Economic Survey 2020-21: Vol 2 Ch 2: Fiscal Developments

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The fiscal policy response of the Government of India to the pandemic was distinct from other countries. Unlike many other countries that chose a front-loaded grand stimulus package for revival of the economy, the Government of India adopted a step-by-step approach. This chapter reviews the fiscal developments in India both before and after the outbreak of the pandemic. It also talks about the fiscal performance and policy response to the pandemic in the, followed by the section on the major reforms introduced in tax administration.

Fiscal situation and response
  • The pandemic year 2020-21 came with fiscal challenges for the Indian economy, which were characterized by additional expenditure requirements directed towards ensuring basic means of sustenance and livelihoods for the vulnerable people, relief measures, etc. A careful strategy followed by govt was- categorizing the ministries into three:
    1. Ministries in category ‘A’ were providing relief or welfare to the public. No expenditure restrictions were placed on these Ministries and in fact, enhanced allocations were made available to them.
    2. Other Ministries that were not directly involved in the pandemic were placed in the category ‘B’ and allowed to spend 20% of their budget per quarter.
    3. Ministries with low priority in the pandemic situation were placed in category ‘C’ and allowed to spend 15% of their budget in each of the first two quarters. 

This categorization enabled the Government to ensure that funds for essential activities were made available in full despite a sharp contraction in revenue receipts and that scarce resources were conserved for re-prioritization.

  • Other than pandemic relief, the Government has placed maximum priority on productive domestic capital expenditure. The capital expenditure during the last three months of the year 2020 recorded a phenomenal growth of 129.5% in October, 248.5% in November and 81.9 per cent in December.
  • Adoption of countercyclical expansionary fiscal policy in times of crisis is expected to boost the growth in GDP both directly, and indirectly through multiplier effects on private consumption expenditure and private investment. Higher GDP growth would thereby facilitate buoyant revenue collection in the medium term, and thereby enable a sustainable fiscal path.

 Analysis of the performance of fiscal indicators and their components (April to November 2020):

  1. The non-debt receipts have been adversely hit by the slump in economic activity after the pandemic outbreak. During April to November 2020, the non-debt receipts have registered a growth of -17.9% relative to the corresponding period last year. This shortfall is attributed to a fall in all components of non-debt receipts viz. net tax revenue, non-tax revenue and non-debt capital receipts. 
  2. The Gross Tax Revenue during the first eight months of 2020-21 was Rs.10.26 lakh crore, 42% of BE, 12.6 per cent lower than in the same period last year. This decline was owing to the negative growth in all direct taxes and major indirect taxes, except excise duties. In particular, the shortfall in direct tax collection contributed to 92 per cent of the shortfall in Gross Tax Revenue.
  3. The shortfall in indirect taxes from April to November 2020 was led by a shortfall in customs and GST collections for the Centre.
  4. The adverse market conditions arising due to COVID-19 have also negatively impacted the Government’s plans to achieve the target for disinvestment receipts, which is a major component of Non-debt Capital receipts.
  5. The revenue expenditure has grown by 3.7% during the first eight months of 2020-21 compared to the same period in 2019-20. The revenue expenditure has grown by 3.7% during the first eight months of 2020-21 compared to the same period in 2019-20.

  6.  The decline in global petroleum prices acted as an important fiscal shock absorber during 2020-21, as it led to a decline in petroleum subsidies and an increase in revenue collection from excise duties.
  7. In order to support the creation of long term assets and infrastructure, the Central Government had enhanced the budget provision for Capital Expenditure on roads, defence, water supply, urban development and domestically produced capital equipment by 25,000 crores for FY 2020-21.

The Fiscal Policy response to  COVID-19 across the globe

  • The fiscal measures adopted have been diverse, comprising of above the line measures, below the line measures and contingent liabilities (guarantees, quasi-fiscal operations).
  • “Above-the-line” measures include those for which full cost is reflected in the fiscal deficit, government debt, and increased borrowing needs in the short term. These measures include additional spending (for example, health services and unemployment benefits.
  • “Below-the-line” measures are defined as generally involve the creation of assets, like equity injections, loans, asset purchase etc., which may have little or no upfront impact on the fiscal deficit all although they can later increase debt or reduce liquidity.
  • Estimates by IMF show that the Government of India announced above the-line measures equivalent to 2.2 per cent of GDP and other liquidity support measures of around 5.3% of GDP up to September 2020.

