Fiscal System deals with the receipts and expenditure of the government. The policy governing this system is known as fiscal policy of the government.

Thus, the two major features of fiscal system are:

(i)   Raising of revenue and

(ii)  Incurring of expenditure by the Government. 

The essence of a fiscal system is the management of finances by the State, which includes:

• Assessment of the requirements of the State from time to time,
• Modalities of raising revenue and supervision and
• Control of administrative machinery intended to raise revenue and incur expenditure for the objectives of the State. 

The Ministry of Finance is responsible for administration of finances of the Government. It is concerned with all economic and financial matters affecting the country as a whole including mobilisation of resources for development and other purposes.  It regulates expenditure of the Government including transfer of resources to the states. This Ministry comprises three departments, namely, (i) Economic Affairs, (ii) Expenditure and (iii) Revenue.

The Department of Economic Affairs consists of eight main divisions, namely,

(i)  Economic;  (ii) Banking;  (iii) Insurance;  (iv) Budget;  (v) Investment;  (vi) External Finance;  (vii) Fund Bank and (viii) Currency and Coinage.

The Department inter alia monitors current economic trends and advises the Government on all matters of internal and external economic management including working of commercial banks, term-lending institutions, investment regulations, external assistance, etc. Preparation of the Budget of the Union of India as well as the state governments and union territory administrations with legislature when under the President’s rule and their presentation to the Parliament is also the responsibility of the Department.

Constitutional angle

Power to raise and disburse public funds has been divided under the Constitution between the Union and the State governments.  Sources of revenue for Union and State are, by and large, mutually exclusive, if shareable taxes and duties between them are excluded.  The Constitution provides that:

• No tax can be levied or collected except by an authority of law;
• No expenditure can be incurred from public funds except in the manner provided in the Constitution; and
• Executive authorities must spend public money only in the manner sanctioned by the Parliament in case of the Union and by the state legislature in the case of a state. 

All receipts and disbursements of the Union are kept under two separate headings, namely, the Consolidated Fund of India and Public Account of India.  All revenues received loans raised and money received in repayment of loans by the Union form the Consolidated Fund.  No money can be withdrawn from this Fund except under the authority of an Act of Parliament.  All other receipts, such as deposits, service funds and remittances go into Public Account and disbursements there from are not subject to the vote of Parliament.   To meet unforeseen needs not provided in the Annual Appropriation Act, a Contingency Fund of India has been established under Article 267(1) of the Constitution.  The Indian Constitution provides for the establishment of a Consolidated Fund, a Public Account and a Contingency Fund for each state.

The Railways, the largest public undertaking, present their budget separately to the Parliament. Appropriations and disbursements under the Railway budget are subject to the same form of parliamentary control as other appropriations and disbursements. However, as the Railways have no separate cash balance of their own, total receipts and disbursements of the Railways are incorporated in the budget of the Union as part of the Central Budget. 

Sources of Revenue

The main sources of the Union tax revenue are customs duties, Union excise duties, corporate and income taxes. Non-tax revenues largely comprise interest receipts, including interest paid by the Railways and Telecommunications, dividend and profits earned by PSEs. The main heads of revenue in states are taxes and duties levied by the respective state governments, share of taxes levied by the Union and grants received form the Union.  Property taxes, octroi and terminal taxes are the mainstay of local finance.

Transfer of Resources

Devolution of resources from the Union to the states is a salient feature of the system of federal finance of India.  Apart from their share of taxes and duties, state governments receive statutory and other grants as well as loans for various development and non-development purposes.

PUBLIC DEBT

Public debt [1]includes internal debt and external debt. In the expression public debt and “other liabilities”, “other liabilities” include outstandings against the various small saving schemes, provident funds etc. It includes private sector borrowings too.

[Public debt is justified as the government does not have adequate resources and taxation cannot be done beyond a point. It should be for productive reasons and also welfare reasons. The spiral of deficit and debt run the risk of undermining the country’s creditworthiness, devaluating the entire economy with grave social consequences. Therefore, it should be incurred judiciously.]

As on March’2015, total public debt stood at 71.6% of GDP and the 14^th finance commission recommends restricting public debt to 62% of GDP.

External Debt

External debt includes both the government and private debt.

• The share of non-government debt in total external debt is about 80%.
• India’s total external debt stood at $483.2 billion during September’2015[2].

