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Chapter 18. Public Finance in India (Indian Economy Summary)

18. Public Finance in India


Public finance is a much wider title which includes all those matters which are connected with public money, i.e., the money a government gets, spends, borrows, lends, raises or prints. Public finance, i.e., finances of the government, now named as public economics, does not only discuss the issue that how much of the country’s resources the government should acquire for its own use but also discusses the ‘efficiency’ with which the money should be used. Public finance gets reference in the ancient treatise Arthashastra of Kautilya which covers ‘treasury, sources of revenue, accounts and audit’ in a very detailed way. However, the subject has gathered much significance in the post Second World War period once the governments’ role in the economy started expanding due to various reasons namely, the rise of public sector, the delivery of public goods, law and order, defence, etc. By the second World War, the importance of the government’s role in the economy was urgently felt and it was believed that all needs of the people cannot be met if the economy is left to the market (i.e., the private sector) in its entirety. For example, national defence, law enforcement and other major areas which must be cared for by the national government besides the supplies of affordable or free healthcare, education, social security measures, etc., could only be taken care of by the governments (as they are not profit driven). This is why there was an agreement among the experts and the policymakers to expand the government’s role in the economy. This led to the ultimate rise of the public sector around the world. Here we will be looking into the major concepts related to the area of public finance with special reference to India.


An annual financial statement of income and expenditure is generally used for a government, but it could be of a firm, company, corporation etc. The ‘word’ has its origin in the British parliamentary exercise of preparing such statement way back in the mid-18th century from the french word ‘Bugeut’ meaning a leather bag out of which the financial statement was brought out and presented in the parliament. Today, this word is used to mean the annual statement in all economies around the world.
The constitution of India has a provision (Art. 112) for such a document called Annual Financial Statement to be presented in the Parliament before the commencement of every new fiscal year—popular as the Union Budget. Same provision is there for the states, too.

Data in the Budget __________________

The Union Budget has three sets of data for every concerned sector or sub-sector of the economy:
(i) Actual data of the preceding year (here preceding year means one year before the year in which the Budget is being presented. Suppose the Budget presented is for the year 2017–18, the Budget will give the final/actual data for the year 2015-16. After the data either we write ‘A’, means actual data/final data or write nothing (India writes nothing).
(ii) Provisional data of the current year (i.e., 2016–17) since the Budget for 2017–18 is presented at the end of the fiscal 2016–17, it provides Provisional Estimates for this year (shown as ‘PE’ in brackets with the data).
(iii) Budgetary estimates for the following year (here following year means one year after the year in which the Budget is being presented or the year for which the Budget is being presented, i.e., 2017–18). This is shown with the symbol ‘BE’ in brackets with the concerned data.).
One comes across certain other kinds of data, too in day-to-day government economic literature. There are three such data—

(i) Revised Estimate (RE)

Revised Estimate is basically a current estimation of either the budgetary estimates (BE) or the provisional estimates (PE). It shows the contemporary situation. It is an interim data.

(ii) Quick Estimate (QE)

Quick Estimate is a kind of revised estimate which shows the most latest situation and is useful in the process of going for future projections for some sector or sub-sector. It is an interim data.

(iii) Advance Estimate (AE)

Advance Estimate is a kind of quick estimate but done ahead (is advance) of the final stage when data should have been collected. It is an interim data.

Developmental and Non-developmental Expenditure __________________

Total expenditure incurred by the government is classified into two segments—developmental and non-developmental. All expenditures of productive nature are developmental such as on the heads of new factories, dams, bridges, roads, railways, etc.—all investments.
The expenditures which are of consumptive kind and do not involve any production are non-developmental, i.e., paying salaries, pensions, interest payments, subsidies, defence expenses, etc.
This classification is not used in the Indian public finance management now (see Plan and Non-Plan Expenditure, in the next entry).

Plan and Non-Plan Expenditure __________________

Every expenditure incurred on the public exchequer is classified into two categories—the plan and the non-plan. All those expenditures which are done in India in the name of planning is the plan expenditure and rest of all are non-plan expenditures. Basically, all asset creating, and productive expenditures are planned and all consumptive, non-productive, non-asset building are non-plan expenditures and are developmental and non-developmental expenditures, respectively.
Since the financial year 1987–88, there was a terminology change in Indian public finance literature when developmental and non-developmental expenditures were replaced by the new terms plan and non-plan expenditures, respectively. (It was suggested by the Sukhomoy Chakravarti Committee.)
Meanwhile, a high-power panel headed by Dr. C. Rangarajan (Chairman, Prime Minister’s Economic Advisory Council), in September 2011 suggested for redefining Plan and Non Plan expenditures as Capital and Revenue expenditures, as the former set of terms ‘blur the classification’ —this will facilitate linking expenditure to ‘outcomes’ and better public expenditure, the panels suggested. Major suggestions of the Panel are:
(i) Plan and Non-Plan distinction in the Budget is neither able to provide a satisfactory classification of ‘developmental’ and ‘non-developmental’ dimensions of government expenditure nor an appropriate budgetary framework. It has therefore become ‘dysfunctional’,
(ii) Suggests for redefining the roles of the Planning Commission (PC) and the Finance Ministry (FM). According to which the PC should be responsible for formulation of the five-year plan and the task of firming up the annual budgets should be entrusted to the FM.
(iii) The PC should dispense with the exercise of approving annual plans of states and it could hold a strategy or review meeting with representatives of the states.
(iv) Public expenditures should be split into capital and revenue expenditures.
(v) Public expenditure should have ‘management approach’ based on measurable ‘outcomes’, indicating that the reponsibility should be assigned to the FM.
Analysis of the Situation: While the need for looking beyond the budget is well accepted, there are many factors raising doubts on the ‘efficacy’ and ‘relevance’ of the five-year plans as the instrument. The division of expenditure between Plan and non-Plan is artificial and creates problems, such as :
(i) Plan expenditure tends to get priority especially when austerity and expenditure reduction has to be done periodically for fiscal consolidation. Non-Plan expenditure gets the cut even if it is vitally needed for economic development, an example is budget provision for maintenance of assets such as hospitals, schools and irrigation dams already created under Plan, but whose maintenance is treated as non-Plan.
(ii) Review and implementation of schemes is another area of direct responsibility for the Ministry of Finance and the Ministry of Statistics and Programme Implementation. The Finance Minister himself had, in the budget speech for 2005–06, promised to ensure that programmes and schemes were not allowed to continue indefinitely from one Plan period to another without an independent and in-depth evaluation. The Planning Commission, serving as the focal point for Plan allocations, dilutes the role of the Finance Ministry in this case.
(iii) ‘Output’ and ‘Outcome Budgeting’ was introduced by the Central Government from the Budget for 2005–06. Non-Plan expenditure remains out of its purview. This means, for example, the outcome of expenditure on running schools and hospitals will not be evaluated. This again is another fallout of the artificial division into Plan and non-Plan.
This classification used to adversely affect the whole budget process, formulation and implementation. Looking at this anomaly, the Government switched over from the ‘plan’ and ‘non-plan’ classification of expenditure to ‘revenue’ and ‘capital’ since the fiscal 2017-18 (as announced in the Union Budget 2017-18).

Revenue __________________

Every form of money generation in the nature of income, earnings are revenue for a firm or a government which do not increase financial liabilities of the government, i.e., the tax incomes, non-tax incomes along with foreign grants.

Non-revenue __________________

Every form of money generation which is not income or earnings for a firm or a government (i.e., money raised via borrowings) is considered a non-revenue source if they increase financial liablities.

Receipts __________________

Every receiving or accrual of money to a government by revenue and non-revenue sources is a receipt. Their sum is called total receipts. It includes all incomes as well as non-income accruals of a government.

Revenue Receipts __________________

Revenue receipts of a government are of two kinds—Tax Revenue Receipts and Non-tax Revenue Receipts—consisting of the following income receipts in India:

Tax Revenue Receipts __________________

This includes all money earned by the government via the different taxes the government collects, i.e., all direct and indirect tax collections.

Non-tax Revenue Receipts __________________

This includes all money earned by the government from sources other then taxes. In India they are:
(i) Profits and dividends which the government gets from its public sector undertakings (PSUs).
(ii) Interests recieved by the government out of all loans forwarded by it, be it inside the country (i.e., internal lending) or outside the country (i.e., external lending). It means this income might be in both domestic and foreign currencies.
(iii) Fiscal services also generate incomes for the government, i.e., currency printing, stamp printing, coinage and medals minting, etc.
(iv) General Services also earn money for the government as the power distribution, irrigation, banking, insurance, community services, etc.
(v) Fees, Penalties and fines received by the government.
(vi) Grants which the governments receives—it is always external in the case of the Central Government and internal in the case of state governments.

Revenue Expenditure __________________

All expenditures incurred by the government are either of revenue kind or current kind or compulsive kind. The basic identity of such expenditures is that they are of consumptive kind and do not involve creation of productive assets. They are either used in running of a productive process or running a government. A broad category of things that fall under such expenditures in India are:
(i) Interest payment by the government on the internal and external loans;
(ii) Salaries, Pension and Provident Fund paid by the government to government employees;
(iii) Subsidies forwarded to all sectors by the government;
(iv) Defence expenditures by the government;
(v) Postal Deficits of the government;
(vi) Law and order expenditures (i.e., police & paramilitary);
(vii) Expenditures on social services (includes all social sector expenditures as education, health care, social security, poverty alleviation, etc.) and general services (tax collection, etc.);
(viii) Grants given by the government to Indian states and foreign countries.

Revenue Deficit __________________

If the balance of total revenue receipts and total revenue expenditures turns out to be negative it is known as revenue deficit, a new fiscal terminology used since the fiscal 1997–98 in India.
This shows that the government’s Revenue Budget (see the next topic) is running in losses and the government is earning less revenue and spending more revenues—incurring a deficit. Revenue expenditures are of immediate nature (this has to be done) and since they are consumptive/non-productive they are considered as a kind of expenditure which sums up to a heinous crime in the area of fiscal policy. Governments fulfil the gap/deficit with the money which could have been spent/intvested in productive areas.
A government might have its revenue expenditures less than its revenue receipts, i.e., having (revenue surplus) budget. Such fiscal policy is considered good where the government has been able to manage some money out of its revenue budget which could be spent for the creation of productive assets. Yes, another thing that should be kept in mind, as how the government has managed this surplus and whether the policies which made this happen are judicious enough or not. In the Second Plan, India emerged as a revenue-suplus state, but experts did not appreciate it as it had many bad impacts on the economy—higher tax rates culminated in tax evasion, corruption, creation of black money, etc.
Revenue deficit may be shown in the quantitative form (as how much the gross/total deficit is in currency terms) or in percentage terms of the GDP for that particular year (shown as percentage of GDP). Usually, it is shown as a percentage of the GDP for domestic as well as international analyses.