 

Fiscal Stimulus by Government of India

Government of India and RBI together announced a total stimulus worth 29.87 lakh crore, which is 15% of national GDP. Out of this, stimulus worth 9% of GDP has been provided by the Government under Atma Nirbhar Bharat Package. This stimulus was provided in the following tranches:

  1. The special economic and comprehensive package announced from 13-17 May 2020.
  2. Measures to stimulate consumer spending in the economy announced on 12 October 2020.
  3. Measures under Atma Nirbhar Bharat 3.0 announced on 12 November 2020.

When the economic recovery began after the lifting up of the lockdown, the focus of the stimulus measures shifted towards on investment boosting measures like Production Linked Incentives, enhancing capital expenditure and steps to encourage investment in the infrastructure sector. This change in the mix of the stimulus measures reflects that the fiscal policy had the flexibility of adapting to an evolving situation in order to enable a resilient recovery.

 

Reforms in Tax Administration

The platform for ‘Transparent taxation- Honoring the Honest’ was launched in August 2020 with an objective to impart greater efficiency, transparency, and accountability, and to eliminate physical interface between taxpayers and tax officers. The key features of the platform are :

  1. Usage of technology, data analytics and Artificial Intelligence and
  2. Recognizing taxpayers as partners in nation-building.

The Platform stands on 3 pillars of tax administration reforms namely, Faceless assessment, Faceless appeal, and Taxpayers’ charter.

Faceless Assessment Scheme 2020

  • It was started with the idea that automated random allocation of cases across Income Tax and elimination of face-to-face contact Fiscal Developments between the income-tax authorities and the taxpayer can lead to an efficient, non-discretionary, unbiased single window system of assessment.
  • In 2020, its scope was broadened by bringing all the pending assessment cases across the country within the purview of the Scheme and declaring that any order passed outside the scheme shall be invalid.
  • The scheme establishes a National Faceless Assessment Centre (NFAC) in Delhi, headed by Principal Chief Commissioner of Income Tax, as the sole point of contact between the Department and the taxpayer.
    • All notices or communications to and from the taxpayer, and internal communications related to the assessment process within the Department are routed through the NFAC.
    • There are various Regional Faceless Assessment Centers are vested with the power to make assessments.

Faceless Appeals Scheme 2020 

  • Under Faceless Appeals Scheme, 2020, all Income Tax appeals will be finalised in a faceless manner under the faceless ecosystem with the exception of appeals relating to serious frauds, major tax evasion, sensitive & search matters, International tax and Black Money Act.
  • The Scheme establishes a National Faceless Appeal Centre (NFApC) as the apex body for the conduct of e-appeal proceedings in a centralized manner.
    • Under the NFApC are Regional Faceless Appeal Centers (RFAC) to facilitate the e-appeal proceedings.
    • The Appeal Units, headed by one or more Commissioner (Appeals) and are placed under the RFAC.
    • The NFApC will be the only point of contact between the taxpayer and the underlying Appeal Units; and Appeal Units and NeAC/Assessing Officer.
    • All internal and external communication takes place electronically and the assessee or the Assessing Officer are not required to attend the proceedings personally or through an authorized representative.

