Fiscal Policy - Budget and Finance Commission

There are two policies that are announced in India-Monetary Policy and Fiscal Policy.

The Monetary policy is announced by RBI where as the fiscal policy is announced by the government

Fiscal Policy is also referred to as public finance, is the sum total of all the financial decisions taken by the government regarding expenditure and revenues. Fiscal policy is very important as the expenditure by a government depends on the revenue that it is generating. The policy also refers to the quality expenditure i.e. target subsidies, have more expenditure under the capital head etc.

The objectives of fiscal policy are

To mobilize financial resources

To direct the expenditure

To maintain economic stability

To promote and accelerate growth

Some of the decisions that are taken under fiscal policy are

Budget

Finance Commission

Taxation system

Subsidy

Disinvestment etc

Budget

Budget is presented under article 112 as Annual Financial Statement

The government cannot withdraw money from the consolidated fund of India without the approval of Parliament

Two types budgets are presented in a financial year-Railway and Union

It is presented on the last working day of February in Lok sabha by the finance minister but before that the President addresses the parliament (lays down the cause of the budget)

Lok Sabha enjoys more powers compared to RS (it can only recommend changes but it is the prerogative of LS to accept/reject the recommendations)

No tax shall be levied or collected except by authority of law

The budget is prepared by Department of Economic affairs (Ministry of Finance)

Under the budget, 14 documents are presented and the most important documents are

o Summary document

o Appropriation bill

o Finance bill

o FRBMA documents

The budget has two accounts-expenditure (appropriation bill) and revenue (finance bill)

FRBMA (Fiscal Responsibility and Budget Management Act) 2003- it was passed so as to provide fiscal consolidation. Under this the government of India proposedto reduce FD, RD, but the recession in 2008-09, has led to higher expenditure by the government. The government is on the way to implement FRBMA. In May 2016, government has set up N K Singh committee to review implementation of FRBMA

Process of passage

o Government obtains the prior recommendation from the president to present the budget. The President addressed the parliament and lays the cause for the budget.

o The Budget is then presented on the floor of Lok Sabha by the Finance Minister with the "Budget speech".

o It is then presented on the floor of the Rajya Sabha for discussion, but Rajya Sabha does not have the power to vote on the demands for grants.

o The Discussion on Budget in the Lok Sabha is conducted in two stages-General Discussion (includes broad discussions on the budget, cut motions are not allowed) and Detailed Discussion (done after the standing committee presents the reports, during this stage the cut motions are allowed to be introduced, demand for grants are voted and passed)

o After the voting, an Appropriation Bill is introduced and voted on, which authorizes the government to withdraw and spend money from the Consolidated Fund of India.

o After this the finance bill is introduced, passed and sent for president’s assent.

o For the procedure to be over usually it takes till the end of may but till thenthe government has to incur certain expenditure, which is allowed to be withdrawn with passage of Vote-on-Account (which is usually one sixth thevalue of total demand for grants)

Cut motions

o Economy Cut= the demand for the grants is reduced by the certain amountbased on the economies

o Token cut= to address a grievance of a member, the amount is reduced by Rs 100

o Policy cut= if the underlying policy (regarding the demand) is faulty then the demand for grants is reduced to Rs 1

Budget is divided into two accounts-Capital and Revenue account

o Capital Account-contains items which lead to creation of assets

Capital Receipts

Capital Expenditure

o Revenue Account-day today items which do not lead to creation of assets

Revenue Receipts

Revenue Expenditure

Deficits

o Revenue Deficit=difference between revenue expenditure and revenue receipts

o Budget Deficit= difference between budget expenditure and budget receipts

o Fiscal Deficit=difference between total expenditure and non-debt creating capital receipts

o Primary Deficit=is the deficit if there was no interest liability (the interest is paid in the present year on the loans that were taken in the past)

PD=FD-Interest Payments

o Monetized Deficit= is the scenario wherein the GoI asks RBI to print fresh currency to bridge the deficit

FRBMA 2003

o Bring down revenue deficit by 0.5% per year and eliminate it by 2007-08.

o Bring down fiscal deficit by 0.3% per year and bring it down to 3% by 2007-08.