Effective Revenue Deficit __________________

Effective revenue deficit (ERD) is a new term introduced in the Union Budget 2011–12. Conventionally, ‘revenue deficit’ (RD) is the difference between revenue receipts and revenue expenditures. Here, revenue expenditures includes all the grants which the Union Government gives to the state governments and the UTs—some of which create assets (though these assets are not owned by the Government of India but the concerned state governments and the UTs). According to the Finance Ministry (Union Budget 2011–12), such revenue expenditures contribute to the growth in the economy and therefore, should not be treated as unproductive in nature like other items in the revenue expenditures. And on this logic, a new methodology was introduced to capture the ‘effective revenue deficit’, which is the Revenue Deficit ‘excluding’ those revenue expenditures of the Government of India which were done in the form of GoCA (grants for creation of capital assets).
The GoCA includes the Government of India grants forwarded to the states & UTs for the implementation of the centrally sponsored programmes such as Pradhan Mantri Gram Sadak Yojana, Accelerated Irrigation Benefit Programme, Jawaharlal Nehru National Urban Renewal Mission, etc., these expenses though they are shown by the Government of India in its Revenue Expenditures they are involved with asset creation and cannot be considered completely ‘unproductive’ like other items put in the basket of the Revenue Expenditures—the reason why a new ‘terminology’ was created.
The term was innovated by the Government of the time to show some rationale in its high revenue deficit by bringing the logic that all of it were not like a typical revenue expenditure (which are consumptive in nature) and some of it were used to create ‘capital assets’ also (though they cannot be shown in the ‘capital’ heads of expenditures). Though, the new Government at centre does not give the same significance to the term, it has been releasing data related to it.
The Union Budget 2017-18 has committed to reduce the effective revenue deficit to 0.7 per cent in 2017-18 and 0.2 per cent in 2018-19 (it was estimated to be 1.2 per cent for 2016-17). While the revenue deficits for 2017-18 and 2018-19 have been set at 1.9 per cent and 1.4 per cent by the budget.

Revenue Budget __________________

The part of the Budget which deals with the income and expenditure of revenue by the government.
This presents the annual financial statement of the total revenue receipts and the total revenue expenditure—if the balance emerges to be positive it is a revenue surplus budget, and if it comes out to be negative, it is a revenue deficit budget.

Capital Budget __________________

The part of the Budget which deals with the receipts and expenditures of the capital by the government. This shows the means by which the capital is managed and the areas where capital is spent.

Capital Receipts __________________

All non-revenue reciepts of a government are known as capital receipts. Such receipts are for investment purposes and supposed to be spent on plan-development by a government. But the receipts might need their diversion to meet other needs to take care of the rising revenue expenditure of a government as the case had been with India. The capital receipts in India include the following capital kind of accruals to the government:

(i) Loan Recovery

This is one source of the capital receipts. The money the government had lent out in the past in India (states, UTs, PSUs, etc.) and abroad their capital comes back to the government when the borrowers repay them as capital receipts. The interests which come to the government on such loans are part of the revenue receipts.

(ii) Borrowings by the Government

This includes all long-term loans raised by the government inside the country (i.e., internal borrowings) and outside the country (i.e., external borrowings). Internal borrowings might include the borrowings from the RBI, Indian banks, financial institutions, etc. Similarly, external borrowings might include the loans from the world Bank, the IMF, foreign banks, foreign governments, foreign financial institutions, etc.

(iii) Other Receipts by the Government

This includes many long-term capital accruals to the government through the Provident fund (PF), Postal Deposits, various small saving schemes (SSSs) and the government bonds sold to the public (as Indira Vikas Patra, kisan Vikas Patra, Market Stabilisation Bond, etc.). Such receipts are nothing but a kind of loan on which the government needs to pay interests on their maturities. But they play a role in capital raising process by the government.

Capital Expenditure __________________

All the areas which get capital from the government are part of the capital expenditure. It includes so many heads in India —
(i) Loan Disbursals by the Government
The loans forwarded by the government might be internal (i.e., to the states, UTs, PSUs, FIs, etc.) or external (i.e., to foreign countries, foreign banks, purchase of foreign bonds, loans to IMF and WB, etc.).
(ii) Loan Repayments by the Government
Again loan payments might be internal as well as external. This consists of only the capital part of the loan repayment as the element of interest on loans are shown as a part of the revenue expenditure.
(iii) Plan Expenditure of the Government
This consists of all the expenditures incurred by the government to finance the planned development of India as well as the central government financial supports to the states for their plan requirements.
(iv) Capital Expenditures on Defence by the Government
This consists of all kinds of capital expenses to maintain the defence forces, the equipment purchased for them as well as the modernisation expenditures. It should be kept in mind that defence is a non-plan expenditure which has capital as well as revenue expenditures in its maintenance. The revenue part of expenditure in the defence is counted in the revenue expenditures by the government.
(v) General Services
These also need huge capital expenditure by the government—the railways, postal department, water supply, education, rural extension, etc.
(vi) Other Liabilities of the Government
Basically, this includes all the repayment liabilities of the government on the items of the Other Receipts. The level of liabilities depends on the fact as to how much such receipts were made by the governments in the past. The amount of payment liabilities in the year also depends on the fact as to which years in the past the governments had other receipts and for what duration of maturity periods. As for example, the PF liabilities were not an item of such liabilities for almost first three decades after Independence. But once the government employees started retiring, it went on increasing. Future India (especially 1960s and 1970s) saw expansion of the PSUs and excessive employment generation in them (devoid of the logic of labour requirement). We see the PF liabilities expanding extensively throughout the 1990s—the governments had been under pressure to manage this segment either by cutting interest on PF or at present trying to make it a matter of market economy. Same thing happened with the element of pension and we have been able to devise a market mechanism for it once pension reforms took place and the arrival of a pension regulatory authority for the area.

Capital Deficit __________________

There is no such term in public finance or in economics as such. But in practice one usually hears the use of the term capital crunch, scarcity of capital in day-to-day economic news items. Basically, the government in the news is facing the problem of managing as much funds, money, capital as is required by it for public expenditure. Such expenditure might be of revenue kind or capital kind. Such difficulties have always been with the developing economies due to their high level requirement of capital expenditures. Had there been a term to show this situation, it would naturally have been Capital Deficit.

Fiscal Deficit __________________

When balance of the government’s total receipts (i.e., revenue + capital reeipts) and total expenditures (i.e., revenue + capital expenditures) turns out to be negative, it shows the situation of fiscal deficit, a concept being used since the fiscal 1997–98 in India.
The situation of fiscal deficit indicates that the government is spending beyond its means. to be more simple, we may say that the government is spending more than its income (though in practice all receipts of the government are not income. Basically, receipts are all forms of money accruing to the government, be it income or borrowings).
Fiscal deficit may be shown in the quantitative form (i.e., the total currency value of the deficit) or in the percentage form of the GDP for that particular year (percentage of GDP). In general, the percentage form is used for domestic or international (i.e., comparative economics) studies and analyses.
India has been a country of not only regular but higher fiscal deficits. Moreover, the composition of its fiscal deficit has been more prone to criticism (we will see this in the forthcoming sub-title ahead).

Primary Deficit __________________

The fiscal deficit excluding the interest liabilities for a year is the primary deficit, a term India started using since the fiscal 1997–98. It shows the fiscal deficit for the year in which the economy had not to fulfil any interest payments on the different loans and liabilities which it is obliged to—shown both in quantitative and percentage of GDP forms.
This is considered a very handy tool in the process of bringing in more transparency in the government’s expenditure pattern. Any two years for example might be compared and so many things can be found out clearly such as, which year the government depended more on loans, the reasons behind higher or lower fiscal deficits, whether the fiscal deficits have gone down due to falling interest liabilities or some other factors, etc.

Monetised Deficit __________________

The part of the fiscal deficit which was provided by the RBI to the government in a particular year is Monetised Deficit, this is a new term adopted since 1997–98 in India. This is shown in both the forms—in quantitative as well as a percentage of the GDP for that particular financial year.
It is an innovation in the fiscal management which brings in more transparency in the government’s expenditure behaviour and also in its capabilities concerning its dependence on market borrowings by the RBI. Basically, every year both central and state governments in India had been depending heavily on market borrowings (internal) for its long-term capital requirements. Market borrowings of the government are done and managed by the RBI. Besides, the RBI is also the primary customer for government securities—yet another means of the government to raise long-term capital. This has been a major area of fiscal concern in India. After the process of fiscal consolidation was started by the government by the early 1990s, we see a visible improvement in this area. This term is itself arrived as the part of fiscal reforms in India (we will visit the issue of fiscal consolidation in India in the coming pages).

Deficit and Surplus Budget __________________

When the budgetary proposals of a government for a particular year proposes higher expenditures than the receipts, it is known as a deficit budget. Opposite to this, if the budget proposes lesser expenditures than the receipts, then it is a surplus budget.
In practice, governments the world over usually do not present a surplus budget as it symbolises government’s lower concerns towards development. But at times as a political weapon a government might come out with such a budget (for example the Uttaranchal Budget for 2006–07 was a surplus budget). How can a government propose for a surplus budget in a developing state when even developed countries still need development and are going for deficit budgets? The Union Budget in India had never been presented as a surplus budget.

Deficit Financing

The act/process of financing/supporting a deficit budget by a government is deficit financing. In this process, the government knows well in advance that its total expenditures are going to turn out to be more than its total receipts and enacts/follows such financial policies so that it can sustain the burden of the deficits proposed by it.
First used in the area of public finance in the early 1930s in USA, today the term is being used by the corporate sector, too and such a financial management of a firm might be followed by it as part of its business strategy. Again, a sick firm might need to follow deficit financing route for many years to come as required by the firm to make it come out of the red (i.e., doing away with the losses).

Need of Deficit Financing__________________

It was in the late 1920s that the idea and need of deficit financing was felt. It is when government needs to spend more money than it was expected to earn or generate in a particular period, to go for a desired level of growth and development. Had there been some means to go for more expenditure with less income and receipts, socio-political goals could have been realised as per the aspirations of the public policy. And once the growth had taken place, the extra money spent above the income would have been reimbursed or repaid. This was a good public/government wish which was fulfilled by the evolution of the idea of deficit financing.
It was by the early 1930s that the US first tried its hand at deficit financing soon to be followed by the whole Euro-American governments. Through this route the developed world was able to come out of the menace of the Great Depression (1929). The idea became popular around the world by the 1960s. India tried its hand at deficit financing in 1969 and since the 1970s it became a routine phenomenon, till it became wild and illogical, demanding immediate redressal. The fiscal deficits in India did not only peak to unsustainable levels but its composition was also not justified and not based on sound fundamentals of economics. Finally, India headed for a slow but confident process of fiscal reforms that is also known as the process of fiscal consolidation (to be discussed in the coming pages).

