Public Debt (Misc. Capital Receipts Receipts) Disinvestment Recovery of Loans Borrowings in CFI Proceeds and Advances  OECD Classification of Taxes A. Taxes on income Income Tax, Corporation Tax, Professional Tax etc. B. Taxes on Property and Capital Transactions Land Revenue, Stamp and Registration Fees, Property Tax, Capital Gains Tax etc. C. Taxes on Goods and Services GST, VAT, Sales Tax, GST, Excise Duty, Taxes on Motor Vehicles, Taxes on Goods and Passengers, Entertainment Tax etc. D. Customs Duty on Imported Goods  Major Sources of Non-Tax Revenues For Union Railways, P&T, Broadcasting Returns on Investment, Dividend / Profit from Government Companies / Public Sector Undertakings Profit on Sale of National Resources : Spectrum Receipts from Services For States Forests, Irrigation Royalties from Mines/ Minerals Dividend / Profit from Government Companies / Public Sector Undertakings Receipts from Services  Expenditure Total Disbursements Consolidated Public Fund of India Account Revenue A/c Capital A/c Net Accrual RE incl. Intt. Increase/ Net on Public Net Loans and Decrease of Capital Outlay Repayment of Debt and PA Advances Cash Balance Public Debt Liabilities  Expenditure Classification Expenditure Revenue Capital Non- Developmental Non- Developmental Developmental Developmental General Services Social Services Social Services General Services Economic Economic Services Services  Services or Activities (Illustrative) General Services Administrative Services, Police, Jails, Judiciary, Secretariat Fiscal Services Interest Payment Pension Social Services Education, Culture and Sports Health and Family Welfare Sanitation, Drinking Water Supply, Nutrition, Urban Development Welfare of SC/STs Economic Services Agriculture and Animal Husbandry Irrigation and Flood Control Roads and Bridges Transport and Communication Power and Energy Rural Development Industry and Minerals  Sources of Deficits Revenue Account Revenue Receipts (RR) = Tax Revenue (TR) + Non Tax Revenue (NTR) from General, Social and Economic Services Revenue Expenditure (RE) for General, Social and Economic Services + Grants & Contributions Revenue Deficit (RD) = RE- RR Capital Account Capital Receipts (CR) = Public Debt Receipts (PDR) + Non-Debt Receipts (NDR) = PDR + (Recovery of L&A + Disinvestment Proceeds) Capital Expenditure (CE) = Repayment of Public Debt (RPD)+ Capital Outlay (CO) + Loans & Advances (L&A) Deficit on Capital Account = CE-CR = CO+ L&A – NDR (i.e. Recovery of L&A + Disinvestment proceeds) = CO + (L&A - Recovery of L&A) – Disinvestment Proceeds = CO+ NL – Disinvestment Proceeds FD = RD + CO + NL – Disinvestment Proceeds  Decomposition of GFD Fiscal Year Fiscal Deficit (Rs lakh RD (%) CO+L&A (%) ( - ) Non-Debt Capital Crore) Receipt (%) 2016-17 5.36 59 53 -12 2017-18 5.91 75 45 -20 2018-19 6.49 70 47 -15 2019-20 9.35 71 36 -17 2020-21 18.18 80 23 -3 2021-22 15.85 65 37 -2 2022-23 17.38 62 42 -4 2023-24 RE 16.54 46 58 -4 2024-25 BE 16.13 36 69 -5  Revenue Deficit Vs Capital Outlay (%) 90 Revenue Deficit Capital Outlay 80 70 60 50 40 30 20 10 0 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 RE BE  Decomposition of Fiscal Deficit (%) 140 120 100 45 47 36 23 80 37 42 58 69 60 40 75 80 70 71 65 62 20 46 36 0 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 RE 2024-25 BE -20 -40 Revenue Deficit (%) Capiatl Outlay +Net Loans (%) Non-Debt Capital Receipt (%)  Trend of Fiscal Deficit (Rs Crore) 18.18 17.38 16.54 16.13 15.84 9.35 9.2 5.91 6.49 6.7 6.4 5.6 4.6 4.9 3.5 3.4 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 RE BE Fiscal Deficit Fiscal Deficit as % of GDP  Fiscal Deficit Vs. Primary Deficit (Rs lakh crore) 18.18 17.38 16.54 16.13 15.84 11.38 9.35 7.79 8.09 5.91 6.49 5.90 4.50 3.25 0.62 0.67 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 RE 2024-25 BE Fiscal Deficit Primary Deficit  Financing of GFD Financing of Gross Fiscal Deficit Net borrowings on Consolidated Fund + Net accrual on Public Account + Withdrawal from Cash Balance = (Public Debt Receipts – Public Debt Repayment) + Net Accrual in Public Account + (Opening balance of cash –Closing balances of cash)  Financing of GFD (Rs lakh Crore) Net Net Cash Internal External Total Net Net Public Drawdown Debt (%) Debt (%) Borrowing Account (%) (%) GFD 2017-18 5.57 0.08 5.65 0.22 0.04 5.91 2018-19 5.55 0.05 5.60 0.90 -0.01 6.49 2019-20 8.64 