Page 252 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 14: Macro Economic Policies: Fiscal Policy

Notes
This striking performance coupled with significant improvement in fiscal
indicators, during the Fiscal Responsibility and Budget Management (FRBM)
Act, 2003 regime definitely put the country on a higher growth trajectory
inspiring confidence in the medium to long term prospects of the economy. The
process of fiscal consolidation during these years has resulted in improvement
in fiscal deficit from 5.9 per cent of GDP in 2002-03 to 2.7 per cent of GDP in
2007-08. During the same period, revenue deficit has declined from 4.4 per cent
to 1.1 per cent of GDP.
In tune with the philosophy of equitable growth, the process of fiscal
consolidation was taken forward without constricting the much-required social
sector and infrastructure related expenditure.
This improvement in the state of public finances was achieved through higher
revenue buoyancy, driven by efficient tax administration and improved
compliance which is evident from increase in the tax to GDP ratio from 8.8 per
cent in 2002-03 to 12.5 per cent in 2007-08.
2. Riding on the path of fiscal consolidation, the Union Budget 2008-09 was
presented with fiscal deficit estimated at 2.5 per cent of GDP and revenue deficit
at 1 per cent of GDP.
However, after the presentation of the Union Budget in February 2008, the world
economy was hit by three unprecedented crises – first, the petroleum price rise;
second, rise in prices of other commodities; and third, the breakdown of the
financial system.
The combined effect of these crises of these orders are bound to affect emerging
market economies and India was no exception. The first two crises resulted in
serious inflationary pressure in the first half of 2008-09. The focus of the monetary
as well as fiscal policy shifted from fuelling growth to containing inflation,
which had reached 12.9 per cent in August, 2008.
Series of fiscal measures both on tax revenue and expenditure side were
undertaken with the objective of easing supply side constraints. These measures
were supplemented by monetary initiatives through policy rate changes by the
Reserve Bank of India and contributed to the softening of domestic prices.
Headline inflation fell to 4.39 per cent in January, 2009. However, the fiscal
measures undertaken through tax concessions and increased expenditure on
food, fertiliser and petroleum subsidies along with increased wage bill for
implementing the Sixth Central Pay Commission recommendations significantly
altered the deficit position of the Government.
3. The global financial crisis in the second half of the financial year which heralded
recessionary trends the world over, also impacted the Indian economy causing
the focus of fiscal policy to be shifted to providing growth stimulus.

The moderation in growth of the economy and the impact of the fiscal measures
taken to stimulate growth can be seen reflected in the estimates for gross tax
revenue which stand reduced from 6,87,715 crore in B.E. 2008-09 to 6,27,949
crore in R.E. 2008-09.
Additional budgetary resources of 1,50,320 crore provided as part of stimulus
package and various committed liabilities of Government including rising
subsidy requirement, provision under NREGS, implementation of Central Sixth
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