Fiscal Reforms in India

Abstract

Fiscal Policy assumes a central place in the overall macroeconomic framework. As government sector and private sector compete for resources and for consumption in the economy, fiscal policy needs to be designed in a framework where an increase in government activity would result in net gains to the economy even when it may negatively impact in private sector activity, or reduce foreign exchange reserves or increase the monetary base. The specific objectives of the research are as to addresses the vital area of reforms, viz. fiscal reforms, to evaluate the impact of fiscal reforms on the public finances of the Union and state governments to analyze the outcome of the different tax measures and public expenditure, .to form a view of the effectiveness of fiscal reforms. Fiscal reforms have initiated a right kind of approach to maintain fiscal discipline in the Indian economy and the Indian economy has met it successfully at the national level however there has been some problems at the state level. Fiscal reforms have brought a new vision and mission for the government both central and state towards competitiveness and efficient mode for managing the economy The research work has analyzed the work of specialized institutions/ organizations of the govt. of India and RBI. The data are mostly sourced from budget documents of govt. of India , articles on central govt. finance published by RBI, finance accounts of govt. of India, handbook of statistics on the Indian economy published by RBI Compared the performance of the fiscal variables in the post reform decade to the extent possible subject of availability of data & put them in simple tabular form The policy simulation results revealed that fiscal deficit, in general, resulted in widening the current account deficit if it is money- financed. In this case, the price and income effects reinforce each other, leading to the deterioration in the external balance both in the short-run and in the long-run. Thus, the recourse to deficit financing to promote public investment and growth involves a loss of control on inflation The study will have an important implication in development programmes and public policies Key -Words:- Fiscal reform, Critical study, Indian economy, Fiscal discipline,Govt. policies I. Introduction In the post-independence years, with the gradual abatement of political and economic uncertainty, stimulating and accelerating growth was one of the primary objectives of fiscal policy. In a nascent economy where the income levels and financial savings were low, the fiscal assumed the responsibility of creating the capital base in the form of infrastructure to stimulate growth. Thus, India embarked on a planning process since 1950 which assigned a large role to the public sector and taxation was made the mainstay of public finances. Early empirical literature on the operation of fiscal policy in India since independence was, thus, skewed more in favor of taxation reflecting its significance in the strategy of resource mobilization for planned development. With the public sector assuming the ‗commanding heights' of the economy during the plan era, studies on public expenditure were closely associated with the performance of the five-year plans. Fiscal policy focused on achieving greater equity and social justice during the 1970s and both taxation and expenditure policies were employed towards fulfilling this objective. High marginal tax rates did not yield the necessary revenue to support the envisaged public expenditure. The growth in receipts thus lagged behind the surge in disbursements despite substantial amount of resources mobilized through additional taxation and hike in the administered prices. Thus, during the 1980s Indian public finance was in a state of disarray with the fiscal pattern destabilizing the relationship between the economy and the budget. This resulted in persistently large deficits which were seemingly intractable. Therefore, the decade of 1980s could be called the decade of fiscal deterioration which, in turn, raised the question of sustainability of fiscal stance of the Government. Empirical research thus, took cognizance of alternative concepts of deficit to analyze its impact on the economy. The fiscal semblances of the 1980s spilled over to the external sector resulting in the macroeconomic crisis of 1991. Another disquieting feature of the fiscal system was the large size of monetized deficit which exerted inflationary pressures. The persistent and burgeoning revenue deficit which became endemic in the system pre-empted the borrowed resources, reducing the availability of resources for capital investment. The structural adjustment programme and the consequent economic reforms gave a fresh dimension to empirical analysis of fiscal policy which focused not only on the various instruments of fiscal policy and issues of debt but also on the overall fiscal sustainability in the context of an open economy framework. Although the first half of the 1990s witnessed some fiscal correction, its retraction