[The strategy of the government in external debt management consists of emphasis on raising sovereign loans on concessional terms with longer maturities, regulating the levels of commercial borrowing and their end-use, rationalizing interest rates on NRI deposits, monitoring short term debt and encouraging non-debt creating capital flows.]

• India’s foreign exchange reserve provided a cover of 72.5% to total external debt.

External debt consists of

• long-term external debt which is the bulk part
• NRI deposits and multilateral loans
• commercial borrowings
• bilateral loans and trade credit

Sr. No.	Component	Percent to total external debt (September,2015)
1	Multilateral	11.0
2	Bilateral	4.5
3	IMF	1.2
4	Export Credit	2.4
5	Commercial Borrowing	37.7
6	NRI Deposits	25.2
7	Rupee Borrowings	0.2
8	Long Term Debt (1 to 7)	82.2
9	Short Term	17.8
10	Total External Debt (8+9)	100.0

Internal debt

Internal debt includes loans raised by the government in the open market through treasury bills and government securities, special securities issued to the RBI and most importantly, various bonds like the oil bonds, fertilizer bonds etc.The money sucked in by the MSS is also shown in the government’s statement of liabilities.

Other liabilities

The debt of the government also includes others like the outstanding against small-savings schemes, provident funds, deposits under special deposit schemes etc. These debts are shown under a separate head titled ‘other liabilities’

Other terms

Debt trap means the government borrows to service the debt already contracted.

Debt service ratio is the ratio of debt service payments (principal + interest) of a country to that country’s total external receipts. (Debt service / total external receipts), it increased from 5.9% during 2013-14 to 7.5% in 2015 due to rise in debt and poor exports. (Lower the ratio, better it is)

External Debt to GDP ratio is 23.7% which is 6^th lowest in the world. (Lower the ratio, better it is)

This is known as ‘Annual Financial Statement’ or ‘Budget’ and covers Central Government’s transactions of all kinds, inside and outside India, occurring during the preceding year, the year in which the statement is prepared as well as the forthcoming year or the ‘Budget Year’ as it is known.

In a developing country, like ours, the fiscal policy (also termed as budgetary policy) has to perform a significant role and is expected to achieve the following objectives:

• To promote and accelerated the growth of productive investment in the economy, both in public and private sectors.
• To mobilize the maximum volume of real and financial resources for the investment plan of the public sector, keeping in view the expanding demand for real and financial resources of the private sector, and in this way, to promote the growth of marginal and average rate of savings in the economy.
• To promote the maintenance of a reasonable measure of economic stability in keeping with the maximum rate of growth of the economy.
• To redistribute the growing national output to lessen income inequalities.

The Annual Budget of the Central government (as also the budgets of the State Governments) is comprehensive statement of projections concerning the sources and uses of Government’s total receipts for the forth-coming financial year (April-March).  The Budget of the Central Government is divided into two parts: revenue budget and capital budget.

• Revenue budget covers those items, which are of a recurring nature and mainly pertainto the current year.
• Capital budget covers those items, which are concerned with acquiring and disposal of capital assets. 

Each account has, of course, a receipts and an expenditure side.

RECEIPTS

Revenue Receipts

Revenue receipts comprising those items that leave no repayment liability are divided into two groups-tax revenue and non-tax revenue.  The former consists of receipts from a variety of direct and indirect taxes while the latter consists of items such as government’s interest income from the loans made to States and Union Territories, Department Undertaking such as Railways, Post & Telegraphs and others, divided income from its ownership of public enterprises, fees and user changes for public services and a few other minor items[3]. 

Capital Receipts

Receipts in the capital budget or the capital receipts consists largely, though not entirely, of internal borrowings (comprising market loans i.e. loans raised against the issue of Government securities excluding treasury bills, small savings such as post office savings and other small savings instruments, public and state provident funds, railway reserve funds etc.) net of repayment and external borrowings, from foreign governments; they also include recovery of loans and advances and some other receipts on capital accounts, such as by sale of asset, divestment of shares of public enterprises.

EXPENDITURE

A significant reform initiative in the budgeting process, announced by the Finance Minister, in his budget speech of 2016-17 is the merger of the Plan and non-Plan distinction in expenditure budgeting. This was to be implemented from the budget of 2017-18.