o Central government not to provide guarantee (for more than 0.5% GDP) onthe loans of PSU and state governments

o Total liabilities of central government not to increase by more than 9% per year

o Union Government would place three more documents along with the budget documents viz. Macroeconomic Framework Statement, Medium Term Fiscal Policy Statement and the Fiscal Policy Strategy Statement.

o At the end of second quarter, the Finance Minister would make a statement on the trend of fiscal indicators and corrective measures taken thereof.

o Recently the GoI has set up a committee headed by former revenue secretary N K Singh (to submit the report by October 31, 2016)

Review the functioning of the Act in the last 12 years and suggestingchanges

Review the factors that are taken into consideration in determining yearly targets

Whether to have fixed or a range for FD

Can the government re-align FD with the changes in the credit flow in the economy

“We do not require a separate Railway budget"- provide the supporting explanationAnswer

o Post independence railways accounted for more than 75% of public transport and 90% of freight traffic which has been reduced to 20% and 40% respectively in recent times

o Size of Railway budget is small compared to Union Budget (during British era it accounted for more than 80% of the value of the budget but it has come around 10% compared to the size of union budget)

o Since the railways budget was prepared separately from the union budget, there was duplication of efforts, higher involvement of officials, higher expenditure etc

o One of the prominent features of Railway budget has been populist measures, with the merger, this would be somewhat brought under control

o Recommendation of Bibek Debroy Committee-the railway is presented separately as a convention and there is no constitutional provision which

dictates that. Hence all it takes is the executive decision of the governmentto merge it with union budget.

o Presently there is an urgent need to have an integrated transport modal mix in India which can provide seamless transportation. To achieve this merger is necessary.

o The 7th Pay Commission Recommendations will increase the burden on its wage bill. With the implementation of the 7th PC, the salary burden on the ministry will be increasing by more than 50%- from Rs.53,000 crore to Rs.77,325 crore in 2016-17 (not accounting for other costs such as pensions)

o The investment and growth in the railways has been the focus of criticism-the railway lines are of 66000 kms of which only 17000 kms have been laid down post independence

14 th Finance Commission

Was appointed on 2nd January 2013 under the chairmanship of Y V Reddy and the terms of reference given to it are

o Recommendations regarding the devolution of taxes between the Center and the States from the divisible pool which includes all central taxes (excluding surcharges and cess)

o Suggestions regarding the principles which would govern the quantum anddistribution of grants-in-aid

o the measures if needed, to augment State government finances to supplement the resources of local government and to review the state of the finances, deficit and debt conditions at different levels of government

the recommendations are applicable for a period of five years (from 2015-16 to 2020-21)

the major recommendations are

o Vertical Devolution-The 14th FC has recommended a new vertical devolution (the proportion of distribution of central divisible pool of taxes between the centre and the states) formula under which the share of states from the central divisible pool of taxes from 32% to 42%

Finance Commission Share of states out of central divisible pool

11th 29.0%12th 30.5%13th 32.0%14th 42.0%

o Horizontal Devolution- The 14th FC has recommended a new horizontal devolution formula under which the variables for the calculation of the individual states’ share out of the total share allocated for the states

Variable 13th FC 14th FCPopulation (1971) 25.0% 17.5%Population (2011) 00.0% 07.5%Fiscal Capacity/Income Distance 47.5% 50.0%Forest Cover 00.0% 07.5%Area 10.0% 15.0%Fiscal Discipline 17.5% 00.0%Total 100% 100%

o Other types of grants proposed-grant to rural and local bodies, performance grant, disaster relief etc (Rs 5.3 lakh crore)

o It has not given any recommendations regarding sector specific grants (given under 13th FC-recommended the grants be given under roads, bridges, education, water sector management etc)

Features

o The devolution to the state governments has received the highest jump/increase

o Another feature is that the recommendations are progressive in nature- the states with lower NSDP will be receiving on average much larger transfers per capita

o The flow of the grants to the local bodies and urban bodies will be increasing

o Some of the gainers as a result of new methodology are Madhya Pradesh, Bihar, Uttar Pradesh, Chhattisgarh, Karnataka, Jharkhand etc