Taxpayers’ Charter

  • The taxpayer’s charter for India comprises of commitments by the Income Tax Deparment and obligations of the taxpayers.
  • It emphasizes the importance of fair, courteous and reasonable treatment to the taxpayer.
  • India's Experience with an independent tax ombudsman:
    • In India, the institution of Income Tax Ombudsman was created in 2003 and Indirect Tax Ombudsman came to existence in 2011.
    • Since the functioning of Ombudsman was governed by the guidelines (Income Tax Ombudsman Guidelines 2010 and Indirect Tax Ombudsman Guidelines 2011), and there was no act of law empowering it with different functions, the institution of Ombudsman was ineffective and the decisions only advisory in nature.
    • The Ombudsman could settle complaints either through agreements between the complainant and the tax department through conciliation and mediation or by passing an award, with a token compensation for loss suffered by the complainant not exceeding Rs. 5,000.
    • The institutions of Ombudsman for direct and indirect taxes were, therefore, abolished in February 2019.
    • The present tax grievance redressal system consists of grievance cells headed by department officials/ Aaykar Sewa Kendras (ASK), e-nivaran portal which is a separate and dedicated window for grievance redressal in the Income Tax Business Application, and CPGRAMS (Central Public Grievance Redress and Monitoring System).
    • The global experience suggests that countries with an independent tax Ombudsman have performed better on the tax administration front through better trust between taxpayers and tax authorities, and have exhibited a higher average Tax to GDP ratio and lower time taken to file taxes (OECD 2017).
    • However the institution, in India's past experience, was not effective and was abolished.
    • A possible reason may have been inadequate independence from the tax department. Therefore, there is a need to reinvigorate the systems of grievance redressal in India and incorporate a more holistic view of enhancing customer experience and protecting taxpayer rights.
    • In such a case to avoid the conflict of interest, ensure fair dealings and consequently build the trust between taxpayers and the concerned tax authority, it is imperative that the redressal organisation has adequate teeth and is independent of the tax department.
    • Such an institution would thereby make the ‘Honoring the Honest’ platform more successful by ensuring accountability and trust in the tax administration system.

 

Trends in Government Finances: Centre, States and General Government

Trends in Receipts:

  • Central government receipts can broadly be divided into Non-debt and debt receipts. The Non-debt receipts comprise of tax and Non-Tax revenue, and Non-debt Capital receipts like recovery of loans and disinvestment receipts. Debt receipts mostly comprise of market borrowings and other liabilities, which the government is obliged to repay in the future.
  • The direct taxes, comprising mainly of corporate and personal income tax, constitute around 55% of (Gross Tax Revenue)GTR.
  • Non-Tax Revenue comprises mainly of :
    1. interest receipts on loans to States and Union Territories,
    2. dividends and profits from Public Sector Enterprises including a surplus of Reserve Bank of India (RBI) transferred to the Government of India, receipts from services provided by the Central Government and external grants.

  • Non-debt Capital receipts mainly consist of recovery of loans and advances, and disinvestment receipts. . The major component of Nondebt Capital receipts is disinvestment receipts that accrue to the government on the sale of public sector enterprises owned by the government.

Trends in Expenditure:

  • Revenue Expenditure constitutes over 87% of the total expenditure. A significant proportion of revenue expenditure goes to salaries, pensions and interest payments, etc.
  • Hence the focus of expenditure restructuring and management measures is targeted on the non-committed component such as subsidies.
  • In 2016, approximately 66 Centrally Sponsored Schemes were rationalized into 28 Umbrella Schemes. The cycle of these Schemes was also made co-terminus with the Finance Commission cycle, to ensure more clarity on the flow of resources available to both the Union and the State Governments over a Finance Commission cycle.
  • In 2019-20, there was an increase of 13.9% in the subsidy bill of the Government, as the food, fertilizer and petroleum subsidies grew by 7.3%, 14.9% and 34.5% respectively, relative to 2018-19.
  • With a low tax to GDP ratio, the Central Government faces the challenge of providing sufficient funds for investment and infrastructure expansion while staying within the bounds of fiscal prudence.
  • Therefore, improving the composition and quality of expenditure assumes significance. Over the past few years, the quality of expenditure measured in terms of the share of capital expenditure in total expenditure has on an average sustained at a level. 

  • Apart from these, there are Extra Budgetary Borrowings (EBRs). They are those financial liabilities that are raised by public sector undertakings for which repayment of entire principal and interest is done from the Central Government Budget.