Means of Deficit Financing__________________

Once deficit financing became an established part of public finance around the world, the means of going for it were also evolved by that time. These means, basically are the ways in which the government may utilise the amount of money created as the deficit to sustain its budget for developmental or political needs. These means are given below in order of their suggested and tried preferences.
(i) External Aids are the best money as a means to fulfil a government’s deficit requirements even if it is coming with soft interest. If they are coming without interest nothing could be better.
When India went to borrow from the IMF in the wake of the financial crisis of 1990–91, the body advised India to keep its fiscal deficit to the tune of 4.5 per cent of its GDP and noted it to be sustainable for the economy. What was the rationale behind this data? Basically, in those times with the foreign aids (soft loans either from the WB or from the Aid India forum) India was able to manage its budget to the tune of 4.5 per cent of its GDP. In 2002, when India’s fiscal deficit was around 6 per cent (5.7 per cent to be precise) the IMF validated it to be sustainable, the reasons were two—first, India was able to show a check on fiscal deficit and secondly, at the same time the forex reserves of the country were suitably higher to neutralise the negative impacts of the higher fiscal deficit than the suggested levels (4.5 per cent).
External Grants are even better elements in this case (which comes free—neither interest nor any repayments) but it either did not come to India (since 1975, the year of the first Pokhran testings) or India did not accept it (as happened post-Tsunami, arguing grants/aids coming with a tag/condition). That is why here this segment has not been discussed as a means to manage deficit.
(ii) External Borrowings are the next best way to manage fiscal deficit with the condition that the external loans are comparatively cheaper and long-term.
though external loans are considered an erosion in the nation’s sovereign decision making process, this has its own benefit and is considered better than the internal borrowings due to two reasons:
(a) External borrowing bring in foreign currency/hard currency which gives extra edge to the government spending as by this the government may fulfil its developmental requirements inside the country as well as from outside the country.
(b) It is prefered over the internal borrowings due to ‘crowding out effect’. If the government itself goes on borrowing from the banks of the country, from where will others borrow for investment purposes?
(iii) Internal Borrowings come as the third preferred route of fiscal deficit management. But going for it in a huge way hampers the investment prospects of the public and the corporate sector. It has the same impact on the expenditure pattern in the economy. Ultimately, economy heads for a double negative impact—lower investment (leading to lower production, lower GDPs and lower per capita income, etc.) and lower demands (by the general public as well as by the corporate world) in the economy—the economy moves either for stagnation or for a slowdown (one can see them happening in India repeatedly throughout the 1960s, 1970s, 1980s). The situation improved after the mid-1990s.
(iv) Printing Currency is the last resort for the government in managing its deficit. But it has the biggest handicap that with it the government cannot go for the expenditures which are to be made in the foreign currency. Even if the government is satisfied on this front, printing fresh currencies does have other damaging effects on the economy:
(a) It increases inflation proportionally. (India regularly went for it since the early 1970s and usually had to bear double digit inflations.)
(b) It brings in regular pressure and obligation on the government for upward revision in wages and salaries of government employees—ultimately increasing the government expenditures necessitating further printing of currency and further inflation—a vicious cycle into which economies entangle themselves.
Now, it remains a matter of choice and availability of the above-given means, and which means a government adopts and in what proportion, for fulfilling its deficit requirements.

Composition of Fiscal Deficit __________________

The keynesian idea of deficit financing, though he advocated it, had a catch in it also which was usually missed by third world economies or intentionally overlooked by them. The catch is related to the question as to why an economy wants to go for fiscal deficit. Thus, it becomes essential to go for an analysis of the composition of the fiscal deficit of a government.
Out of the two broad expenditure obligations of a government—revenue expenditure and capital expenditure—the following combinations of expenditure composition are suggested:
(i) A fiscal deficit with a surplus revenue budget or a zero revenue expenditure is the best composition of fiscal deficit and the most suitable time for deficit financing.
(ii) The deficit requirements for lower revenue expenditures and higher capital expenditures are the next best situation for deficit financing, provided revenue deficit is eliminated soon.
(iii) The last could be the situation when major part of deficit financing is to fulfil revenue expenditures and a minor part to go for capital expenditures. The total money of the deficit might go to fulfil revenue expenditure, which could be the worst form of it.
Basically, there should be a judicious mix of plan and non-plan expenditure as well as revenue and capital expenditures in India. lesser non-plan expenditure or higher plan-expenditure are better reasons behind deficit financing in India (though India has a typical feature of capital expenditure which makes this combination of deficit financing not a suggested form—discussed ahead).
Third world economies (including India) though went for higher and higher fiscal deficits and deficit financing, they either did not address or failed to address the composition of deficit favourable towards capital and non-revenue expenditures.

Fiscal Policy

The real meaning, significance and impact of fiscal policy emerged in the wake of the Great Depression and the Second World War. Fiscal policy has been defined as ‘the policy of the government with regard to the level of government purchases, the level of transfers, and the tax structure’—probably the best and the most acclaimed definition among experts. Later, the impact of fiscal policy on macro-economy was beautifully analysed. As the policy has a deep impact on the overall performance of the economy, fiscal policy is also defined as the policy which handles public expenditure and tax to direct and stimulate the level of economic activity (numerically denoted by the Gross Domestic Product). It was J. M. Keynes, the first economist who developed a theory linking fiscal policy and economic performance.
Fiscal policy is also defined as ‘changes in government expenditures and taxes that are designed to achieve macroeconomic policy goals’ (such as growth, employment, investment, etc.). Therefore, we say that ‘fiscal policy denotes the use of taxes and government expenditures’.
How the taxes and the government expenditures influence the overall economy, has been explained in a brief discussion here. Let us first discuss the taxes and their impact on the economy:
(i) Taxes have a direct bearing on people’s income affecting their levels of disposable incomes, purchase of goods and services, consumption and ultimately their standard of living;
(ii) Taxes directly affect the savings of individuals, families and firms which affect investment in the economy—as investment affects the output (GDP) thereby influencing the per capita income;
(iii) Taxes affect the prices of goods and services as factor cost (production cost) is affected thereby affecting incentives and behaviour of economic activities, etc.
Government expenditures affect/influence the economy in two ways:
(i) There are some expenditure on government purchases of goods and services, for example construction of roads, railways, ports, foodgrains, etc., in the goods category and salary payments to government employees in the services category; and
(ii) There are some expenditure due to government’s income support, to the poor, unemployed and old-age people (known as government transfer payments).

Deficit Financing in India __________________

India was declared to be a planned economy right after Independence. As development responsibilities of the government were very high, there was a need of huge funds in rupee as well as in foreign currency forms. India faced continuous crises in managing the required fund to support its five Year Plans—neither foreign funds came nor internal resources could be mobilised in sufficient amount. (Due to lower tax collections, weaker banks that too privately owned, and negligible saving rate, etc.)
By the late 1960s, the government headed for deficit financing and from the 1970s onwards, India started going for higher and higher fiscal deficits and became more and more dependent on increased deficit financing with every fresh year. we may classify dificit financing in India into three phases.

The First Phase (1947–1970) __________________

This phase had no concept of deficit financing and the deficits were shown as Budgetary Deficits. Major aspects of this phase were—
(i) Trying to borrow from inside and outside the economy but unable to meet the target.
(ii) In the 1950s, a serious attempt was made to increase tax collections and check revenue expenditures to be ultimately able to emerge as a surplus revenue budget economy. But huge cost was paid in the form of tax evasion, rise in corruption, stagnating standard of life and a neglected social sector.
(iii) Taking recourse to heavy borrowings from the RBI and finally nationalisation of banks so that their money could be used by the government to support the plans. This not only increased the interest burden of the governments but also ruptured the whole financial system in coming years—banks did not remain commercial entities and became part of the government’s political statement.
(iv) Establishing giant PSUs with higher revenue expenditures (salaries) which increased the revenue expenditures of the future governments when the pensions and the PFs needed to be serviced.
(v) Unable to go for the required level of investment even after taking recourse to all the above given means.

The Second Phase (1970–1991) __________________

This is considered the period of deficit financing, follow up of unsound fundamentals of economics and finally culminating in severe financial crisis by the year 1990–91. Major highlights of this phase may be summed up as follows—
(i) this phase saw the nationalisation policy and simultaneous revival of an increased emphasis on expansion of the PSU (two points should be noted here specially—first, many of the South East Asian economies have, officially declared their acceptance of capitalism and privatisation. Secondly, China had declared that investment in the government-controlled companies are a loss of money at this time).
(ii) Upcoming PSUs increased the total expenditure of the government’s revenue as well as capital.
(iii) Existing PSUs were taking their own due from the economy—the illogical employment creation excessively increased the burden of salaries, pensions and PF; many of them had started fetching huge losses by this time; as the public sector does not have profit as its primary goal; there was a lack of profit and loss analysis; as the PSUs had no connection between their need of labour force and the existing labour force. Ultimately, the responsibility of profit or loss did not remain the onus of the officers, thus making them centres of intentional losses and an institutionalised centre of corruption; etc.
(iv) The governments have failed on both the fronts—checking population rise and mass employment generation—the burden of different subsidies went on increasing making them unmanageable and highly illogical. Self-employment programmes could not pick up, or better said, it was politically suitable to go for piece-meal wage-employment programmes with different names.
(v) Planned development remained highly centralised and devoid of any place for local aspirations—frustrations of masses started showing up in the form extremist and radical organisations raising their heads creating a law and order problem and excessive expenditure on them. The outcome was a burdened police force and lagging judicial set up.
(vi) The plan expenditure which governments were going for were through investments in the PSUs which were not committed to profit motive, deficit financing for the PSUs was not based on sound economics. Majority of the plan expenditure in a sense turned out to be non-economic, i.e., non-plan expenditure at the end.
Due to the above-given reasons, it was tough to say whether it was sound to go for huge fiscal deficits in India.

The Third Phase (1991 onwards) __________________

This started with the initiation of the economic reforms process under the conditionalities put forth by the IMF (controlling fiscal deficit was one amongst them). As the economy moved from government dominance to market dominance, things needed a restructuring and public finance also needed a touch of rationality.