FISCAL POLICY/ PUBLIC FINANCE

The main objectives are

To mobilize financial resources

To direct the expenditure

To maintain economic stability

To promote and accelerate growth

Fiscal Policy consists of

Budget

Finance Commission

Taxation system

Subsidy

Disinvestment etc

BUDGET-POINTS TO BE COVERED

Important points of budget

Important concepts

Process of Budgeting

Railway budget

14th Finance Commission

IMPORTANT CONCEPTS

Types of Accounts-

Consolidated fund

Public Account

Contingency fund

Types of Bills

Money Bill

Financial Bill

Constitutional Amendment Bill

Ordinary Bill

IMPORTANT CONCEPTS (CONTD…)

Expenditure charged (non-votable) and

expenditure made (votable)

Cut motions

Economy cut

Policy Cut

Token Cut

Appropriation and Finance Bills

FRBM Act 2003

BUDGET PASSAGE

BUDGET-TWO ACCOUNTS

Government Expenditure

Revenue Expenditure

>Law and Order

>Defence

>Interest Payment

>Subsidies

>welfare payments

>Pension Payments

Capital Expenditure

>Exp on Infrastructure

>Repayment of Loans

>Loans to states, UTs etc

DEFICITS

Revenue Deficit

Budget Deficit

Fiscal Deficit

Primary Deficit

Monetized Deficit

RAILWAY BUDGET

DO WE NEED RAILWAY BUDGET?

Size of Railway budget is small compared to Union Budget (usually around 10% compared to the size of union budget)

Recommendation of Bibek Debroy Committee-no constitutional requirement

Integration required into union budget to have a seamless national travel policy

The 7th Pay Commission Recommendations will increase the burden on its wage bill

FINANCE COMMISSION

Set up under article 280

Set up by the President every fifth year

Consists of 5 members 1 chairman+4 members

Qualification Chairman must have experience in public affairs

Judge of HC or one who is qualified

Person who has specialized knowledge in finance and accounts of the government

Person who has experience in financial matters and administration

Person with special knowledge in economics

Terms of reference

Distribution of taxes between centre and states

Principles governing grant-in-aid to states by the centre

Measures needed to augment consolidated fund of India

Any other matters referred to it

14th Finance commission (2015-20)

Finance Commission

Share of states out of

central divisible pool

11th 29.5%

12th 30.5%

13th 32.0%

14th 42.0%

14th Finance commission (2015-20)

14TH FINANCE COMMISSION

The 14th Finance Commission has given a new

horizontal formula

Has included two new variables-forest cover and

population (reduced weightage Fiscal Discipline

to zero)

Other types of grants proposed-grant to rural and

local bodies, performance grant, disaster relief

etc (Rs 5.3 lakh crore)

A WATERSHED MOMENT

New Vertical and horizontal devolution formula

Has proposed transfers to local bodies, grants for disaster management, grants for performance etc (will transfer more that Rs 5.3 lakh between 2015-20)

The FFC transfers are more progressive because of the new transfer formula (is a better methodology to transfer than CAS-Central Assistance to States)

The states have better fiscal discipline and it will improve because of transfers through FFC

14TH FC-HIGHER FLOW TO THE STATES?

QUESTIONS

With reference to the Union Government consider the following statements. (2015)

1. The Department of Revenue is responsible for the preparation of Union Budget that is presented to the parliament

2. No amount can be withdrawn from the Consolidated Fund of India without the authorization of Parliament of India.

3. All the disbursements made from Public Account also need the Authorization from the Parliament of India

Which of the following statements given above is/are correct?

a) 1 and 2 onlyb) 2 and 3 onlyc) 2 onlyd) 1, 2 and 3

QUESTIONS

There has been a persistent deficit budget year after year. Which of the following actions can be taken by the government to reduce the deficit? (2015)

1. Reducing revenue expenditure

2. Introducing new welfare schemes

3. Rationalizing subsidies

4. Expanding industries

Select the correct answer using the code given below.