The reform has been initiated in light of the policy decision to do away with the term 'Plan' while distinguishing expenditure on socio-economic welfare programmes and schemes in the wake of abolition of Planning Commission. Besides, a notion has widely gained ground among the policy-makers and officials across all levels that Plan expenditure is good and Non-Plan is bad. This bias in favour of Plan expenditure and against Non-Plan expenditure has led to a situation in which essential Non-Plan expenditure such as maintenance of assets, recruitment of doctors, teachers etc. is neglected. This has also led to a motivation for showing higher Plan expenditure and higher Plan sizes both at Central and State levels.

Further, several factors such as shift of focus of Plan expenditure from capital to revenue expenditure and the process of transferring expenditure of old schemes to Non-Plan at the end of each Five Year Plan means, that a clear correspondence cannot be drawn between Plan and developmental expenditures.  The Plan/Non-Plan bifurcation of expenditure has also contributed to a fragmented view of resource allocation to various programmes/schemes. With this fragmented distinction, it is difficult not only to ascertain cost of delivering a service but also to link outlays to outcomes. Outcomes and outputs of programmes depend on total expenditure, Plan and Non-Plan put together and not merely on Plan expenditure. Plan and Non-Plan distinction in the budget is therefore, neither able to provide a satisfactory classification of developmental and non-developmental dimensions of Government expenditure nor an appropriate budgetary framework.

With the budget 2017-18, the classification of Plan and Non-Plan expenditure has been phased out. In that place, the government has brought a new classification under Scheme and Non-Scheme expenditure. These are expenditure that are incurred to finance the major central government schemes. The scheme expenditure and non-scheme expenditure comes under both revenue expenditure and capital expenditure.

Development Expenditure and Non-Development Expenditure

Development expenditure is the expenditure incurred in order to provide those economic and social services, which the country requires to maintain and enhance social productivity.  E.g. expenditure on social and community services such as education and health and on economic services such as irrigation, etc.

On the other hand, Non-development expenditure on the current/revenue account is a sort of necessary evil, as albeit they must be incurred, they do little or nothing by way of helping to increase production directly.  Among the items included are law and order and defence expenditures, general administrative etc.

TYPES OF DEFICITS
Revenue Deficit         =	Revenue receipts – Revenue expenditure
Budgetary Deficit      =	Total receipts – Total expenditure (Budget documents define budget deficit as the sum of net increase in the floating debt[4] of the Government and the net withdrawal of their cash balances.
Fiscal Deficit               =	Revenue receipt + non-financial liability or non-debt imposing capital receipts (grants, proceeds of sales of assets, divestment proceeds) – Total expenditure.
Primary Deficit	Fiscal deficit – Interst payments
Effective Revenue Deficit =	Revenue Deficit ­ Grants for creation of capital assets

Deficit Financing

The most difficult and important part of a planning is to mobilize the financial resources.   It is easy to fix the targets and choose the priorities, but it is difficult to get the finances required for planned projects. There are various sources of finance available to the government.  It can levy and collect, use the profit of public enterprises, and collect public borrowings and small savings. It can also seek external assistance in the form of grants, private and foreign investment, and loans from international financial institute like the IMF, World Bank etc.  But, it is possible that the above-mentioned sources are not enough to supply the required finance for implementing the plan. In that case, the government has to resort to deficit financing.  The term deficit financing was used by the first Planning Commission to indicate the direct addition to gross national expenditure through budget deficits, which may be on revenue account or on capital account.  Mathematically, it is the difference between total revenue and total expenditure.  For example if government’s total revenue is Rs. 9,500 crore and total expenditure is Rs. 10,000 crore, the difference of Rs. 500 crore is bridge through deficit financing.  There are various methods of deficit financing like advances from RBI, use of accumulated cash balances etc.  In India, the government has used deficit financing as a last option. Thus we see that government finds it very difficult to achieve its target.  It is largely due to its inability to raise finance through other sources.  The most important sources of finance are domestic resources.  Thereafter comes the external assistance.  But many a time the government cannot collect the requisite amount from these sources, which results in deficit financing[5]. 

There are many reasons for adopting deficit financing in India. The contribution from tax and non-tax revenue is not enough. For the preceding many years the government has continued with the process of making deficit budget. It has not been able to raise the level of revenue or curb the expenditure.  Tax-to-GDP ratio in India is considered low according to international standards.  Government’s expenditure is also increasing at an alarming peace.  What is disturbing is that non-development expenditure like interest payment, salary and allowance etc. is increasing more rapidly.