Indian Fiscal Situation: A Summary

In December 1985, the Government of India presented a discussion paper in the Parliament titled ‘Long-Term Fiscal Policy’. It was for the first time in the fiscal history of India that we see a long-term perspective coming on the fiscal issue from the government. This also included the policy of government expenditure. The paper was bold enough to recognise the deterioration in India’s fiscal position and accepted it among the most important challenges of the eighties—the paper set specific targets and policies to set the things right. This paper was followed by a country-wide debate on the issue and it was in 1987 that the government came ahead with two bold steps in the direction—
(i) a virtual freeze was announced on government expenditure, and
(ii) a ceiling on the budgetary deficit.
The above steps had a positive impact on the situation but it was temporary as since mid-1988 the situation again started deteriorating. The BoP crisis at the end of 1990 was generated partly by the alarmingly high fiscal deficit and due to a high level of external borrowings. The IMF support to fight the crisis came in but with many macro-economic conditionalities, checking the fiscal meance being a major one among them. With the process of economic reforms which started in 1991–92, the government also announced its commitment to reduce fiscal deficit to 3–4 per cent (of GDP) by the mid-1990s (from the level of about 8 per cent during 1987–90). This step was among the many measures which the government started with the objective of stabilising the economy. We may have a look at India’s fiscal situation upto the 1990–91 in the following way:
(i) The fiscal deficits of the central government, after averaging below 4 per cent of the GDP till the 1970s started climbing up by being 5.77 per cent in 1980–81, 8.47 per cent in 1986–87 ending up at 7.85 per cent in 1990–91 after being above 7 per cent in the second half of the 1980s.
(ii) The revenue (i.e., current) expenditure of the government (Centre and states combined) increased from 11.8 per cent of GDP to 23 per cent between 1960 and 1990. The revenue receipts of the government also went up on an average of 14.6 per cent in 1971–75 to 20 per cent in 1986–1990. But the gap between revenue receipts and expenditures remained negative—financed largely by domestic borrowings (as a result the interest payments on domestic debt increased from 0.5 to 2.5 per cent of the GDP during 1975–90. The revenue deficit went on increasing after 1979–80 and reached the highest level of 3.26 per cent of the GDP in 1990–91.
(iii) The fiscal situation of the states was not good either. State governments which are primarily responsible for health, education and other social services had an aggregate revenue expenditure of 5 per cent of GDP on these accounts while their capital expenditure accounted for 2.5 per cent on social and other sectors. The states’ expenditure on the social sector went down while their interest payments had increased during the 1980s.
As per the experts, the debt situation in the states would have been even worse, but for the fact that the states, unlike the Centre, did not have independent powers to borrow either from the RBI or the market because of the statutory overdraft regulatory scheme. Thus, their deficits have been self-limiting—whenever the states tried to cut down their deficits the care of the social sector and capital expenditure suffered and development prospects in the states also suffered.
Now the question arises that why the government has not been able to check the menace of fiscal deficits even though there has been a consensus to do so? There are reasons which can be cited for it:
(i) Political factor: The political lobbies and sectional politics as well as the subsidies are supposed to be one big factor for rising government expenditure. We see this on a higher scale if there is a probable mid-term election or closer to a general election.
(ii) Institutional factor: The administrative size combined with the processes of reporting, accounting, supervising and monitoring getting greater importance than the production and delivery of goods and services.
(iii) Ethical factor: This is a more powerful factor as it easily generates wide public support for the government expenditure. There are many heads of such expenditures such as subsidies (food, power, fertilizer, irrigation, etc.) poverty alleviation programmes, employment generation programmes, education, health and social services. The logic for such expenditure comes from the idea that the government should function as protector of the poor and provider of jobs for them implying that such government expenditures benefit the poor.
It was in 2000 that the double menace of revenue and fiscal deficits got attention from the government at the Centre and some constitutional/statutory safeguards looked necessary. Consequently, the Fiscal Responsibility and Budget Management Bill, 2000 was proposed in the Parliament.

FRBM Act, 2003 __________________

The fiscal policy of an economy has been considered as the building block for enabling macro-environment by economists, policymakers and the IMF, alike. It does not only provide stability and predictability to the policy regime, but also ensures that national resources are allocated in terms of their defined priorities through the tax transfer mechanism.
Unproductive government expenditures, tax distortions and high deficits are considered to have constrained the Indian economy from realising its full growth potential. At the begining of the fiscal reforms in 1991, the fiscal imbalance was identified as the root cause of the twin problems of inflation and the difficult balance of payments (BoPs) position. Since then the medium-term fiscal policy stance of the government has been on the following lines:
(i) reducing the deficits (revenue and fiscal);
(ii) prioritising expenditure and ensuring that these resulted in intended outcomes; and
(iii) augumenting resources by widening tax base and improving tax-compliance while maintaining moderate rates.
The fiscal consolidation which followed in 1991 failed to give the desired results as there was no defined mandate for it. Neither was there any statutory obligation to do so. This is why the Fiscal Reforms and Budget Management Act (FRBMA) was enacted on 26 August, 2003 to provide the support of a strong institutional/statutory mechanism. Designed for the purpose of medium-term management of the fiscal deficit, the FRBMA came into effect on 5 July, 2004.
The FRBM Bill, 2000 was passed by the Parliament with all political parties voting in favour, and is considered a watershed in the area of fiscal reforms in the country. Main highlights of the FRBMA, 2003 are as given below:
(i) GoI to take measures to reduce fiscal and revenue deficit so as to eliminate revenue deficit by 31 March, 2008 (which was revised by the UPA Government to March 31, 2009) and thereafter build up adequate revenue surplus.
(ii) Rules to be made under the Act to specify annual targets for the reduction of fiscal deficit (FD) and revenue deficit (RD) contingent liabilities and total liabilities (RD to be cut by 0.5 per cent per annum and FD by 0.3 per cent per annum).
(iii) FD and RD may exceed the targets only on the grounds such as national security, calamity or on exceptional grounds.
(iv) GoI not to borrow from RBI except by Ways and Means Advances (WMAs).
(v) RBI not to subscribe to the primary issue of the GoI securities from 2006–07 (it means that these government bonds/papers will become market—based instrument to raise long-term funds by the government).
(vi) Steps to be taken to ensure greater transparency in fiscal operations.
(vii) Along with the Budget and Demands for Grants, the GoI to lay the following three statements before the Parliament in each financial year:
(a) Fiscal Policy Strategy Statement (FPSS);
(b) Medium Term Fiscal Policy Statement (MTFPS); and
(c) Macroeconomic Framework Statement (MFS).
(viii) The Finance Minister to make quarterly review of trends in receipts and expenditure in relation to the Budget and place the review before the Parliament.
Recent changes: After the enactment of the FRMBA, the states also followed the suit passing their FRAs (fiscal responsibility acts) in the forthcoming years. Both of the governments have shown better fiscal disciplines since then. To the extent ‘exact’ follow-up to the FRBMA-linked targets are concerned, the performance has been mixed. The targets were exceeded many times due to fiscal escalations (either due to natural calamities or on exceptional ground), while many times they were better than the mandated targets, too. But this act brought the element of higher fiscal discipline among the governments, there is no doubt in it.
In the past few years a view has emerged as per which binding the government expenditures to a fixed number may be counterproductive to the economy at large. Due to a hard and fast discipline regarding fiscal targets, some highly desirable expenditures by the government may get blocked, for example—expenditures on infrastructure, welfare, etc. This is why we find a changed stance of the Government of India in the Union Budget 2016–17 regarding the follow-up to the FRBMA. Terming it a new school of thought the Budget suggests two important changes in its fiscal road map:
(i) It may be better to have a fiscal deficit range as the target in place of a fixed number as target. This would give necessary policy space to the government to deal with dynamic situations.
(ii) A need is felt to align fiscal expansion or contraction with credit contraction or expansion respectively, in the economy.
In the opinion of the Budget, the government should remain committed to fiscal prudence and consolidation but a time has come when the working of the FRBMA needs a review—especially in the context of the uncertainty and volatility which have become the new norms of global economy. In the backdrop of this changed stance, the the Government, in 2016 constituted a Committee to review the implementation of the FRBMA.

FRBM Review Committee

The five-member committee handed over its report by late January 2017. Though the report is yet to be put in the public domain, meanwhile, some important clues to its recommendations have been outlined by the Union Budget 2017-18 as given below:
• It has done an elaborate exercise and has recommended that a sustainable debt path must be the principal macro-economic anchor of our fiscal policy.
• It has favoured Debt to GDP of 60 per cent for the General Government by 2023— consisting of 40 per cent for Central Government and 20 per cent for State Governments.
• Within the framework of debt to GDP ratio, it has derived and recommended 3 per cent fiscal deficit for the next three years.
• It has also provided for Escape Clauses, for deviations upto 0.5 per cent of GDP, from the stipulated fiscal deficit target. Among the triggers for taking recourse to these Escape Clauses, it has included “far-reaching structural reforms in the economy with unanticipated fiscal implications” as one of the factors.
The budget has informed that the report will be carefully examined and appropriate decisions will be taken on its advices in due course.

Limiting Government Expenditure

Elected governments are composed of different interest groups and lobbies. At times, such governments might intend to use its economic policies in a highly populist way for greater political mileage without caring for the national exchequer. Such acts might force the governments to go in for excessive internal and external borrowing and printing of currency. Governments generally avoid to increase tax or impose new taxes for their revenue increase as such acts are politically unpopular. On the other hand, borrowings and printing of currency impose no immediate economic or political costs. A government in the election year usually spends money frugally by borrowings (from the RBI in India) because it is the coming government after the elections who is supposed to repay them. Government expenditures remain higher and expanding due to some economic reasons also—by doing so extra employment is generated and the output (GDP) of the economy is also boosted. If governments go for anti-expansionary fiscal and monetary policies with the objective of reducing its expenditures the employment as well as the GDP both will be hampered. This is considered a bias in the economic policies of the elected governments. But there has always been a consensus among the experts and policymakers that an external (i.e., outside the government) and some form of a statutory check must be over the government on its powers of money creation (i.e., by borrowings or printing). With the objective of removing the bias—to make fiscal policy less sensitive to electoral considerations, several countries had introduced some legal provisions on their governments before India enacted its FRBMA. We see mainly three variants of it around the world:
(i) It was New Zealand which first introduced such a legal binding on the government’s powers of money creation. Here the central bank is legally bound to ensure that money creation by the government does not increase the rate of inflation target—it means that the central bank has the overriding powers on the government there in the area of extra money creation.
(ii) The second variant is putting some firm legal or constitutional limit on the size of government deficits or the power of the government to borrow. Germany and Chile had such an arrangement—today Germany is bound to the fiscal limits prescribed by the Maastricht Treaty. In the late 1990s, an upper limit on the government’s powers to create deficit was introduced.
(iii) Some countries introduced the so-called ‘Currency Board’ type of arrangement to serve the same purpose—this is the third variant. In this arrangement, money supply in the economy is directly linked to changes in the supply of foreign assets—neither the government nor the central bank has any independent powers to create money, as growth in money supply is not allowed to exceed growth in the foreign assets.
It was in 1994 that India took the first step in this direction when the central government had a formal agreement with the RBI to limit its borrowing through ad hoc treasury bills to a predetermined amount (Rs. 6,000 crores in 1994–95). However, it was a highly liberal arrangement with the government having the ultimate powers to revise the aforesaid predetermined amount by a fresh agreement with the RBI. The importance this beginning had was finally in the enactment of the FRBMA 2003—a historic achievement in the area of fiscal prudence in the country.