(a) 1 and 3 only

(b) 2 and 3 only

(c) 1 only

(d) 1,2,3 and 4

QUESTIONS

With Reference to the Fourteenth Finance Commission, which of the following statements is/are correct? (2015)

1. It has increased the share of States in the central divisible pool from 32 percent to 42 percent

2. It has made recommendations concerning sector-specific grants

Select the correct answer using the code given below.

a) 1 only

b) 2 only

c) Both 1 and 2

d) Neither 1 nor 2

QUESTIONS (200 WORDS)

Critically evaluate the recommendations of 14th

Finance commission

Discuss the process of budgeting

We do not require a separate Railway budget-

Analyze

Implementation of recommendations of 14th FC is

a watershed movement-Discuss

INDIA

&

INTERNATIONAL

TRADE

POINTS TO BE COVERED

Exchange Rate

Fed Tapering

Balance of Payments

Foreign Trade Policy

Position of the Indian government

EXCHANGE RATE

RECEIPTS-DOLLAR INFLOWS-SUPPLY

Exports of goods and services

Inflow of tourists

Inward remittances

Borrowing by the government from external agencies

FDI/FPI

Deposits by NRIs

PAYMENT-DOLLAR OUTFLOW-DEMAND

Imports of goods and services

Indians going abroad for study/tourism

Outward remittances

Repayment of loans/interest

Outward FDI/FPI

Withdrawal of NRI deposits

FOREIGN EXCHANGE

Popularly referred to as “FOREX”

The conversion of one country's currency into

that of another.

It is the minimum number of units of one

country’s currency required to purchase one unit

of the other countries currency.

Three Types – Fixed, Floating and Managed

SOME TERMS

Devaluation and Revaluation

Depreciation and Appreciation

FOREX MARKET-EQUILIBRIUM

CURRENCY CRISIS

When a currency depreciates (usually by 15% of

its value) in a quick time then the situation is

referred to as a currency crisis

If the currency continues to depreciates then it

completely looses its value

In India the central bank intervenes to stabilize

the currency by selling the dollars in the market

and purchasing rupees. This is referred to as

Dirty float

RBI INTERVENTION IN THE MARKET

FACTORS INFLUENCING THE EXCHANGE RATE

FEDERAL TAPERING &

FED POLICY RATE

BASICS

BASICS

BASICS

FED TAPERING – QUANTITATIVE EASING

QUANTITATIVE EASING

It is an unconventional Monetary Policy

It is an expansionary monetary policy

The central bank uses it when all the other tools being used does not have an intended effect

Under this the central bank goes ahead and starts buying the government securities or reduces the lending rate to a very minimal level which leads Cheap credit

Higher liquidity

Origin Country (OC)-USA (usually developed countries)

Source Country (SC)-India (usually developing countries)

IMPACT

Positives The credit is available in the OC at a cheaper cost

Boosts the lending and investment

Will boost job generation

There will be flow of capital from origin country into sourcing country

Will increase the capital flow into the stock markets of sourcing country

Negatives

Will affect the domestic currency value of sourcing country

Will affect exports and imports

Will likely lead to inflation in sourcing country

Considerable part of the money that comes in is “hot money”

FED TAPERING

Federal Reserve goes for tapering (is an indicator of growth)

Supply of dollars become lesser

Foreign investors such as FPIs will withdraw investments

Rupee depreciation-good for exports and bad for imports and apart from it there are external

borrowings (impact on the Balance on Payments)

WHY WAS FEDERAL FUNDS RATE HIKED?

The GDP growth rate has been 2%

The Unemployment rate has come down to 4.6%

Inflation rate is at a comfortable position -1.2%

The Federal Reserve answers to the Joint Economic

Committee of Legislature

FEDERAL FUNDS RATE-IMPACT ON INDIA

Capital flight

Higher volatility/liquidity

Devaluation of Indian currency/Rupee

Will make imports costlier (gold, crude oil etc)

May hurt the investment that was flowing into start-

ups

IMPACT ON INDIA

IMPACT ON INDIA

FED TAPERING-HOW TO CONTROL IMPACT

Higher foreign exchange reserves

Moderate global commodity prices

Fiscal consolidation

Easing inflation

Higher inflows through other measures-NRI

deposits, inward remittances etc

BOP A/C

REVENUE EXPENDITURE

CURRENT

A/C

EXPORTS

INVESTMENT

INCOME

INREMITTANCES

IMPORTS

DEBT SERVICE

PAYMETS

OUTREMITTANCES

CAPITAL

A/C

FOREIGN LOANS

FDI

FII

FOREIGN LOANS

FDI

FII

TERMS

There are two accounts-Current and Capital

Balance of Trade

BoT=Exports ~ Imports

Exports>Imports BoTS

Exports<Imports BoTD

Current A/C

Revenue>Expenditure CAS

Revenue<Expenditure CAD

India Faces BoTD and CAD because of higher imports

BoP surplus/deficit and BoP crisis

TERMS (CONTD…)