Public enterprises also contribute significantly. Departmental enterprises contribute relatively a meagre amount.  There remain only a few institutions like the RBI and some financial and banking institutions and commercial enterprises like Indian Oil Corporation etc., which contribute adequately.  Every five-year plan aims at creating more numbers of employment and rural development.  This results in heavy expenditure, leading to deficit financing.   Deficit financing has many repercussions on socio-economic conditions.  Under it, the production of consumer goods follows the supply of financial resources, i.e. there is a gap of time between resource-supply and consumer goods production.  Thus, too much demand causes inflationary pressure.  This inflationary situation affects the middle class and the poor adversely.  The value of their savings decreases and thus may discourage their saving tendency.  There are other drawbacks like price rise and widening of gap between rich and poor.

It may be said that deficit financing is not bad if it is used cautiously.  But it should be kept at a lower level.  This can only be done with a greater will power and fiscal discipline.  Also, a judicious combination of additional resource mobilization and unwanted non-developmental expenditure be adopted. 

The Important features of the act, provide as under:

Laying before both Houses of Parliament, along with the annual Budget in each financial year the following statements of fiscal policy:

(a) Medium-term Fiscal Policy Statement;

(b) Fiscal Policy Strategy statement and;

(c) Macro-economic Framework Statement.

Medium-term Fiscal Policy

•  The Medium-term Fiscal Policy Statement shall set-forth a three-year rolling target for prescribed fiscal indictors with specification of underlying assumptions. Besides, the Medium-term Fiscal Policy Statement shall include an assessment of sustainability relating to: (i) the balance between revenue receipts and revenue expenditures and; (ii) the use of capital receipts including market borrowings for generating productive assets.

Fiscal Policy Strategy

The Fiscal Policy Strategy Statement shall, contain:

(a) The policies of the Central Government for the ensuing financial year relating to taxation, expenditure, market borrowings and other liabilities, lending and investments, pricing of administered goods and services, securities and description of other activities, such as, underwriting and guarantees which have potential budgetary implications;

 (b) The strategic priorities of the Central Government for the ensuing financial year in the fiscal area;

 (c) The key fiscal measures and rationale for any major deviation in fiscal measures pertaining to taxation, subsidy, expenditure, administered pricing and borrowings;

 (d) An evaluation as to how the current policies of the Central Government are in conformity with the fiscal management principles set out in Fiscal Policy Strategy Statement and the objectives set out in the Medium-term Fiscal Policy Statement.

FRBM[6] (Fiscal Responsibility and Budget Management) Act 2003, notified in 2004 with the following salient

Features:

• Government to annually reduce the revenue deficit by0.5 per cent and the fiscal deficit by 0.3 per centbeginning fiscal 2004-05.
• Elimination of revenue deficit and reduction of fiscal deficit to 3 % of gdp by March 31, 2009.
• A cap on the level of guarantees and total liabilities of the government.
• Prohibits government to borrow from the RBI (primary borrowing) after April 1, 2006. RBI can not print money to lend to the government.
• On a quarterly basis that government shall place before both the houses of parliament an assessment of trends in receipts and expenditure.
• Annually present the macro-economic framework statement, medium term fiscal policy statement and fiscal policy strategy statement. The three statements would provide the macro-economic background and assessment relating to the achievement of frbm goals.
• Under exceptional circumstances like natural calamities, government may be compelled to breach targets.FRBMwas brought in for fiscal discipline; increase plan expenditure; reduce the amount of borrowings; meet consumption from government’s own fiscal resources; to leave the RBI with autonomy as far as money creation goes etc. Fiscal consolidation is necessary particularly in the era of globalization when the penalty for irresponsibility is high.

Kelkar task force in its report on implementing FRBM (2004) said that plan expenditure should be enhanced and the way to cut deficit is by enhancing revenues (taxes) and rationalize non-asset creating expenditure like subsidies which should be targeted better.

Amendments to theFRBM act as part of finance bill 2012 included concepts of "effective revenue deficit" and "medium term expenditure framework" statement are two important features of amendment to frbm act in the direction of expenditure reforms.

“Effective revenue” deficit is the difference between revenue deficit and grants for creation of capital assets. This will help in reducing consumptive component of revenue deficit and create space for increased capital spending.