Fiscal Consolidation in India

The average combined fiscal deficits, of the Centre and states after 1975, had been above 10 per cent of the GDP till 2000–01. More than half of it had been due to huge revenue deficits. The governments were cautioned by the RBI, the planning Commission as well as by the IMF and the WB about the unsustainability of the fiscal deficits. It was at the behest of the IMF that India started the politically and socially painful process of fiscal reforms, a step towards fiscal consolidation. A number of steps were taken by the government at the Centre in this direction and there had been incessant attempts to do the same in the states’ public finances too. Major highlights in this direction can be summed up as given below:
1. Policy initiatives towards cutting revenue deficits:
(i) Cutting down expenditure—
(a) Cutting down the burden of salaries, pensions and the PFs (down-sizing/right-sizing of the government, out of every 3 vacancies 1 to be filled up, interest cut on the PF, pension reforms-PFRDA, etc.);
(b) Cutting down the subsidies (Administered Price Mechanism in petroleum, fertilizers, sugar, drugs to be rationalised, it was done with mixed successes);
(c) Interest burden to be cut down (by going for lesser and lesser borrowings, pre-payment of external debts, debt swaps, promoting external lending, minimal dependence on costlier external borrowings, etc.);
(d) Defence being one major item of the expenditure bilateral negotiations initiated with china and Pakistan (the historical and psychological enemies against whom the Indian defence preparedness was directed to, as supposed) so that the defence force cut could be completed on the borders, etc.;
(e) Budgetary supports to the loss-making PSUs to be an exception than a rule;
(f) Expenditure reform started by the governments in different areas and departments;
(g) General Services to be motivated towards profit with subsidised services to the needy only (railways, power, water, etc.);
(h) Postal deficits to be checked by involving the post offices in other areas of profit;
(i) Higher education declared as non-priority sector; fees of institutions of professional courses revised upward; etc.
(ii) Increasing revenue receipts:
(a) Tax reforms initiated (Cenvat, VAT, Service Tax, GST proposed, etc.);
(b) The PSUs to be disinvested and even privatised (if a political concensus reached which alludes today);
(c) Surplus forex reserves to be used in external lending and purchasing foreign high quality sovereign bonds, etc.
(d) State governments allowed to go for market borrowing for their plan expenditure, etc.
2. The borrowing programme of the government:
(i) The ways and Means Advances (WMA) scheme commenced in 1997 under which the government commits to the RBI about the amount of money it will give as part of its market-borrowing programme, to bring transparency in public expenditure and to put political responsibility on the government.
(ii) The RBI will not be the primary subscriber to government securities in the future—committed way back in 1997.
3. The fiscal responsibility on the governments:
(i) The Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2003 (voted by all political parties) which puts constitutional obligation on the government to commit so many things as fiscal responsibility comes in the public finance—fixing annual targets to cut revenue and fiscal deficits; the government not to borrow from the RBI except by the WMA; government to bring in greater transparency in fiscal operations; along with the Budget the government to lay statements regarding fiscal policy strategy in the House and Quarterly Review of trends of receipts and expenditures of the government.
(ii) A mechanism (to include state governments under the umbrella of fiscal responsibility) was advised (now implemented, too) by the 12th Finance Commission which allows the state governments to go for market borrowing (without central permission) for their need of plan development provided they pass their fiscal responsibility acts (FRAs) and commit to the fiscal responsibility regarding cutting their revenue and fiscal deficits. By March 2016, all states and UTs had implemented their FRAs.
India’s fiscal consolidation process by now has had a mixed performance. By now, the FRBM Act has been amended twice (in 2004 and 2012), mainly to redefine the fiscal targets or shift the targets to future years. By early 2010, a new school of thinking emerged in the country as per which fixing hard and fast fiscal targets for the governments, at times, may be counterproductive to the economy. This why the GoI through the Union Budget 2016-17 proposed to go for a fixed range for fiscal targets in place of a fixed number. The Government of India has accordingly announced to set up an expert committee to review the implementation of the FRBM Act.

Zero-Base Budgeting

The idea of zero-base budgeting (ZBB) first came to the privately owned organisation of the USA by the 1960s. This basically belonged to a long list of guidelines for managerial excellence and success, others being Management by Objectives (MBO), Matrix Management, Portfolio Management, etc to name a few. It was the US financial expert Peter Phyrr who first proposed this idea for government budgeting and Jimmy Carter, Govornor of Georgia, USA was the first elected executive to introduce ZBB to the public sector. When he presented the US Budget in 1979 as the US President it was the first use of the ZBB for any nation state. Since then many governments of the world have gone for such budgeting.
Zero-base budgeting is the allocation of resources to agencies based on periodic re-evaluation by those agencies of the need for all the programmes for which they are responsible, justifying the continuance or termination of each programme in the agency budget proposal—in other words, an agency reassesses what it is doing from top to bottom from a hypothetical zero base.
There are three essential principles of ZBB. Some experts say it in a different way, there are three essential questions which must be answered objectively before going for any expenditure as per the techniques of ZBB:
(i) Should we spend?
(ii) How much should we spend?
(iii) Where should we spend?
There are three special features of this budgeting which distinguishes it from the traditional budgeting. These features, in brief, are as under:
(i) The conventional aggregate approach is not applied in it, in which each department of the government prepares their own budget for many activities in the aggregate and composite form, making it difficult to scrutinise each and every activity. In place of it every department needs to justify its existence and continuance in the budget document by using the mathematical technique of econometrics, i.e., cost-benefit analysis. In a nutshell, every activity of each department is ‘X-rayed’ and once the justification is validated they are allocated the funds.
(ii) Economy in public expenditure is the raison d’etre of this budgeting. This is why the ZBB has provisions of close examination and scrutiny of each programme and public spending. Finally, the public spending is cut without affecting the current level of benefits of various public services accruing to the public.
(iii) Prioritising the competing needs is another special feature of ZBB. Before allocating funds to the different needs of the economy, an order of priority is prepared with utmost objectivity. As the resources/funds are always scarce, in the process of prioritised allocation, the item/items at the bottom might not get any funds.
Side by side its benefits, there are certain limitations too before the ZBB which prohibits its assumed success, according to experts. These limitations have made it subject to criticisms. The limitations are as given below:
(i) There are certain expenditures upon which the government/parliament does not have the power of scrutiny (as the ‘charged Expenditure’ in India).
(ii) There are certains public services which defy the cost-benefit analysis—defence, law and order, foreign relations, etc.
(iii) Scrutiny is a subjective matter and so this might become prey to bias. Again, if the scrutinisers have a complete utilitarian view many long-term objectives of budgeting and public policy might get marginalised.
(iv) It has scope for emergence of the Ministry of Finance as the all-powerful institution dictating other ministries and departments.
(v) Bureaucracy does not praise it as it evaluates their decisions and performances in a highly objective way.
Despite the above-given strong limitation, the ZBB has a sound logic and should be considered a long-term budgetary reform process. The basic idea of this form of budgeting is to optimise the benefits of expenditure in every area of activity and in this sense it is exceptional. To the extent the corporate world is concerned, this has been a very successful financial management tool.
In India, it is believed to be in practice since 1997–99. We cannot say that India is a success in ZBB, but many of the profit-fetching PSUs have been able to use it successfully and optimise their profits.

Charged Expenditure

It is the public expenditure which is beyond the voting power of the Parliament and is directly withdrawn from the consolidated fund of India. For Example, the emoluments of the President, speaker and Deputy speaker of the Lok Sabha, Chairman and Deputy Chairman of the Rajya Sabha, Judges of the Supreme Court and the High Courts in India, etc.

Types of Budgets

Golden Rule __________________

The proposition that a government should borrow only to invest (i.e., plan expenditure in India) and not to finance current spending (i.e., revenue expenditure in India) is known as the golden rule of public finance. This rule is undoubtedly prudent but provided spending is honestly described as investment, investments are efficient and does not crowd out the important private sector investments.

Balanced Budget __________________

A budget is said to be a balanced budget when total public-sector spending equals total government income (revenue receipts) during the same period from taxes and charges for public services. In other terms, a budget with zero revenue deficit is balanced budget. Such budget making is popularly known as balanced budgeting.

Gender Budgeting __________________

A general budget by the government which allocates funds and reponsibilities on the basis of gender is gender budgeting. It is done in an economy where socio-economic disparities are chronic and clearly visible on a sex basis (as in India).
Gender budgeting started in India with the Union Budget 2006–07 which proposed an outlay of Rs. 28,737 crore dedicated to the cause of women and created gender budgeting cells in 32 ministries and departments.

Outcome and Performance Budgets __________________

The concepts are part of result-oriented budgeting. While outcome budget is presented by different departments and divisions of a ministry or the government, the performance budget is presented by the ministry of finance on behalf of the government. Both go for ‘quantitative’ as well as ‘qualitative’ progress reports of the performance. The outcome budget is a micro level process while performance budget is a macro-level process in budgeting. There are many outcome budgets in any one performance budget.
The basic objective of such budgeting is to bring in transparency and thereby making the government more and more responsible to the house and the public. Naturally, they bring in prudence and optimisation elements in public spending (also see entry ‘Outcome Budget’ in Chapter 23).