How to take care of BoPD

> Increasing exports

> Decreasing imports

> Doing above two simultaneously

> Encouraging more FDI and FII

> Reduction of non-essential imports

> Currency Devaluation

> Long term way-out is increasing exports

Note-the exports should be made as a function of quality than quantity

ECONOMIC SURVEY 2015-16

TRADE DEFICIT

FTP 2015-20

GOVERNMENT EXPOSURE

TOTAL EXPOSURE

CURRENCY SWAPS

Done usually by companies and the governments

Under this the exposure/risk to exchange rate

fluctuation is hedged

Involves exchange of a notional principal and

interest with one another in order to gain

exposure to a desired currency

QUESTIONS

The price of any currency in international market

is decided by the (2012)

1. World Bank

2. demand for goods/services provided by the country

concerned

3. stability of the government of the concerned country

4. economic potential of the country in question

Which of the statements given above are correct?

(a) 1, 2, 3 and 4

(b) 2 and 3 only

(c) 3 and 4 only

(d) 1 and 4 only

QUESTIONS

Which of the following constitute Capital Account? (2013)

1. Foreign Loans

2. Foreign Direct Investment

3. Private Remittances

4. Portfolio Investment

Select the correct answer using the codes given below.

(a) 1, 2 and 3

(b) 1, 2 and 4

(c) 2, 3 and 4

(d) 1, 3 and 4

QUESTIONS

The balance of payments of a country is a

systematic record of (2012)

(a) all import and export transactions of a country

during a given period normally a year

(b) goods exported from a country during a year

(c) economic transaction between the government of

one country to another

(d) capital movements from one country to another

QUESTIONS

Discuss the FTP 2015 and in the present economic turmoil that the targets can be achieved

Explain fed tapering and possible impact on India and what can the government of India do to reduce it

Discuss various types exchange rate mechanisms

Discuss the role of RBI in deciding the exchange rate mechanism

Discuss the factors that would affect the exchange rate

India and International Trade

Exchange Rate

Foreign Exchange or Forex is the market where the currencies are bought/sold

It is the minimum number of units of one country’s currency required to

purchase one unit of the other countries currency or vice versa. The need for

changing our currency with other arises as India trades with rest of the world

(apart from trade there is also remittances, investment, tourism etc)

There are three methods of determining the exchange rate

o Fixed

o Floating

o Managed

Fixed ER

o It is the system of following a fixed rate for converting currencies.

o In this system, the government (or the central bank acting on its behalf)

intervenes in the currency market in order to keep the exchange rate close

to a fixed target.

o It does not allow major fluctuations from the central rate.

o Example-Currency Board (Singapore and Argentina-The currency board

fixes the exchange rate. Especially useful during the hyperinflation when

there is a lot of money under circulation)

o Advantages

It ensured stability in forex market

Countries could formulate long term policies

During the period of stability and certainty, the trade grows faster

o Drawbacks

It’s a rigid system, which doesn’t factor in changing economic

scenario

It would bring in stagnancy in the policies of the governments

The situation in each of the countries keeps changing with time

Floating

o Under the flexible exchange rate system, the rate of exchange is allowed

to vary to suit the economic policies of the government.

o Flexible exchange rates are exchange rates, which fluctuate according to

market forces.

o The value of the currency is determined solely by the forces of demand

and supply in the exchange market

o Advantages

Try to attain efficiency

Try to eliminate the need to hold foreign reserves

Try to eliminate barriers on the trade and capital movements

o Drawbacks

The volatility

Can have an impact on the exporters/importers

Managed

o Managed means the exchange rate system has attributes of both systems.

o Managed exchange rate systems permit the government to place some

influence on an exchange rate that would otherwise be freely floating.