Grants for creation of capital assets are defined as ‘the grants-in-aid given by central governments, constitutional authorities or bodies, autonomous bodies and other scheme implementing agencies fro creation of capital assets”

The amendment confers a statutory status on the concept of effective revenue deficit which had already featured in the central budget 2011-12. The proposed amendment seeks to eliminate effective revenue deficit by 2015.

Medium-term Expenditure Framework

MTEF statement is required to be laid before parliament as required under the fiscal responsibility and budget management act, 2003

MTEF is to set forth a three-year rolling target for the expenditure indicators e.g.

Revised estimates for the year which has ended, budget estimate for the current financial year and projection for next two years. The objective of the MTEF is to provide closer integration between budget and the FRBM statements. It also furthers the government’s commitment towards fiscal consolidation.

FRBM ACT,2003 REVIEW COMMITTEE RECOMMENDATIONS – N.K. SINGH

The FRBM Review Committee (Chairperson: Mr. N.K. Singh) submitted its report in January 2017. The Report was made public in April 2017. The Committee proposed a draft Debt Management and Fiscal Responsibility Bill, 2017 to replace the Fiscal Responsibility and Budget Management Act, 2003 (FRBM Act). Key recommendations of the Committee and features of the draft Bill are summarised below.

Debt to GDP ratio: The Committee suggested using debt as the primary target for fiscal policy. A debt to GDP ratio of 60% should be targeted with a 40% limit for the centre and 20% limit for the states. It noted that majority of the countries that have adopted fiscal rules have targeted a debt to GDP ratio of 60%. The targeted debt to GDP ratio should be achieved by 2023. This ratio is expected to be around 70% in 2017.

To achieve the targeted debt to GDP ratio, it proposed yearly targets to progressively reduce the fiscal and revenue deficits till 2023 (Table 1). Note that debt indicates the total outstanding liabilities of the government, while the fiscal deficit indicates new borrowings made in the year, and the revenue deficit indicates what part of these new borrowings have been used to cover revenue expenses.

Fiscal Council: The Committee proposed to create an autonomous Fiscal Council with a Chairperson and two members appointed by the centre. To maintain its independence, it proposed a non-renewable four-year term for the Chairperson and members. Further, these people should not be employees in the central or state governments at the time of appointment.

Role of the Council: The role of the Council would include: (i) preparing multi-year fiscal forecasts, (ii) recommending changes to the fiscal strategy, (iii) improving quality of fiscal data, (iv) advising the government if conditions exist to deviate from the fiscal target, and (v) advising the government to take corrective action for non-compliance with the Bill.

Deviations: The Committee noted that under the FRBM Act, the government can deviate from the targets in case of a national calamity, national security or other exceptional circumstances notified by it. Allowing the government to notify these grounds diluted the 2003 Act. The Committee suggested that grounds in which the government can deviate from the targets should be clearly specified, and the government should not be allowed to notify other circumstances.

Further, the government may be allowed to deviate from the specified targets upon the advice of the Fiscal Council in the following circumstances: (i) considerations of national security, war, national calamities and collapse of agriculture affecting output and incomes, (ii) structural reforms in the economy resulting in fiscal implications, or (iii) decline in real output growth of at least 3% below the average of the previous four quarters. These deviations cannot be more than 0.5% of GDP in a year.

Debt trajectory for individual states: The Committee recommended that the 15th Finance Commission should be asked to recommend the debt trajectory for individual states. This should be based on their track record of fiscal prudence and health.

Borrowings from the RBI: The draft Bill restricts the government from borrowing from the Reserve Bank of India (RBI) except when: (i) the centre has to meet a temporary shortfall in receipts, (ii) RBI subscribes to government securities to finance any deviations from the specified targets, or (iii) RBI purchases government securities from the secondary market.

Criticism: (i) allowing for deviations if the output is 3% lower than the four quarter average, may not leave flexibility to tackle economic downturns and growth booms, and (ii) having multiple targets (debt, fiscal deficit and revenue deficit) with precise limits may make it difficult to achieve them all. He suggested having a single objective, i.e. placing debt on a declining trajectory, and proposed alternate limits to reduce debt and deficits till 2023. Further, he argued against specifying a revenue deficit target.