Cut Motion

In democratic political systems, there is a provision of Cut Motion in the House/Parliament (usually it is the opposition but floor might be crossed by members of the House belonging to the government due to presence of inner-party politics). In the US, the budget provisions presented by the government must be passed by the Congress. Only then they can be enacted. Unlike this, in the British parliamentary system though the budget of the government is voted by the House usually this is considered a political document and passed unchanged. India has mixed provisions of voting on the budget after discussion in both the Houses. There are different constitutional provisions by which the Parliament starts discussion to reduce the demands, grants, etc. proposed by the government in the Budget—
(i) Token Cut: This motion intends to ‘reduce the demand by Rs. 100’. Such a motion is moved in order to express a specific grievance which is within the sphere of the responsibility of the Government of India—the discussion remains confined to the particular grievance specified in the motion.
(ii) Economy Cut: This motion intends to ‘reduce the demand by a specified amount’ representing the economy (in expenditure) that can be affected. Such specified amount may be either lump sum reduction in the demand or omission or reduction of an item in the demnd—the discussion remains confined to the matter in which the economy can be affected.
(iii) Disapproval of Policy Cut: This motion intends to ‘reduce the demand to Re. 1’. This represents disapproval of the policy underlying the demand—the discussion remains confined to the particular policy and is open to members to advocate an alternate policy.
(iv) Guillotine is the process in which the Speaker puts all the outstanding demands made by the Budget directly to vote in the House—ending further discussions (intended to cut short the discussion on the Budget). Through this, the Speaker may put the whole Budegt to vote (i.e., allowing ‘no discussion’ on the Budget by the House). In recent years, this route was taken time and again by the Government of India, to avoid the aggressive mood of the Opposition.
Though, this is a short route to get the Budget passed by the House (avoiding criticism by the opposition benches), it may turn out to be very dangerous —as the voting process may take the form of ‘no confidence motion’ and the government may be routed out of power. But, till date, Guillotines never resulted into routing a government out of power in India (as India follows the British Model of Parliamentary system).


Putting the right kind of fiscal policy has always been the most challenging policy decision to be taken by the democratic governments around the world, there are some famous ‘trilemmas’ related to this aspect. Economics have by now many ‘trilemmas’ developed and articulated by economists from time to time and the process still continues. Let us see some highly popular and newsmaking ones:
(i) The ‘financial stability trilemma’ put forward by Dirk Schoenmaker (2008), explains the incompatibility within the Euro zone of :
• a stable financial system,
• an integrated financial system, and
• national financial stability policies.
(ii) By far the most high profile current trilemma of the Eurozone (by Edward Chancellor) was believed to be the seeming irreconcilability between its three wishes, namely,
• a single currency,
• minimal fiscal contribution to bail outs, and
• the ECB’s commitment to low inflation.
(iii) Martin Wolf spoke about the US Republican Party’s fiscal policy trilemma:
• large budget deficits are ruinous;
• a continued eagerness to cut taxes; and
• an utter lack of interest in spending cuts on a large enough scale.
(iv) Then we have the Earth Trilemma (EEE), which posits that for:
• economic development (E),
• we need increased energy expenditure (E),
• but this raises the environmental issue (E).
(v) Above all these more recent trilemmas in economics, the prima donna of all of them is Mundell’s ‘impossible trinity’. This old trilemma asserts that a country cannot maintain, simultaneously, all three policy goals of—
• free capital flows,
• a fixed exchange rate, and
• an independent monetary policy. The impossible trinity, has seen enough waters flowing down the time since it was articulated almost five decades ago which has a strong theoretical foundation in the Mundell-Fleming Model developed in the 1960s.
Dani Rodrik argued that if a country wants more of globalisation, it must either give up some democracy or some national sovereignty. Niall Ferguson highlighted the trilemma of a choice between commitment to globalisation, to social order and to a small state (meaning limited state intervention).

Treasury Computerisation

Governments __________________

A scheme for implementation of the mission mode project ‘Computerisation of State Treasuries’ was put in place by the GoI in June 2010 under the National e-Governance Plan (NeGP). The states and UTs are required to complete their projects in about three years beginning 2010–11. The funds are released against deliverables. The scheme will support states and UTs to fill the existing gaps in their treasury computerisation, upgradation, expansion and interface requirements, apart from supporting basic computerisation. The scheme covers installation of suitable hardware and application software systems in a networked environment on a wide area basis and building of interfaces for data sharing among various stakeholders.
The scheme for treasury computerisation is expected to make the budgeting process more efficient, improve cash flow management, promote real-time reconciliation of accounts, strengthen management information systems (MIS), improve accuracy and timeliness in accounts preparation, bring about transparency and efficiency in public delivery systems, help bring about better financial management along with improved quality of governance in states and UTs. The overall estimated cost of the scheme is Rs. 626 crore at Rs. 1 crore per district in existence on 1 April, 2011. Financial support is up to 75 per cent (90 per cent in case of northeastern states) of the individual project cost of admissible components limited to Rs. 75 lakh per district (Rs. 90 lakh per district for north-eastern states). Funds will be released as central assistance in three instalments of 40 per cent, 30 per cent, and 30 per cent each, subject to satisfactory receipt of utilisation certificates.

Direct Benefit Transfer

In 2015, the new government in Centre introduced the game-changing potential of technology-enabled Direct Benefits Transfers (DBT), namely the JAM (Jan Dhan-Aadhaar-Mobile) Number Trinity solution. It offers possibilities for effectively targeting public resources to those who need them most, and including all those who have been deprived in multiple ways. Under it, the beneficiaries will get the money ‘directly’ into their bank or post-office accounts linked to their 12-digit biometric identity number (Aadhar) provided by the Unique Identification Authority of India (UIDAI). The idea was first initiated by the GoI in 2013 (UPA-II) on pilot basis with seven schemes in 20 district of the country.
Part of the technological platform—the Digital India—it is expected to provide, integration of various beneficiary’ databases with Aadhaar and appropriate process re-engineering. It would result in:
• removal of fake and duplicate entities from beneficiary lists
• prevention of leakage and wastage
• substantial saving of effort, time and cost
• ensuring full traceability of flow of funds to the beneficiary.
• checking the element of corruption through transparency
• accountability of flow of funds
• expenditure rationalisation
Meanwhile, the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Bill, 2016 was passed by the Parliament and enforced by late 2016. This is a transformative piece of legislation which will benefit the poor and the vulnerable. The statutory backing to Aadhar will address the uncertainty surrounding the project after the Supreme Court restricted the use of the Aadhaar number until a Constitution Bench delivers its verdict on a number of cases challenging the mandatory use of Aadhaar in government schemes, and rules on the issue of privacy violation.
To ensure targeted disbursement of government subsidies and financial assistance to the actual beneficiaries, is a critical component of ‘minimum government and maximum governance’ of the Government of India. After the successful introduction of DBT in LPG, the government in 2016–17 introduced it on pilot basis for fertilizer in few districts. Similarly, the government has also started the automation facilities of the 5.35 lakh FPS (Fair Price Shops) which come under the PDS (Public Distribution System).
As per the Union Budget 2017-18, the country has made a strong beginning with regard to DBT with regard to LPG and kerosene consumers—Chandigarh and 8 districts of Haryana have become kerosene free. Besides, 84 Government schemes have also been boarded on the DBT platform. The idea of DBT will also be key to India’s transition to a cashless economy—as pointed by the Economic Survey 2015-16 and vindicated in the post-demonetisation period.
The Economic Survey 2015–16 suggested the DBT solution for farm loans and interest subvention schemes availed by the farmers. It further advised for replacing the existing system of MSP/procurement based PDS with DBT which will free the market of all controls on domestic movement and import. The present system distorts the concept of a market and needs to be discontinued to enhance productivity in agriculture, as per the Survey.

Expenditure Management Commission

By early September 2014, the GoI constituted an Expenditure Management Commission (EMC) through a Resolution. The EMC will look into various aspects of expenditure reforms to be undertaken by the government and other issues concerning Public Expenditure Management. The Commission has one full time, one part time and one ex-officio members other than Chairman of (Cabinet rank). Dr. Bimal Jalan is its first Chairman. The terms of reference of the Commission are as given below:
(i) Review the major areas of Central Government expenditure, and to suggest ways of creating fiscal space required to meet developmental expenditure needs, without compromising the commitment to fiscal discipline.
(ii) Review the institutional arrangement, including budgeting process and FRBM rules, for enforcing aggregate fiscal discipline and suggest improvements theirin;
(iii) Suggest measures to improve allocative effeciencies in the existing expenditure classification system, including focus on capital expenditure;
(iv) Design a framework to imrpove operational efficiency of expenditures through focus on utilization, targets and outcomes;
(v) Suggest an effective strategy for meeting reasonable proportion of expenditure on services through user charges;
(vi) Suggest measures to achieve reduction in financial costs through better Cash Management Ssystem;
(vii) Suggest greater use of IT tools for expenditure management;
(viii) Suggest improved financial reporting systems in terms of accounting, budgeting, etc., and
(ix) Consider any other relevant issue concerning Public Expenditure Management in Central Government and make suitable recommendations.

Need of Public Investment

We see the new government at the Centre initiating several reforms. Together with the experts, the Government of India also believe that this has revived the investor sentiment. But a real investment flow is yet to pick-up, especially from the private sector. The cause for such a situation has been identified as the “balance sheet syndrome with Indian characteristics”. The Economic Survey 2014–15 has analysed this situation in greater details.
In such a scenario, together with other measures, the most important action which has been suggested is “boosting the public investment”. Merit of such an action has been emphasised by the Mid Year Economic Analysis 2014–15, too. The document says that reviving ‘targeted public investment’ will work as an engine of growth in short-term and will lead to investment flows coming in from the private sector. It has not suggested public investment as a substitute for private investment but as a means to complement and kick start investment flows from the latter.