Through such official interventions it is possible to manage both fixed and

floating exchange rates.

o India-Managed Market Determined Exchange Rate (The methodology

adopted by RBI has been referred to as a Dirty Float)

o China-Pegged Exchange Rate Mechanism

Devaluation and Revaluation

o Devaluation and Revaluation are done by the Central bank

o In devaluation more home currencies are offered for every unit of foreign

currency and vice versa happens in revaluation

o Devaluation makes imports costlier and gets higher returns on exports

and Revaluation makes imports cheaper and returns on exports are

reduced

Depreciation and Appreciation

o Are determined by market based on supply and demand of currencies

o No role of the government

o Depreciation makes imports costlier and gets higher returns on exports &

Appreciation makes imports cheaper and returns on exports are reduced

Currency Crisis- Whenever there is a continuous outflow of dollars, it leads to

appreciation of dollar and depreciation of rupee and if this scenario (where there

is a gradual erosion of faith in the domestic currency leading to domestic

currency being converted to just a piece of paper) is not contained then the

domestic currency will lose all its value, hence to prevent this situation, the

central bank intervenes wherein it dumps the dollars and buys rupee from the

market thereby stabilizing the value of domestic currency. Post the 2008 crisis,

RBI dumped around $900 mn in order to stabilize the rupee.

Factors influencing the exchange rates

o Interest rates- various investors are on the lookout for the country that

pays higher interest. Whenever a country pays higher interest foreign

currencies will flow into this country thereby leading to appreciation of the

domestic currency and the domestic investors also will invest within the

same country

o Incomes- the rise in the income denotes higher expenditure on

consumption as a result of which the demand for imported goods will

increase thereby leading to depreciation of the domestic currency

o Inflation- the cost of the goods in a country with lower inflation rate will

increase slowly and steadily compared to a country where the inflation

rate will be high. As a general rule it has been seen that the country with

lower inflation has experienced appreciation in its domestic currency as

the purchasing power in this country is higher compared to other

countries.

o CAD- CAD represents how much exports and imports have been done in a

short term. If the import value is more it means the country has to pay

more in terms of dollars compared to how many dollars it has earned. In

simple terms when a country suffers from CAD, there is a depreciation of

the domestic currency

o Public Debt- higher government or public debt means, that the

government has to borrow more and this situation leads invariably to

inflation thereby depreciating the domestic currency

o Terms of Trade- is the ratio of export prices to import prices. If the export

prices continuously increase compared to import prices then there is a

huge inflow of dollars leading to appreciation of domestic currency

o Political Stability- it has more to do with the confidence of the investors. If

a country has exhibited good political stability with sound economic

principles then the foreign investors are attracted towards such a country,

thereby leading to appreciation of domestic currency

Balance Of Payments

It represents the trade relationship of a country with rest of the world i.e.

balance of expenditure and revenue that a country must pay/receive from the

rest of the world

The BoP, has two accounts-Current account and capital account

o For every component on revenue side there is a component on the

expenditure side

o Revenue represents inflows, where as expenditure represents outflows

REVENUE EXPENDITURE

CURRENT A/C EXPORTS INVESTMENT INCOME

INREMITTANCES

IMPORTS DEBT SERVICE PAYMETS

OUTREMITTANCES

CAPITAL A/C FOREIGN LOANS FDI FII

FOREIGN LOANS FDI FII

o The current a/c has the exports in visible (goods/merchandise) and

invisibles (services), income and transfers (grants, gifts and remittances)

o The capital a/c capital inflows (debt or equity; maturity) and has FDI, FPI,

loans etc

Balance of Trade (BoT) - the trade is in the form of merchandise/goods. The BOT

could be surplus/deficit

o BOT Deficit = value of exports<value of imports

o BOT Surplus = value of exports>value of imports

India suffers from BoTD (from April 2015 to January 2016); India exported $ 217.7

bn and imported $ 324.5 bn, leading to trade deficit of $106.8 bn. The exports

declined by 17.6 and imports by 15.5% during this period. It was because

o Decline in the oil prices

o Decline in the global demand for commodities such as steel and

aluminum

Current Account

Revenue>Expenditure = CAS (Current a/c surplus)

Revenue<Expenditure = CAD (Current a/c deficit)

