Indian Fiscal System - Explained

Indian Fiscal System – Explained

Fiscal System:

It refers to the management of revenue and capital expenditure finances of the state.

Fiscal Policy:

Refers to the use of taxation, public expenditure and the management of the public debt in order to achieve certain specified objectives.

Sources of Revenue:

Main sources of Revenue are customs duties, exercise duties, service tax, taxes on property, corporate tax, income taxes.

Sources of Expenditure:

• Plan Expenditure: It includes agriculture, rural development, irrigation and flood control, energy, industry, minerals, transport and communications etc.
• Non Plan Expenditure: It consists of interest payments, defence, subsidies and general services.

Public Debt:

• Internal Debt: It comprises loans raised from the open market treasury bills issued to the RBI, Commercial Banks, etc.
• External Debt: It consists of loans taken from world bank, IMF, Asian Development Bank and individual countries.

Deficits: 

In a budget statement, four types of deficits are mentioned these are

1. Revenue deficit
2. Budget deficit
3. Fiscal deficit
4. Primary deficit

Explanation: 

• Revenue Receipts = Tax Revenue (net of state’s share) + Non tax revenue
• Revenue Expenditure includes :

a)    Interest Payments

b)    Major Subsidies

c)    Defence Expenditure

•       Capital Receipts includes:

a)    Recovery of loans

b)    Other Receipts (Mainly PSU disinvestment)

c)    Borrowings and other Liabilities

d)   Capital expenditure is huge expenditure e.g. Repayment of pas loan including PPF (Private Provident Fund) and small saving.

•      Total Expenditure = Revenue Expenditure + Capital Expenditure + Plan Expenditure + Non Plan Expenditure.
•      Fiscal Deficit = Total Expenditure – Revenue Receipts – Recovery of Loans – Proceeds from Disinvestment.
•       Revenue Deficit: It is the difference between Revenue Receipts and Revenue Expenditure. It shows the current fiscal situation of the government.
•       Revenue Deficit = Total revenue expenditure – Total revenue receipts.
•       Primary Deficit = Fiscal Deficits – Interest Payments.

Effective Revenue Deficit announced in Budget 2016-2017, it is the difference between revenue deficit and grants on creation of capital assets.