0.09 8.73 0.56 0.05 9.34 2020-21 17.22 0.70 17.92 0.33 -0.07 18.18 2021-22 13.65 0.36 14.01 1.80 0.03 15.84 2022-23 16.12 0.37 16.49 0.91 -0.02 17.38 2023-24 RE 16.81 0.55 17.36 0.90 -1.72 16.54 2024-25 BE 15.30 0.16 15.46 -0.73 1.40 16.13  Financing of GFD (Rs lakh crore) 20.00 15.00 10.00 5.00 0.00 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 -5.00 RE BE Net Internal Debt (%) Net External Debt (%) Net Public Account (%) Cash Drawdown (%)  Fiscal Responsibility and Budget Management Act (FRBMA) 2003 FRBM Act 2003 provides a legal institutional framework for fiscal consolidation. It is now mandatory for the Central government to take measures to reduce fiscal deficit, to eliminate revenue deficit and to generate revenue surplus in the subsequent years. The Central FRBM rule specifies reduction of fiscal deficit to 3% of the GDP by 2008-09 with annual reduction target of 0.3% of GDP per year by the Central government. Similarly, revenue deficit has to be reduced by 0.5% of the GDP per year with complete elimination to be achieved by 2008-09. The Government can move away from the path of fiscal consolidation only in case of natural calamity, national security and other exceptional grounds which Central Government may specify. But the deviation from fiscal deficit target cannot exceed 0.5%. To impart fiscal discipline at the state level, the Twelfth Finance Commission gave incentives to states for conditional debt restructuring and interest rate relief for enacting their own FRBM Acts. All states have implemented their own FRLs by 2010. GoI had to abandon the fiscal consolidation path due to the of 2007-08, and FRBMA targets were put on hold as the crisis called for increase in govt. expenditure to boost demand.  FRBMA Contd. The Act also requires the government to lay before the parliament three policy statements in each financial year: (1) Fiscal Policy Strategy Statement and (2) Macroeconomic Framework Policy Statement (assessment of growth prospects) and (3) Medium Term Fiscal Policy Statement and (4) Medium Term Expenditure Framework Statement (MTEF – giving 3 year rolling targets). 2012 amendment: Concept of Effective Revenue Deficit was introduced. 2015 amendment: targets were shifted. 2018 amendment: Central Government is required to limit the fiscal deficit to 3% of the GDP by March 31, 2021 and debt to 40% of the GDP by the year 2024-25. It will endeavour to contain General Government Debt within 60% of GDP. 2022 onwards: Amendments awaited to accommodate higher fiscal deficits. FRBMA prohibits borrowing by the GoI from the RBI, thereby, making monetary policy independent of fiscal policy. It bans the purchase of primary issues of the Central Government securities by the RBI after 2006, preventing monetization of government deficit.  GST GST Council : States and centre sacrificed their respective powers to levy taxes to the GST Council. Central taxes/ surcharges subsumed in GST: Central Excise Duty (CENVAT), Additional Excise Duties, Service Tax, Additional Customs Duty, commonly known as Countervailing Duty (CVD), Special Additional Duty of Customs, Central Sales Tax Surcharges and Cesses levied by Centre like cess on rubber, tea, coffee, national calamity contingent duty etc. State taxes/ Surcharges subsumed in GST VAT / Sales tax, Entertainment tax, Luxury tax, Taxes on lottery, Taxes on betting and gambling, Octroi (City), Entry Tax (State), Purchase Tax State Cesses and Surcharges in so far as they relate to supply of goods and services Left Out: Petroleum and Petroleum Products, Alcohol for Human Consumption, Electricity, Real Estate  Cess and Surcharge – No Limits Ever 1. Cess on Exports 2. Cess on Crude Oil 3. Health and Education Cess 4. Road and Infrastructure Cess (on imported petroleum and high speed diesel) 5. Other Construction Workers Welfare Cess (on builders) 6. GST Compensation Cess (on tobacco and tobacco products, motor vehicles) 7. Health Cess of 5% on imported medical devices introduced in 2020-21 budget 8. National Calamity Contingent Duty (NCCD) ( Surcharge on Tobacco and Tobacco Products) 9. Income Tax surcharge (AY 2025-26) Rs. 50 Lakhs to Rs. 1 Crore Rs. 1 Crore to Rs. 2 Crores Rs. 5 crores to Rs. 10 Crores 10% 15% 25%  Public Account - Art 266(2) of Constitution Public Account came into existence more as an administrative convenience rather than an economic