Transfer to States:

  • The Budget 2020-21 envisaged a rebound in the total transfers to States from 5.7% of GDP in 2019-20 RE to 6% of GDP in 2020-21 BE.
  • The Central Government has accepted the recommendations made by the Fifteenth Finance Commission (FC-XV) in its Report for the financial year 2020-21, relating to the Post Devolution Revenue Deficit Grant, Grants to Local bodies and Disaster Management Grants for the financial year 2020-21. They are:
    • FC-XV recommended Grant-in-Aid amounting to Rs. 1.99 lakh crore for transfer to States during 2020-21 for Post Devolution Revenue Deficit Grant,
    • Grants to Local bodies and Disaster Management Grants which is approximately 50% higher than recommended by the FC-XIV for the award year 2019-20
    • Out of the corpus of Rs. 90,000 crore allocated as a grant for local bodies in the year 2020-21, 32.5% has been recommended for urban local bodies and the remaining for rural local bodies.
    • the local bodies grant during the year 2020-21 were also allocated to Fifth and Sixth Schedule Area as well as Mandal/Tehsil and District/Zila Panchayats in case of rural local bodies, and also allocated to fifty-nine Cantonment Boards in case of the urban local bodies.
    • Moreover, for the first time, Finance Commission grants were also allocated for the purpose of improving ambient air quality in million-plus cities/ urban agglomerations.

Central Government Debt

  • Total liabilities of the Central Government include debt contracted against the Consolidated Fund of India, technically defined as Public Debt, as well as liabilities in the Public Account.
  • Total liabilities of the Central Government at end-March 2020 stood at Rs. 97.05 lakh crore.
  • Out of these, 88.67% was public debt and the remaining 10 per cent catered to Public Account liabilities, which include National Small Savings Fund, State Provident Funds, Reserve Funds and Deposits and other Accounts.
  • Trends show that total liabilities of the Central Government, as a ratio of GDP, declined steadily immediately after the enactment of the FRBM Act, 2003, and has sustained at a level during the last decade.


  • Central government debt is characterized by low currency and interest rate risks. This is owing to a low share of external debt in the debt portfolio and almost the entire external borrowings being from official sources.
  • Another positive trend seen was reduced rollover risks. The proportion of dated securities maturing in less than five years has seen a consistent decline in recent years. 

State Finances

  • The RBI Study on State Finances highlights the decline in actual capital spending relative to BE observed in the states for the last 3 years (2017-18 Actuals, 2018-19 Actuals and 2019- 20PA).
  • This may have adverse implications for the pace and quality of economic development, given the high fiscal multiplier effect of capital expenditure.
  • In fact in the current year, when the states are dealing with the pandemic with constrained fiscal space, capital expenditure can play a pivotal role in the recovery process.
  • In order to re-orient the focus of the States’ fiscal policy on capital expenditure, Central Government has announced Scheme for Special Assistance to States for Capital Expenditure during FY2021.
  • Measures taken by the Centre to support the States in times of COVID-19:
    1. Enhanced limit of borrowing for FY2020-21 under Atma Nirbhar Bharat package:.
    2. Compensation to the States for loss in GST revenue
    3. Scheme for Special Assistance to States for Capital Expenditure
    4. Special one-time dispensation to the SDRF

General Government Finances

  • The General Government liabilities as a proportion of GDP exhibit an increasing trend over the last few years.
  • However, in the wake of the global pandemic outbreak, the General Government (Centre plus states) is expected to register a fiscal slippage on account of the shortfall in revenue and higher expenditure requirements.
  • This deviation from the path of fiscal consolidation may however be transient as the fiscal indicators may rebound with the recovery in the economy.

 

Key economic terms at glance:

Fiscal consolidation It is defined as concrete policies aimed at reducing government deficits and debt accumulation.
Fiscal slippage  It is any deviation in expenditure from the expected.
Rollover risk It is a risk associated with the refinancing of debt. Rollover risk is commonly faced by countries and companies when a loan or other debt obligation (like a bond) is about to mature and needs to be converted, or rolled over, into new debt.
Countercyclical fiscal policy This policy takes the opposite approach: reducing the spending and raising taxes during a boom period, and increasing the spending, and cutting taxes during a recession.
Multiplier effect It refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending. For ex: a money multiplier effect is used to analyze the effects on the money supply.



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