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Indian Economy / Fiscal System

Components of Fiscal System in India

Fiscal system of any country is nothing but the comprehensive structure of Government's revenues and expenditures and the organizational framework within which the Government agencies gather and disburse such funds.

Components of Fiscal System

There are four components in fiscal system namely, Taxation, Public Debt, Deficit Financing and Public Expenditure.

  • Taxation

    • Taxation is necessary tool for mobilizing resources.

    • In India, indirect taxes account for about 51% of the gross tax revenue, while the direct taxes account for about 49% of the gross tax revenue.

    • Gross tax revenue constitutes about 17% of the GDP.
  • Public Debt

    • It represents Government borrowings either from within the country or from external commercial borrowings.

    • Internal liability constitutes more than 95% of the total outstanding liability and it is a high cost debt.

    • Outstanding debt by the end of fiscal year 2017-18 works out to be about 70% of the GDP.

    • Public debt increases money supply which in turn will lead to inflation.
  • Deficit Financing

    It is nothing but filling up the gap between the revenue and the expenditure by borrowing from RBI through the Treasury Bills, which are being auctioned by Reserve Bank Of India.

    At present, they are having 91 days, 182 days and 364 days of maturity. It is one of the easy source of money and has shown alarming growth trend. It will cause inflation.

  • Public Expenditure

    It is the expenditure that is made by the Government. Expenditure incurred on infrastructure, basic industries and irrigation projects is desirable.

    Non-plan expenditures like interest payments, administrative expenses, subsidies, etc. have been on the rise which looks a cause of concern.

Fiscal Responsibility and Budget Management (FRBM) Act, 2003

The important objectives of FRBM Act are

  • To eliminate the revenue deficit and build revenue surplus.

  • To bring down fiscal deficit to 3% of the GDP in nominal terms.

  • Greater transparency in the fiscal operations and review of the fiscal situation quarterly.

  • Regulating direct borrowing from RBI through Treasury Bills in order to control the expenditure and effect the fiscal discipline. There should be borrowing directly from the RBI through Treasury Bills only under exceptional situations, like natural calamities.