necessity. Article 266 (3) states that no moneys out of any Consolidated Fund shall be appropriated except in accordance with law - for the purposes and in the manner provided in the Constitution. Appropriation under articles 112 to 117 of the Constitution for Centre, and articles 202 to 206 for the States. No such legislative approval, however, has been prescribed for withdrawing any money from the Public Account, which does not involve revenues or debt of the Governments but other public moneys that do not belong to the Government as such. Thus there is no legislative control over the use of funds from the Public Account which makes them open to misuse. It also makes government’s cash management difficult as public account is merged with the cash balance.  Structure of Public Account There are five major heads of accounts under the Public Account: (i) Small Savings, Provident Fund and Other Accounts (ii) Reserve Funds (iii) Deposits and Advances (iv) Suspense and Miscellaneous and (v) Remittances. These accounts basically comprise funds that do not belong to the Government, but which the government holds in trust and manages on behalf of their owners who can be ordinary people or government contractors or anyone, and sometimes even the Government itself when it holds taxpayers’ money outside of Consolidated Fund. Some of these funds are interest bearing on whose balances the Government has to pay interest from the Consolidated Fund using taxpayers’ money - others may not carry any interest liability. Once some money gets parked in the public accounts, the legislative process of voting the appropriations and exercising controls over the use of those appropriations through examination of audit reports by the Public Accounts Committee cease to operate in respect of these funds.  Small Savings, Provident Fund & Other Accounts -I Small Savings National Savings Deposit Post Office Savings and Recurring, Post Office Time Deposits, Post Office Monthly Income Account, Senior Citizen Savings Scheme, Sukanya Samriddhi Account National Savings Certificates Defence Savings Certificates, National Development Bonds, Post Office Certificates Investments of National Small Savings Fund (NSSF) Provident Funds Public Provident Fund State Provident Funds GPF, CPF, Defence, Railways and Other Provident Funds  Small Savings, Provident Fund & Other Accounts -II Other Accounts 1. Special deposits by retirement funds with the Central Government Insurance and Pension Funds Family Pension, CGEGIS, State Government Employees' Group Insurance Scheme Post Office Insurance Funds 2. Securities issued in lieu of subsidies to Oil Marketing Companies FCI Fertiliser Companies 3. Other Deposits Special Deposits and Accounts  Reserve Funds Created out of Consolidated Fund of Centre/ States, usually Administered by Departmental Secretaries / Pr. Secretaries Both interest and non-Interest Bearing Examples: Depreciation Reserve Funds of PSUs Sinking Funds for amortization of loans raised by the Government and for other purposes Hindu Religious and Charitable Endowment Fund Various Development and Welfare Funds State Roads and Bridges Fund Non-interest bearing Famine Relief Fund, National/ State Disaster Response Fund (SDRF) Guarantee Redemption Fund, Railway Safety Fund, Rural Employment Guarantee Fund, etc. Huge number of reserve funds are operated by the states. Many of these funds remain inoperative for a number of years.  Deposits and Advances The Deposit head under ‘Deposits and Advances’ includes Sums deposited with Government in the daily course of business by members of the public Deposits made in civil and criminal courts , Security deposits taken from government servants/ contractors when required, Public Works and Earnest Money Deposits, Deposits made by electoral candidates Deposits of Local Funds of Municipalities and Panchayats, Electricity Boards, Housing Boards, Universities etc. Non interest bearing deposits include Defence Deposits, Postal Deposits, Telecom Deposits, National Investment Fund, etc. Like the reserve funds, some carry interest liability while others do not. All these are included in the Government’s total financial liabilities. Civil Advances include Interest free temporary advances Departmental Advances – Forest, Telecom, Railways Permanent Cash Imprest, etc.  