A notable development in the budget for 1997-98 was a move away from financing the budget deficit through the issue of ad-hoc Treasury Bills (TBs).  The RBI has always expressed its concern about the excess Monetization of deficit through ad-hocs. Monetized deficit, which was only 3.7% of gross fiscal deficit (GFD) in March ’95, shot up to 31% by Mar ’96.  The Government had failed in principle to stick to the September 1994 agreement, which limits the outstanding amount of ad-hocs to Rs. 9000 crore for a maximum period of 10 days.  To discourage the government from overstepping the limit, the RBI was allowed to issue date securities to the extent of overstepping, at market related rates but unfortunately this system did not work out well.

The system of ad-hocs is replaced by a system of Ways and Means Advance (WMA). WMA is not altogether new to the Indian system. Section 17(5)of the RBI act allows it to extend WMA to the states with the limits mutually fixed and interest charged on a graduated scale depending on the duration of the loan.

Strictly speaking, WMA is supposed to accomodate temporary mismatches in the government’s receipts and expenditure. WMA is not a mode of financing fiscal deficit and WMA drawn upon the government shall be periodically returned to enable use of such advances for future mismatches.  The RBI sources agree that the changeover to the new system requires a sophisticated system of cash management by the government and also calls for an improvement in debt towards the system of WMA.  Issue of adhoc TBs meant an automatic Monetization of the deficit, with the RBI printing notes.  This also meant that the net RBI credit to the government went up, an essential component of Reserve Money which is turn led to an increased inflation.  Such a situation will not be possible in case of WMA.

The guidelines of WMA circulated by the RBI point out that any withdrawals by the government from the RBI in excess of the limit of WMA should be permissible only for ten consecutive working days, relaxable in the transition period of the initial 2 years. When 75% of WMA is utilized, the RBI would trigger fresh floatation of government securities.  Monetization will occur only to the extent the security may devolve on RBI.

Even though there are definitive advantages of moving away from ad hocs, critics of WMA have expressed some concern.  They have stated that there were limits also on issue of adhoc TBs, which in reality were never adhered to.  With tax expenditure control funds requirements for the government will be enormous, and it will have to find ways of financing them.  Financing through borrowing from the market may again lead to a liquidity shortage and a rise in interest rates.  Therefore, unless the government reduces its expenditures, it will find ways to nudge the Central Bank (RBI) to provide if with large WMA limits, leading to a loss of the sanctity of the system.

However, the opposite view is that the government may now in fact be forced to reduce its expenditures, or else face an increase in the interest burden under the new system.  The government was paying an interest charge of 4.6% on the adhocTBs.  The rate of interest on WMA will definitely be higher than on TBs as it would be closer to the market rate, with an increase in the rate for periods longer than ten consecutive working days.  In case of WMA meant for states, RBI can suspend payments if their accounts run into overdraft for more than seven days.  Such a clause needs to be built into the new RBI – Centre relationship because if such stringencies are not resorted to, WMA may fall short of expectations.

Zero-based Budgeting

The concept of zero-based budgeting was introduced in the 1970s. As the name suggests, every budgeting cycle starts from scratch. Unlike earlier systems where only incremental changes were made in the allocation, under zero-based budgeting every activity is evaluated each time a budget is made and only if it is established that the activity is necessary, are funds allocated to it. The basic purpose of ZBB is phasing out of programmes/activities which do not have relevance anymore. The objective of the ZBB is to overhaul the functioning of the government departments and PSUs so that productivity can be increased and wastage can be minimized.

However, because of the efforts involved in preparing a zero-based budget and institutional resistance related to personnel issues, no government ever implemented a full zero-based budget, but in modified forms the basic principles of ZBB are often used.