Role of Public Investment __________________

Several recent studies, from India and abroad, have been quoted by the Economic Survey 2014–15 to suggest an increase in the public investment—in a targeted way. Here, ‘targeted’ public investment means, government investment in the sector which can generate the largest ‘spillover effects’ to the economy. In present time, the Railways has that level of spillover potential. The Survey agrres with the famous observation of W. W. Rostow – ‘the introduction of the railways has been historically the most powerful single initiator of take-offs’. The rational for such a policy action has been emphasised by referring to the follwoing documents and studies:
(i) It has been found that there has been a ‘link’ between public and private investment in past which caused either rise or fall in the growth rate. The Central Statistics Office (CSO) data indicate that a ‘boom’ in private corporate investment in the high growth phase of 2004–08 was accompanied by an increase in public investment by about 1.5 per cent.
Similarily, a decline in public investment by more than 1 percentage point between 2008–13, is accompanied by a general decline in private corporate investment by more than 8 percentage points
(except an increase during 2009–10 and 2010–11).
(ii) The World Economic Outlook-2014 (an IMF report) noted that increases in public infrastructure investment, if efficiently implemented, affects the economy in two ways:
(a) In the short run it boosts aggregate demand and crowds in (increases) private investment due to the complementary nature of infrastructure services.
(b) In the long run, a supply side effect also kicks in as the infrastructure built feeds into the productive capacity of the economy (infrastructure being the lifeline of an economy that bringing positive effects to all sectors).
The studies of the IMF confirm that increase in public investment can have positive effects on output. The medium-term public investment multiplier for developing economies is estimated to be between 0.5 and 0.9, however, the magnitudes depend on the efficiency of implementation.
(iii) In order of boosting public investment there are the two challenges in this regard are—
(a) Mobilisation of the financial resources to enhance public investment, and
(b) Implementation capacity.
To the extent implementation capacity is concerned, a sector with the maximum positive ‘spillovers’ together with proven capacity for investing quickly and efficiently, can serve the purpose. Two such sectors are: rural roads and railways. Enhancing road connectivity can have a huge positive spillover on the economy—this has been shown by recent studies—the examples in case are the National Highways Development Project and the PM Gram Sadak Yojana of early 2000s. These public investment moves encouraged rurl employment and earnings.
The Survey believes that the present government should encourage public investment in the hetherto neglected railways sector—it has the potential to have similar effects on the economy as the road sector could do in past. This has the potential to crowd in greater private investment and without jeopardising India’s public debt dynamics.
(iv) Public investment has direct positive bearings on the growth prospects, as per the empirical studies. India’s productivity surge around 1980 was due to boost in productivity led by enhanced public investments in the infrastructure sector (in contrast to the demand creating effects). The study analyses the effects on overall growth using a framework where government infrastructure services are an input into private production. The results of the study indicate that allowing for the appropriate lag (of around five years) between public infrastructure spending and growth, the former can explain around 1.5-2.9 percent of overall growth.
(v) A study by the RBI reports the long run multiplier (of capital outlays on GDP) to be 2.4. The study also confirms that the effect of revenue expenditure on GDP, though high, fades out after the first year, suggesting gains from reprioritizing expenditures.
Thus, the Survey has emphasised a big role of enhancing public investment in the railways sector. It could be started as only public investment. But soon, the impetus given by the government will generate enough avenues and new possibilities that the sector will start attracting enough investment flows from the privates sector. Once such an effect is visible then there are several possible alternatives to promote investment—the PPP to dedicated private inevstments. Railways being a lead infrastructure sector it will bring in multi-dimensional positive spillovers in the economy. Linking people and places has great potential in creating great many numbers of openings in the economy.

Future Outlook

Today, Indian economy is much more exposed to the external dynamism than anytime in past—being unfavourable for the past many years. During this period, its domestic affairs were also not very favourable. For the forthcoming year 2017-18, the following outlook may be predicted:

Real Gross Income__________________

In this regard, it will be useful to examine the four following components of aggregate demand:
• Exports: Exports appear to be recovering on the back of increasing global economic activity. This looks continuing post-US elections which is expected to announce fiscal stimulus. The IMF’s update (World Economic Outlook, January 2017) has projecting an increase in global growth from 3.1 per cent in 2016 to 3.4 per cent in 2017, with a corresponding increase in growth for advanced economies from
1.6 per cent to 1.9 per cent. As India’s real export is highly elastic to global GDP, higher exports can contribute to 1 per cent growth in the year.
• Consumption: The outlook for private consumption is less clear. International oil prices are expected to be about
10-15 per cent higher in 2017 (compared to 2016), which would create a drag of about 0.5 percentage points. On the other hand, consumption is expected to receive a boost from two sources—firstly, catch-up after the demonetisation-induced reduction in the last two quarters of 2016-17; and secondly, due to cheaper borrowing costs (likely to be lower by 0.75 to 1 per cent). As a result, spending on housing and consumer durables and semi-durables could rise smartly. Predicting monsoon prospects for 2017 so early looks difficult thus clues regarding agricultural production are not certain—though the year 2016-17 is estimated to be a record year for foodgrain production.
• Private Investment: Since no clear progress is yet visible in tackling the twin balance sheet (TBS) problem, private investment is unlikely to recover significantly in the year.
• Government: Some of this weakness could be offset through higher public investment, but that would depend on the stance of fiscal for the year, which has to balance the short-term requirements of an economy recovering from demonetisation against the medium-term necessity of adhering to fiscal discipline—and the need to be seen as doing so.
Overall, the real GDP growth is expected to be between 6.75 to 7.5 per cent—the country to remain the fastest growing economy in the world. This prospect for the economy in 2017-18 is though exposed to three main downside risks—
(i) The extent to which the effects of demonetisation could linger into next year, especially if uncertainty remains on the policy response. Currency shortages also affect supplies of certain agricultural products, especially milk (where procurement has been low), sugar (where cane availability and drought in the southern states will restrict production), and potatoes and onions (where sowings have been low). Vigilance is essential to prevent other agricultural products becoming in 2017-18 what pulses were in 2015-16.
(ii) The geopolitics could take oil prices up further than forecast. The ability of shale oil production to respond quickly should contain the risks of a sharp increase, but even if prices rose merely to US $ 60-65 per barrel the Indian economy would nonetheless be affected by way of reduced consumption; less room for public investment; and lower corporate margins, further denting private investment. The scope for monetary easing might also narrow, if higher oil prices invited inflationary pressure.
(iii) There are risks from the possible eruption of trade tensions amongst the major countries, triggered by geo-politics or currency movements. This could reduce global growth and trigger capital flight from emerging markets including India.
The one significant upside possibility is a strong rebound in global demand and hence in India’s exports. There are some nascent signs of that in the last two quarters of 2016. A strong export recovery would have broader spillover effects to investment.

Fiscal Outlook__________________

The fiscal outlook for the central government for next year will be marked by three factors:
(i) The increase in the tax to GDP ratio of about 0.5 percentage points in each of the last two years, owing to the oil windfall will disappear. In fact, excise-related taxes will decline by about 0.1 percentage point of GDP, a swing of about 0.6 percentage points.
(ii) There will be a fiscal windfall both from the high denomination notes that are not returned to the RBI and from higher tax collections as a result of increased disclosure under the Pradhan Mantre Garib Kalyan Yojana (PMGKY). Both of these are likely to be one-off in nature, and in both cases the magnitudes are uncertain. The fiscal gains from it will take time to get fully realised.
(iii) It appears that the GST will probably be implemented later in the fiscal year (as per Government it will be implemented from July 2017). The transition to the GST is so complicated from an administrative and technology perspective that revenue collection will take some time to reach full potential. Combined with the government’s commitment to compensating the states for any shortfall in their own GST collections (for next 5 years at a baseline of 14 per cent increase), the outlook must be cautious with respect to revenue collections. The fiscal gains from the GST will also take time to be fully realized.
The revenue outgo on account of the implementation of the 7th Pay Commission may dilute the fiscal gains discussed above.

