The Indian Budget 1996-97 The Indian Economy Overview


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Fiscal Developments

  1. According to normal practice, the Economic Survey preceded the presentation of the Interim-Budget and accounts data for 1994-95 and revised estimates for 1995-96 are available only now for a reassessment of fiscal stabilisation. Over the past five regular budgets the fiscal deficit has declined as a proportion of GDP from 8.3 per cent in 1990- 91 to a revised 5.9 per cent in 1995-96 (Table 5). Much of this decline occurred, however, in the first year. Since then the fiscal deficit has hovered around six per cent of GDP, except for 1993-94 when the fiscal deficit was 7.5 per cent. This borrowing represents the Central Government's draft on the savings available to the economy for productive investment. The 2.4 per cent reduction in the fiscal deficit has been brought about by a sharper 3.2 per cent reduction in the primary deficit (equal to fiscal deficit minus interest payments). The primary deficit represents the effort made by the Government to control the deficit, as interest payments are largely predetermined by past borrowing. Unfortunately, this reduction in the primary deficit has been partly offset by a 0.8 percentage point increase in interest payments as a proportion of GDP. This, in turn, is largely a legacy of preceding primary deficits accumulated as debt. The revenue deficit, on the other hand, has fallen only by 0.4 per cent of GDP over these five budgets, from 3.5 per cent of GDP to 3.1 per cent of GDP and remains too high for comfort.

  2. The revised estimates for 1995-96 confirm the success of the strategy of tax reform pursued in the last few years. Elements of the strategy include simple and more economically rational tax structures, lower rates, wider bases and more effective tax administration. Initially, as Table 5 shows, the ratio of gross tax revenues to GDP fell from 10.8 per cent in 1990-91 to 9.5 per cent in 1993-94, after which it recovered to 10.1 per cent in 1995-96 (RE). The recovery in tax revenue collections has been spearheaded by the outstanding performance of direct taxes which increased from 2.1 per cent of GDP in 1990-91 to 3 per cent in 1995-96 (RE), with their share in gross tax collections rising from 19 per cent in 1990-91 to 29 per cent in 1995-96. The average buoyancy of personal income taxes, as measured by the ratio of change in the tax revenue to change in GDP at current prices, has risen from an average of 1.1 in 1986/87 - 1990/91 to 1.5 during 1991/92 - 1995/96 (RE). Similarly, the buoyancy of corporate income tax revenues has risen from an average of 0.8 during 1986/87 - 1990/91 to 1.7 in 1991/92 - 1995/96 (RE). The increasing role of direct taxes and the reduction in dependence on customs duties (Table 5) has enhanced both the equity and efficiency of the tax system as direct taxes are generally favoured as more progressive and customs duties are viewed as trade-distorting.
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