Programme Budgeting and Performance Budgeting

• Programme budgeting in the shape of planning, programming and budgeting system (PPBS) was introduced in the US Federal Government in the mid-1960s. Its core themes had much in common with earlier strands of performance budgeting.
• Programme budgeting aimed at a system in which expenditure would be planned and controlled by the objective. The basic building block of the system was classification of expenditure into programmes, which meant objective-oriented classification so that programmes with common objectives are considered together.
• PPBS went much beyond the core elements of programme budgeting and was much more than the budgeting system. It aimed at an integrated expenditure management system, in which systematic policy and expenditure planning would be developed and closely integrated with the budget. Thus, it was too ambitious in scope. Neither was adequate preparation time given nor was a stage-by-stage approach adopted. Therefore, this attempt to introduce PPBS in the federal government in USA did not succeed, although the concept of performance budgeting and programme budgeting endured.
• Many governments today use the “programme budgeting” label for their performance budgeting system. As pointed out by Marc Robertson, the contemporary influence of the basic programme budgeting idea is much wider than the continuing use of the label. It is defined in terms of its coreelements as mentioned above. Programme budgeting is an element of many contemporary budgeting systems which aim at linking funding and results.
• “The extent of ongoing influence of programme budgeting is partly obscured by a wide variety of terminology used today to refer to programme such as “outcomes” or output groups (Australia) and ‘Requests for Resource’ (UK)”
• Programme budgeting by itself may not bring the outcome orientation. It is also difficult to make performance targets as part of the budget formulation process unless managers at various levels get involved in the budgeting process, involving prioritization of activities and resource allocation on that basis.

Gender Budgeting

Gender Budgeting is a powerful tool for achieving gender mainstreaming so as to ensure that benefits of development reach women as much as men. It is not an accounting exercise but an ongoing process of keeping a gender perspective in policy/ programme formulation, its implementation and review. GB entails dissection of the Government budgets to establish its gender differential impacts and to ensure that gender commitments are translated in to budgetary commitments.

The rationale for gender budgeting arises from recognition of the fact that national budgets impact men and women differently through the pattern of resource allocation. Women, constitute 48% of India’s population, but they lag behind men on many social indicators like health, education, economic opportunities, etc. Hence, they warrant special attention due to their vulnerability and lack of access to resources. The way Government budgets allocate resources, has the potential to transform these gender inequalities. In view of this, Gender Budgeting, as a tool for achieving gender mainstreaming, has been propagated.

Gender Budgeting in India[7]

In order to mainstream gender across sectors and all levels of governance, Government of India, has adopted Gender Budgeting as a tool in 2004-05. Ministry of Women and Child Development has been consistently promoting gender budgeting across the country as a pathway to ensure gender mainstreaming at all levels and stages of the budgetary process. 

The Ministry of Women and Child Development is implementing various schemes/programmes for empowerment of women and development of children across the country. The details of those schemes are as follows:

For Women empowerment:

1. BetiBachaoBetiPadhao (BBBP), a comprehensive programme is being implemented to address the declining Child Sex Ratio (CSR) and related issues of empowerment of women over a life-cycle continuum.
2. Pradhan Mantri Matru Vandana Yojana (PMMVY), {erstwhile Maternity Benefit Programme} has been contributing towards better enabling environment by providing cash incentives for improved health and nutrition to pregnant and nursing mothers.
3. Scheme for Adolescent Girls aims at girls in the age group 11-18, to empower and improve their social status through nutrition, life skills, home skills and vocational training.
4. Pradhan Mantri Mahila Shakti Kendra scheme, promote community participation through involvement of Student Volunteers for empowerment of rural women.
5. National Creche Scheme to provide day care facilities to children of age group of 6 months to 6 years of working women who are employed.
6. Rastriya MahilaKosh (RMK) to provide micro-credit to poor women for various livelihood support and income generating activities at concessional terms in a client-friendly procedure to bring about their socio-economic development
7. SwadharGreh to provide relief and rehabilitation to destitute women and women in distress.
8. Ujjawala, a Comprehensive Scheme for prevention of trafficking and for rescue, rehabilitation, re-integration and repatriation of victims of trafficking for commercial sexual exploitation.

1. Working Women Hostels for ensuring safe accommodation for women working away from their place of residence. Under this scheme, 2 new proposals have been received and 2 sanctioned in Himachal Pradesh during last three years.
2. Schemes of One Stop Centre (OSC) and Women Helpline (WH) are being implemented to facilitate access to an integrated range of services including medical aid, police assistance, legal aid/ case management, psychosocial counseling and temporary support services to women affected by violence.
3. Gender Budgeting Scheme is being implemented as a tool for mainstreaming gender perspective at various stages of planning, budgeting, implementation, impact assessment and revisiting of policy/programme objectives and allocations. The Scheme helps in strengthening of institutional mechanisms and training of various stakeholders so as to mainstream gender concerns in Central and State Governments.