Although on the face of it, CAD is dangerous, a developing county such as India

(which is scarce in resources) will require high imports, which may lead to deficit

but a higher CAD might cause more harm

The CAD can be bridged by a country by

◦ Using part of the gold stocks that it has

◦ May use foreign currency reserves

◦ May borrow loans

◦ Attract investments and deposits

Generally the countries prefer the last mode as it is in their interest

Which is more dangerous-CAD or FD

Comparatively CAD is more dangerous because

o CAD is in terms of dollars and FD is in domestic currency

o CAD is external and FD is internal

o Fluctuations in exchange rates will have impact on CAD

BoP-overall the BoP account can be a surplus or a deficit. If it is deficit then the

foreign exchanges are taken from the third account-Forex Account (Balancing

Account) and the deficit is bridged. If the reserves in the forex account are falling

short then this scenario is referred to as BoP crisis. The last time India suffered

from BoP crisis was in 1991 and it had approached IMF for assistance.

How to take care of BoPD

o Increasing exports-the exports lead to accumulation of the foreign

currencies

o Decreasing imports will reduce the outflow of foreign currencies

o Doing above two simultaneously

o Encouraging more FDI and FII (more inflow of dollars)

o Reduction of non-essential imports

o Currency Devaluation

o Long term way-out is increasing exports (and it should be noted that the

exports have to made a function of quality)

Foreign Trade Policy (2015-20)

o Is applicable for a period from 2015-2020

o MEIS and SEIS (Service Exports from India Scheme)-all the previous

schemes for promoting merchandise exports have been merged into MEIS.

Served From India Scheme (SFIS) has been renamed as SEIS. Certain listed

goods and services sent to certain listed countries will get incentives

o Aim is to increase the exports from India to $900 bn by 2020 (since 2011,

our exports are hovering around $ 300 bn and if the target has to be

achieved then the exports have to grow by CAGR of 23% which is very

ambitious)

o The duty credit scrips are transferable

o FTP to be aligned with Make In India

o Challenges

Port Infrastructure needs huge improvement as they handle almost

95 per cent of trade volumes or 68% in terms of value

There has to be ease of documentation

The banks must provide credit for both import and export,

warehousing facilities etc

SHYAM S KAGGOD

(ECONOMICS FACULTY-BYJU’S)

POINTS TO BE COVERED

Taxation-concept

Types of taxation systems

Some concepts-GST, Capital gains tax, cess etc

Problems with Indian Taxation System

Progressive & Regressive

Direct & Indirect

Advalorem & Specific

Tax avoidance and Tax evasion

Surcharge & Cess

Countervailing & Antidumping

Types of Taxation Systems

SOME OF THE CONCEPTS

Service tax

VAT

Presumptive Taxation

GAAR

Capital Gains tax

GST

GST-CASCADING EFFECT

A B C Selling

Price=₹ 100 Selling

Price=₹ 130

Tax @ 10%

Will buy it

at ₹ 110 &

adds profit

of ₹ 20 Tax @ 10%

Will buy it

at ₹ 143

GST-INPUT TAX CREDIT

A

Tax paid is ₹ 100

B

Tax paid is ₹ 120

C

Tax paid is ₹ 130

Tax to be paid

is ₹ 400

INPUTS

OUTPUT

Tax Paid to

the

government

is ₹ 50

WHY GST?

Cascading effect

Multiplicity of indirect taxes

Setting off not allowed/difficult in some case

The transportation costs will add to the costs

Lines between goods and services have blurred (eg-

IPR are considered goods for imposing sales tax and

as services for imposing service tax)

GST

Streamlining/subsuming all the indirect taxes-

one nation one indirect tax

First introduced in 2011 and again in December

2014

115th CAB and 122nd CAB

PROVISIONS OF GST BILL

The bill empowers both central and state governments

to take decisions/make laws regarding taxes

GST council

Set up by the president

Union Finance Minister + state Finance ministers

Functions-model GST laws, taxes/surcharge/cess to

be levied by the centre and state, exemptions to be

given etc

GST council to decide regarding resolution of disputes

PROVISIONS OF GST BILL

PROVISIONS OF GST BILL

The additional Interstate GST will be levied by

central government (additional levy of 1%

withdrawn)

Exemption-alcoholic liquor for human

consumption, GST council to decide when to

impose taxes on crude petroleum, high speed

diesel, petrol, natural gas and Aviation Turbine

Fuel (ATF)

