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Indian Economic Policy

Notes As a result, the ratio of fiscal deficit to GDP declined considerably. It declined from 5.5 percent in the
late 1980s to 4.5 percent in the 1990s, and then to 3.2 percent in the 2007-08 Budget (see Appendix).
Fiscal deficit was reduced by restraining the growth rate of both the revenue and capital expenditures.
In order to regularize the fiscal management of the country, an Act — Fiscal Responsibility and
Budget Management Act (FRBMA) — was passed in 2003. The FRBM Act prescribes 3 percent of
GDP as the upper limit for fiscal deficit, to be achieved by 2008-09. The 2007-08 budget estimates
show that the government is close to achieving this target.
Apart from constraints imposed by the FRBM Act, robust economic growth and improved performance
of the manufacturing and services sectors kept the tax revenue buoyant in the last five years. The
average revenue growth rate, over this period, was 16.2 percent and growth rate of net tax revenue of
the central government was 20.7 percent. The gross tax-GDP ratio increased from 8-9 percent during
the preceding decade to 11.5 percent in 2006-07, and is estimated to rise to 12.9 percent in 2008-09
(BE). However, inflation rate has risen from about 5 percent during 2003-07 to 12 percent in July 2008.
In order to control inflation, the RBI adopted a stringent monetary policy. It had raised the prime
lending rates. However, due to low impact of global recession on the Indian economy and a prudent
monetary policy, inflation rate has gone down to a negative rate of — 1.6 percent. But, in 2008-09,
(RE) the fiscal deficit was 6.1 of GDP. The fiscal deficit remains a challenge for the government.
Self-Assessment

1. Choose the correct options:
(i) Federal Reserve Board of Governors members are appointed by the ____________ and
confirmed by the ______________.
(a) Treasury; Congress (b) President; Senate
(c) Federal Reserve presidents; Treasury (d) Public; House of Representatives
(ii) FOMC, the policy making body of the Federal Reserve, stands for _________________________.
(a) Financial Options Management Corporation
(b) Final Organized Money Company
(c) Federal Open Market Committee
(d) Fiscal Operating Money Committee
(iii) The federal funds rate is set by the FOMC and refers to __________________.
(a) The rate that affects what fees banks charge consumers
(b) The rate in which the Treasury measures the deficit
(c) The interest rate that banks are charged to borrow from the Fed
(d) The interest rate that banks use to lend to each other overnight
(iv) The finance commission of India came into existence in
(a) 1951 (b) 19 45
(c) 1972 (d) 1989
24.3 Summary

• The India Constitution has divided the powers in various fields between the Central Government
and States. For instance, in the financial field, it has very elaborate provisions. It may be noted
that the financial relations between the Centre and States are among the most difficult problems
in a federation.
• The Constitution has divided tax-sources between the Centre and the States so that there should
be no overlapping of tax jurisdiction, otherwise, it will cause confusion and conflict. Thus, the
distribution of taxes in India is more logical and thorough than in other federations.

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