Trade policy review report by the secretariat



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1.2  Fiscal Policy


              1. India's fiscal deficit as a ratio to GDP has declined in recent years. Based on the Fiscal Responsibility and Budget Management Act (FRBMA) and a Medium-Term Fiscal Policy Statement in each year's annual budget, India has continued a process of fiscal consolidation; the central Government deficit stood at 4.5% in 2013-14, a decline from 5.7% in 2011-12, mainly achieved by reduction in expenditure. The current target for fiscal consolidation under the FRBMA, as revised in September 2012, is to achieve a central Government deficit of 3% of GDP by 2017-18; accordingly, the Government aims to achieve a target of reducing the fiscal deficit to 3.5% in 2016-17. Although progress has been made recently, achieving fiscal consolidation in the medium-term still remains a challenge for India, in particular considering its infrastructure needs and growth targets. The ratio of central Government debt to GDP decreased in 2013-14 to 46.3% (estimates) compared with 50.6% in 2010-11.14 Some 96% of India's (central Government) debt is domestic. Fiscal deficits of States amounted to around 2.3% of GDP in 2014-15 (compared with 1.9% in 2011 12).

              2. India classifies its expenditure as revenue (current) and capital, and plan and non plan (interest payments, subsidies, defence expenditure, payrolls, and pensions). The thrust of public expenditure management policies has been to rationalize non plan revenue expenditure by, for example, requiring cash-rich public sector enterprises to transfer higher dividends to the central Government, and raising the levels of plan expenditure, preferably capital expenditure. In this context, the authorities consider that certain subsidies, e.g. the food subsidies, have huge overhead costs, and not all the budget allocated to the subsidy reaches the poor; in other cases, e.g. subsidies on fertilizers, the expenditures generate a distorted resource allocation to the detriment of productivity.15 Expenditures on subsidies can be streamlined in various ways, such as approving a new direct tax code that would entail streamlined and smaller tax deductions, reforming untargeted subsidies on fuel and fertilizer, and strengthening governance and transparency in the allocation of subsidized food and making use of direct cash transfers instead.16 In 2014, India began adopting unique identification numbers for individuals (Aadhaar) with a view, inter alia, to identifying beneficiaries of subsidies and providing know-your-customer (KYC) norms in financial services.17 While a new system of subsidized procurement and distribution of food has been introduced under the National Food Security Act 2013, the authorities consider that it is increasingly feasible and more effective for poverty reduction than the existing subsidy programmes to adopt direct cash transfer to the poor with the use, inter alia, of the identification numbers and payment through mobile phones.18

              3. India's tax-to-GDP ratio stood at 7.4% in 2013-14 and is estimated to stand at 7.6% in 2014 15 (Table 1.3); the authorities consider this ratio to be low and in need of improvement by, for example, broadening the tax base.19 The authorities consider that India has a complex tax system that suffers from problems in structure (e.g. tax exemptions, tax rebates, uneven tax treatment of similar economic activities) and administration.20 Parliament is still in the process of approving the goods and services tax (GST) as well as a direct tax bill, which is envisaged to remove a large number of cesses and tax exemptions.21

Table 1.3 Central Government's tax revenue, 2010-15

(Rs billion and %)






2010-11

2011-12

2012-13

2013-14

2014-15a

Total tax revenue, net of states' share (Rs billion)

5,698.7

6,297.6

7,402.6

8,360.3

9,772.6

(% of GDP)

7.3

7.0

7.3

7.4

7.6




(% of total tax revenue)

Direct taxes

55.3

54.9

53.4

54.4

53.7

Corporation taxes

37.7

36.3

34.4

34.0

33.0

Personal income taxes

17.5

18.5

19.0

20.4

20.4

Indirect taxes

43.4

44.1

45.7

44.8

45.8

Customs

17.1

16.8

16.0

15.1

14.8

Excise duties

17.4

16.3

17.0

15.4

15.1

Service taxes

9.0

11.0

12.8

14.2

15.8

a Provisional estimates.

Source: WTO Secretariat, based on information provided by the Indian authorities.




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