Compensation to be given for 5 years

GST

OLD VS NEW

Old method GST

Goods and services were taxed

separately

No differentiation between Goods

and services

Different states different tax rates Uniform tax rates across the

country

National market not possible National market can be

established

Tax on production (origin based

taxation)

Tax on consumption (target/end

based taxation)

Cascading effect No cascading effect

Many indirect taxes Only one

Setting off in some cases not allowed Setting off is allowed

GST EXAMPLE

SUBRAMANIAN COMMITTEE

Simplify tax administration, protect revenues and encourage

compliance

Three rates-Standard rate (17% to 18%),Lower rate

(12%),Sin rate/demerit rate (40%)

Alcohol and real estate must be brought under GST

1% Interstate GST should not be implemented

Compensation to reinforce trust between centre and states

GST implementation must be evaluated every 1 or 2 years

SUBRAMANIAN COMMITTEE

COMPOSITION SCHEME

BENEFITS OF GST IMPLEMENTATION

GST - CONCERNS

Anti-Profiteering measures

Tax rate - multiple tax rates

Revenue protection

e-Way bill system

Inflation

Compliance amongst the small businesses

SOME OF THE PROBLEMS RELATED TO

INDIAN TAX SYSTEM

India under taxes and under spends compared to developed countries

The ratio of voters to tax payers is only 4% (it should be 23%)

The exemption limits have been increased from time to time (in case of Income Taxes)

Most of the economy is not covered under taxation. Only 5.5% of the income earners pay tax

Government provides tax exemptions to corporates

EXEMPTION LIMIT

STEPS TO BE TAKEN BY GOI

To refrain from raising exemption thresholds

Reducing corruption

Subsidies for the well-off need to be scaled back

Property tax needs to be developed

SOME TAXATION REFORMS

GoI has announced that it will be phasing out tax

exemption given to corporates (tax incentives to the

corporates for 2015-16 were Rs 68711)

SOME TAXATION REFORMS

Recommendations of R V Easwar committee report to be implemented

Computerization of IT department work

The tax refunds must be provided faster and in case of delays the beneficiary has to be incentivized

Treat stock trading returns up to Rs 5 lakh as capital gains and not as business income

TDS rates for individuals must be reduced from 10% to 5%

GST reform

GAAR reform

QUESTIONS

Which one of the following is not a feature of “Value Added Tax”? (2011)

(a) It is a multi-point destination-based system of taxation

(b) It is a tax levied on value addition at each stage of transaction in the production-distribution chain

(c) It is a tax on the final consumption of goods or services and must ultimately be borne by the consumer

(d) It is basically a subject of the Central Government and the State Governments are only a facilitator for its successful implementation

QUESTIONS

The sales tax you pay while purchasing a

toothpaste is a

(a) tax imposed by the Central Government.

(b) tax imposed by the Central Government but

collected by the State Government

(c) tax imposed by the State Government but

collected by the Central Government

(d) tax imposed and collected by the State

Government

QUESTIONS

What is/are the most likely advantages of implementing

‘Goods and Services Tax (GST)’?

1) It will replace multiple taxes collected by multiple authorities

and will thus create a single market in India.

2) It will drastically reduce the ‘Current Account Deficit’ of India

and will enable it to increase its foreign exchange reserves.

3) It will enormously increase the growth and size of economy of

India and will enable it to overtake China in the near future

Select the correct answer using the code given below:

(a) 1 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

QUESTIONS

Consider the following statements

1. Tax revenue as a percent of GDP of India has steadily increased in the last decade

2. Fiscal deficit as a percent of GDP of India has steadily increased in the last decade

Which of the statements given above is/are correct ?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

QUESTIONS (200 WORDS)

Discuss the recommendations of Subramanian

Committee on GST

Discuss the recent initiatives of the Indian

government in the taxation segment

‘GST is not the panacea for all the ills of Indian

Economy’ –critically evaluate

GST regime represents an improvement in form as

well as substance compared to previous tax regime-

explain

QUESTIONS

GST has led to co-operative federalism/economic

Union of India-elaborate

GST though revolutionary needs fine-tuning if

India wants to reap its benefits-discuss

GST implementation rather than reducing the

litigation may lead to tax terrorism-discuss