Macroeconomic Policy Stance__________________

Important macroeconomic policy requirements and needs will be as analysed below:
• The economy needs policy support to recover smoothly from demonetisation. If bank deposits grow—lending, and yields on G-Secs should be lower—and will provide a boost to the economy. Though, sharp rise in oil prices and those of agricultural products, would limit the scope for interest rate cuts from the RBI.
• The Government needs to continue its fiscal credibility and prudence by remaining committed to reducing fiscal deficit like past four years (it has been set at 3.2 per cent for the year by the Union Budget 2017-18). Fiscal deficit has been reduced by the Government from 4.5 per cent of 2013-14 to 4.1 percent, 3.9 per cent, and 3.5 per cent in the following three years.
• The use of the fiscal windfall (comprising the unreturned cash and additional receipts under the PMGKY) which is still uncertain, will be one key issue. Since the windfall to the public sector is both ‘one off ’ and a ‘wealth gain’ (not an income gain), it should be deployed to strengthening the government’s balance sheet rather than being used for government consumption, especially in the form of programs (that create permanent entitlements). The best use of the windfall would be to create a “public sector asset reconstruction/rehabilitation company/agency” (i.e., advised as PARA) so that the twin balance sheet problem can be addressed—by three possible means:
(i) facilitating credit and investment revival;
(ii) compensating states for revenue shortfalls due to the GST; and
(iii) clearing debt.
Meanwhile, the Government by mid-February 2017 indicated about its willingness to set up such an agency.
• On reforms front , structural reforms will be the most important boost to growth together with—strategic disinvestment, tax reform, subsidy rationalization and addressing the twin balance sheet problem. In the case of the twin balance sheet problem, past experiences suggest that creating a rehabilitation agency (PARA) will be the best way out of the situation.
• Given the difficulty of reforming labour laws, the thrust could be to move towards affording greater choice to workers which would foster competition amongst service providers. Choices would relate to:
(i) whether they want to make their own contribution to the Employees’ Provident Fund Organisation (EPFO);
(ii) whether the employers’ contribution should go to the EPFO or the National Pension Scheme; and
(iii) whether to contribute to the Employee State Insurance (ESI) or an alternative medical insurance program.
At the same time, there could be a gradual move to ensure that at least compliance with the central labour laws is made paperless, presence-less, and cashless.
On the expenditure side, the studies make clear that existing government programs suffer from poor targeting. One ‘radical idea’ to consider is the provision of a universal basic income (UBI). Another more modest proposal worth embracing is procedural—no new welfare programme should be launched without introspecting the improvement angle over the existing ones. Together with it, the government needs to evaluate and phase down existing programmes which are not serving their purposes. It will not only strengthen the cause of welfare targeting but bring in more legitimacy in the state.
1. L. N. Rangarajan (ed.), The Arthashastra, Penguin Books, (New Delhi, 1992).
2. The size of government expenditure for the developed economies stood at almost 10 per cent of their GDPs at the begining of the 20th century—which could rise to 18 per cent only at the outbreak of the second world war—went for a steep rise by 1980 to 40 per cent. The government expenditure was barely 9 per cent of the GDP in India at the time of Independence, nearly doubled in 1970s and reach 75 per cent in the 1980s—when questions were raised about their sustainability as revenue receipts failed to grow adequately resulting in rising budgetary deficits (see Amaresh Bagchi (ed.), Readings in Public Finance, Oxford University Press, (New Delhi: 2005) pp. 1–4.
3. It should be noted here that the world which had the form of the state economy (i.e., the Socialist countries at this time, majority of the economic activities were under government control. As the communist form of the state economy emerged by the late 1940s (i.e., Peoples Republic of China, 1949), it had 100 per cent state control over the economic activities.
4. Collins Dictionary of Economics, op. cit., & Oxford Dictionary of Business, op. cit.
5. Based on the budgetary documents of the Ministry of Finance, Government of India, New Delhi.
6. MInistry of Finance, Union Budget 1987–88 (New Delhi: Government of India, 1987).
7. Review of the Working of the Monetary System, headed by Sukhomoy Chaktravarthy, Reserve Bank of India, Government of India, New Delhi, 1985.
8. Raja J. Chelliah, ‘The Meaning and Significance of the Fiscal Deficit’, in Amaresh Baghi (ed.), Readings in Public Finance, (New Delhi: Oxford University Press, 2005), pp. 387–88. Also see Ministry of Finance, Union Budget 1997–98, (New Delhi: Government of India, 1997).
9. Raja J. Chelliah, ‘The meaning and significance of public deficit’, p. 381 & p. 387. Also see Ministry of Finance, Union Budget 1997–98.
10. Ministry of Finance, Union Budget 1997–98.
11. Raja J. Chelliah, p. 389. Also see Ministry of Finance, Union Budget 1997–98.
12. In the US economy if tax revenue falls short of government expenditures, the government has a fiscal deficit, and it means that the government needs to borrow in the capital market to cover the difference. Opposite to it, if the government runs a fiscal surplus (i.e., its tax revenues exceed its expenditure) then the government, like the household sector, will be a net saver and will represent a source of saving for the economy (see stiglitz and Walsh, Economics, 549).
13. J. K. Galbraith, A History of Economics, (London: Penguin Books, 1987) p. 226. (The whole Chapter XVII on J.M. Keynes (pp. 221–36) is interesting to refer on the topic.)
14. For a detailed discussion on the topic one may refer to Joseph. E. Stiglitz, Economics of the Public Sector, (New York: W.W. Norton, 2000).
15. It should be noted here that although the governments had run deficits (i.e., budget deficit) even before the Keynesian idea of the deficit, the pre-Keynesian thinking was that in peacetime the budget should generally be balanced (i.e., neither deficit nor surplus), or even in surplus so that the government debt created by wartime deficits could be paid off. For further reference on the topic and its constraints, Stanley Fischer and William Easterly, Economics of the Government Budget Constraints, World Bank Research Observer, Vol. 5, No. 2, July 1990, pp. 127–42;
also reproduced in Amaresh Bagchi (ed.), Readings in Public Finance, pp. 301–19.
16. Ibid.
17. Ibid.
18. Ibid.
19. L.N. Rangarajan, The Arthashastra, pp. 259–62.
20. J. Cullis and P. Jones, Public Finance and Public Choice ( New York: Oxford University Press, 1998).
21. The acclaimed definition first came up in the widely used work Macroeconomics by Dornbusch and Fisher which is now available as R.S. Dornbusch, S. Fisher and Richard Startz, Microeconomics, (New Delhi: Tata McGraw-Hill, 2002).
22. John Hicks, the British Nobel Laureate did show it referring changes in taxes and government expenditure using the framework of the famous IS-LM model (Ibid).
23. S. R. Maheshwari, A Dictionary of Public Administration (New Delhi: Orient Longman, 2002) p. 227.
24. In his acclaimed work The General Theory of Employment, Interest and Money, 1936.
25. Stiglitz and Walsh, Economics, p. 729.
26. Samuelson and Nordhaus, Economics, p. 412.
27. Based on the elaboration by Samuelson and Nordhaus, Economics, pp. 412–13.
28. For a detailed data-based discussion refer to Sudipto Mundle and M. Govinda Rao, ‘Issues in Fiscal Policy’ in Bimal Jalan (ed.), The Indian Economy: Problems and Prospects (New Delhi: Penguin Books, 2004),
pp. 258–85.
29. This was the general feeling among experts, policymakers and the IMF, alike.
30. The proximate cause of the payment crisis in the mainstream perspective, was faulty macroeconomic policies, specially large fiscal deficits of the government during 1984–91, deficits that spilled over in country’s current account of the balance of payment. (See Mihir Rakshit, ‘The Micro-economic Adjustment Programme: A Critique’, Economic and Political Weekly 26(34) (August), quoted by Mihir Rakshit, ‘Some Microeconomics of India’s Reform Experience’ in Kaushik Basu (ed.), India’s Emerging Economy: Performance and Prospects in the 1990s and Beyond (New Delhi: Oxford University Press, 2004), p. 84.
31. S. D. Tendulkar and T.A. Bavani, Understanding Reforms (New Delhi: Oxford University Press, 2007) p. 73.
32. Bimal Jalan, India’s Economic Policy ( New Delhi: Penguin Books, 1992) p. 48.
33. Handbook of Statistics on the Economy 2002–03, Reserve Bank of India, Table 221 (cited by Tendulkar and Bhavani, Understanding Reforms, p. 74).
34. Bimal Jalan, India’s Economic Policy, p. 50
35. Reserve Bank of India, The Report of Tenth Finance Commission (New Delhi, Government of India, 1994) (as quoted in Bimal Jalan, India’s Economic Policy,
p. 50.
36. This scheme has changed now. After the implementation of the suggestions of the 12th Finance Commission states are now allowed to go for market borrowings to take care of their plan expenditures once they have passed and enacted their Fiscal Responsibility Acts (FRAs) in consonance with the FRBM Act, 2003.
37. Based on the points raised by Bimal Jalan, p. 49.
38. this factor seems getting redressal with the starting of outcome and performance budgeting 2004–05 onwards.
39. Ministry of Finance, Economic Survey 2006–07, (New Delhi: Government of India, 2007), p. 18.
40. Ibid.
41. Ibid.
42. Ministry of Finance, Economic Survey 2003–04, (New Delhi: Government of India, 2004).
43. Economic Survey 2013–14; 2014–15 and 2015–16.
44. The acceptance to the recommendations of the 13th and 14th Finance Commissions by the Government of India in this regard have been highly effective.
45. We find similar view being forwarded by the Ministry of Finance, Economic Survey 2015–16, Vol. 1 & Vol. 2 (New Delhi: Government of India, 2016).
46. Opposite to it, in the UK, the government has overriding powers on the central bank and there is absence of any legal checks on money creation powers of the government. Once the UK becomes part of the European Union it will come under such a check through the Maastricht Treaty. Before the enactment of the FRBMA, 2003. India was like the UK, however, the Constitution of India has a provision for imposing a statutory limit on the centre’s borrowing powers under Article 292. But the Article is not mandatory and has not been invoked by any of the governments till date.
47. By the Congress passing the Balanced Budget Act, 1997 which promised to eliminate federal deficit spending by 2002 (see Nicholas Henry, Public Administration and Public Policy (New Delhi: Prentice-Hall, 2003), p. 217.
48. Argentina introduced this arrangement in the late 1990s.
49. Ministry of Finance, Economic Survey 1994–95 (New Delhi: Government of India, 1995).
50. IMF imposed some macro-economic conditions on the economy while India borrowed from it for its BoP correction in 1990–91. One among the conditions was cutting down the government expenditure (i.e., salaries, pensions, interest and subsidies, etc.) by
10 per cent every year.
51. George R. Terry and Stephen G. Franklin, Principles of Management (New Delhi: AITBS, 2002), pp. 9–10.
52. See Peter A. Phyrr, ‘The zero Base Approach to Government Budgeting’, Public Administration Review, 37 (Jan./Feb., 1977), 7; and Thomas P. Lauth, ‘Zero-Base Budgeting in Georgia State Government: Myth and Reality’, Public Administration Review, 38 (Sept./Oct., 1978) pp. 420–30; (cited in Nicholar Henry, Public Administration and Public Affairs (New Delhi: Prentice-Hall, 2003), p. 217.
53. Nicholas Henry, Public Administration and Public Affairs, p. 218.
54. In the Constitution of India it is deliberated in the Article 112 (3), a – g, where it is referred as ‘expenditure charged’ on the consolidated fund of India—popular as the ‘charged expenditure’ (see Ministry of Law, Justice and Company Affairs, The Constitution of India, Government of India, New Delhi, 1999), pp. 38–39).
55. See Samuelson and Nordhaus, Economics, 710; stiglitz and Walsh, Economics, pp. 552–54.
56. Mathew Bishop, Pocket Economist, p. 104.
57. Ministry of Finance, Union Budget 2006–07, (New Delhi: Government of India, 2007).
58. Based on the notes released by the Ministry of Finance, Government of India, October 2006 while releasing the Quarterly Review of the Union Budget 2006–07.
59. Rules of Procedure and Conduct of Business in Lok Sabha, Parliament Secretariat, New Dehli.
60. Dirk Schoenmaker, “A New Financial Stability Framework for Europe”, The Financial Regulator, o, 13 (3), 2009.
61. Edward Chancellor, “Germany’s Eurozone Trilemma”, Financial Times, 6 November, 2011.
62. Martin Wolf, “The Political Genius of Supply Side Economics”, Financial Times, 2010.
63. Dani Rodrik, “The Inescapable Trilemma of the World Economy”, 27 June, 2007, (
64. Niall Ferguson, “Conservatism and the Crisis: A Transatlantic Trilemma”, Centre for Policy Studies, Ruttenberg Lecture, 24 March, 2009.
65. Ministry of Finance, Economic Survey 2011–12, p. 69.
66. Ministry of Finance, Economic Survey 2015–16,
pp. 28, 123, 213; Publication Division, India 2016 (New Delhi: Government of India, 2017) pp. 718.
67. W. W. Rostow, The Process of Economic Growth (Oxford: Clarendon Press, 2nd edition, 1960),
pp. 302-303, cited in B. R. Mitchell, ‘The Coming of the Railway and United Kingdom Economic Growth), The Journal of Economic History 24(3), September 1964.
68. International Monetary Fund, World Economic Outlook-2014, Is it Time for an Infrastructure Push? The Macroeconomic Effects of Public Investment, October 2014.
69. Sam Asher Paul Novosad, The Employment Effects of Road Construction in Rural India, Working Paper 2014, quoted by the Ministry of Finance, Economic Survey 2014–15.
70. D. Rodrik, and D. A. Subramanian, From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition, IMF Staff Papers, 52(2), 2005.
71. Robert Barro, ‘Government Spending in a Simple Model of Endogenous Growth”, Journal of Political Economy, 98(5) 1990.
72. Reserve Bank of India, Fiscal Multipliers in India, Box II.16, Annual Report 2011–12, (New Delhi: Government of India, 2012).
73. The discussion is based on the Economic Survey
2016-17, Vol. 1, pp. 20-22 and the Union Budget 2017-18 as well as other announcements of the Government of India.

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