Suspense and Remittance Accounts Suspense temporarily accommodates all governmental/ inter-governmental/ departmental transactions pending availability of the requisite details in corresponding vouchers/ challans that would identify their final destinations. Pay and Accounts Office-Suspense Public Sector Bank Suspense RBI Suspense Departmental Adjusting Account Suspense, TDS Suspense, Provident Fund Suspense, and many others. It also includes temporary investments of cash balances in short term loans or Government securities at nominal rates of interest (Cash Balance Settlement Suspense Account). Remittances concern intra- and inter-Governmental cash remittances between its various departments / ministries and also between the RBI and the various Governments and Government Departments.  Distortions Created by Public Account Public Account balances, being part of the cash balances of the Government, thus inflate them and also make the cash management of the Government fraught with risks. Many of these funds are again created by transferring taxpayers’ money from the Consolidated Fund, and kept at the disposal of the Government. The license to do so freely often allows the Government to devise ingenious ways to defeat the normal accountability controls. Lapsability of Funds One mechanism the Governments often use to defeat such statutory control is to withdraw these savings from the Consolidated Fund and park them in the so-called Personal Ledger Accounts (Also PD Accounts) maintained under the Public Account (Deposits not bearing interest) so that the funds can remain there indefinitely at the disposal of the Government without any legislative scrutiny - an aberrations made possible by the nature of Public Account.  Borrowing Despite Surplus Cash Interest to be paid from the Consolidated Fund: Hence public account creates a liability for the exchequer, even though the legislature has no control over it, as balances in the public account, being only held in trust by the Government, is not votable, neither is the interest on their account. Loss to Govt.: Merging of the public accounts into the cash balance creates further distortions; these balances get invested in Treasury Bills with the RBI, earning around 5% interest while the actual interest liability of the State Government on these accounts is much more, hence the Government loses money on that account. Also since public account balances, being merged in the cash balance of the States, could be invested only in treasury bills, the option of investing them in other more attractive investment avenues is not available. Funds transferred from CFI and kept in the Public Account, outside the constant watch of the auditor and the legislature. The PD accounts or surplus balances continue to distort not only the accounts but also the public finances, as these funds are liable to be misused.  Assignment (Rs Lakh Crore) 2020-21 2021-22 2022-23 (1) From the final accounts data given, 1. Revenue Receipts, of which 16.34 21.69 23.83 calculate Revenue a. Tax Revenue (Net to Centre) 14.26 18.04 20.98 Deficit, Fiscal Deficit b. Non-Tax Revenue 2.08 3.65 2.85 and Primary Deficit as percentage of GDP 2. Capital Receipts, of which 18.83 16.21 18.12 for each of the three a. Recovery of Loans 0.20 0.25 0.26 years. b. Other Receipts (Disinvestment Proceeds) 0.38 0.15 0.46 (2) Further, c. Net Borrowings 18.25 15.81 17.40 Committed 3. Total Receipts 35.17 37.90 41.95 Expenditure is the sum of items a. to d. 4. Total Expenditure, of which 35.09 37.93 41.93 under Revenue I. Revenue Expediture, of which 30.83 32.00 34.53 Expenditure. Calculate is share in a. Interest Payments 6.80 8.05 9.29 the fiscal deficit. (All b. Salary and wagrs 2.48 2.59 2.68 figures are in Rs lakh c. Pension 2.08 1.99 2.41 crore) c. Subsidies 7.06 4.45 5.31 II. Capital Outlay 4.26 5.93 7.40 5. GDP 197.45 235.97 269.49 Thank You State Total Number of PD Balance as on Nature of Accounts as on March 31, 2020 Balance March 31, 2020 (₹Crore) (Dr/ Cr). Andhra Pradesh 1491 25476 Cr. Bihar 252 3811.3 Cr. Chhattisgarh (2019-20) 223 1585 Cr. Gujarat NA 1004 Cr. Haryana 164 1871 Cr. Himachal Pradesh (2019-20) 112 3 Cr. Karnataka 71 3989 Cr. Kerala 815 166 Cr. Madhya Pradesh 816 4963 Cr. Maharashtra NA 10806 Cr. Odisha 811 7047 Cr. Punjab 161 43 Cr. Rajasthan 1928 14383 Cr. Tamil Nadu 68 1153 Cr. Telangana8 198 177 Cr. Uttar Pradesh 12 10 Cr. West Bengal 160 3465 Cr.