For Child Development

1. Integrated Child Development Services (ICDS) Scheme is being implemented through States/UTs with the aim of holistic development of children upto 6 years of age and to meet nutritional needs of pregnant women and lactating mothers.
2. Integrated Child Protection Scheme (ICPS) (now Child protection Services) is being implemented through the State Government/UT Administrations to create a safe and secure environment for overall development of children in need of care and protection in urban and semi-urban areas.
3. National Nutrition Mission (NNM): The Government of India has approved setting up of National Nutrition Mission (NNM) commencing from 2017-18.  The NNM, as an apex body, will monitor, supervise, fix targets and guide the nutrition related interventions across the Ministries.  The programme through the targets will strive to reduce the level of stunting, under-nutrition, anaemia and low birth weight babies. 

Outcome Budgeting

Introduced in india in the year 2005, It is a performance measurement tool that helps in better service delivery; decision-making; evaluating programme performance and results; communicating programme goals; and improving programme effectiveness.

The Outcome Budget comprises scheme/project-wise outlays for all central ministries,listed against corresponding outcomes (measurable physical targets) to be achieved during the year.

It measures the development outcomes of all government programmes, which means that if you want to find out whether some money allocated for, say, the building of a school or a health centre has actually been given, you might be able to. It will also tell you if the money has been spent for the purpose it was sanctioned and the outcome of the fund-usage.

Subsidies provided by the central government fall under two categories namely Explicit subsidies and Implicit subsidies.

Explicit subsidies are provided directly to the producer or the consumer by subsidising the goods or services being purchased or produced. For Ex- Food subsidy is consumer based explicit subsidy and Fertilizer subsidy is producer based explicit subsidy.

Implicit subsidies are provided by government by not collecting the full cost of goods or services being consumed. For ex- subsidised electricity and water to farmers.

Any subsidy must be guided by certain principles and objectives-        

• Allocation of resources to the needy
• Redistribution of resources
• Managing Trade (like using export subsidies to capture market)
• Fiscal Impact i.e. the subsidy structure should be fiscally prudent.

Provision of subsidies to the poor has large welfare dimensions; but fiscal prudence considerations required to containing subsidies to sustainable levels. These seemingly conflicting objectives can be reconciled by making subsidies transparent, efficient and targeted through initiatives like direct benefits transfer wherever feasible.

The explicit subsidies paid from the union budget increased over six-fold from around Rs.43,000 crore in 2002-03 to nearly Rs.2,67,000 crore in 2014-15 . As a ratio of GDP, subsidies from the union budget peaked in 2012-13 to reach 2.58 per cent. The share of major sectors, namely food, fertilizer and petroleum, along with ‘others’receiving these subsidies is depicted in Figure

Petroleum Subsidy-In India, the petroleum subsidy has been a major burden due to the Administrative Price Mechanism (APM) being followed for the petroleum products. Petroleum subsidy peaked in the years 2012-13 due to rise in the prices of crude oil. But since then, due to fall in crude prices and due to gradual deregulation of the APM the petroleum subsidy burden reduced considerably.

Fertilizer Subsidy- Fertilizer subsidy burden on Indian economy rose from a meagre 500 crore during 1980-81 to nearly 100000 crores in the recent years. Most of the rise in fertilizer subsidy burden is on account of rise in cost of production and inputs while rise in subsidy burden on account of rise in consumption is very low.

Fertilizer subsidy favours the rich farmers more compared the poor farmers and hence need to be restructured towards an inverted subsidy structure i.e. decrease in subsidy as the consumption rises.

Food Subsidy- The food subsidy burden is rising due to high MSP of certain food-grains and rising production which leads to glut in market thereby forcing government to procure surplus grains from the market.

To instil fiscal prudence in the food subsidy structure there is urgent need to implement the recommendations of Shanta Kumar Committee on FCI and Food procurement restructuring[8].

Finance commission is a constitutional body (Finance Commission Act, 1951). Article 280 speaks about the provision of formation of Finance commission by the president. The article says:

The President shall, within two years from the commencement of this Constitution and thereafter at the expiration of every fifth year or at such earlier time as the President considers necessary, by order constitute a Finance Commission which shall consist of a Chairman and four other members to be appointed by the President.

The main function of finance commission is to recommend how the Union government should share taxes levied by it with the states. These recommendations are meant for the period of five years. The commission also lays down rules by which the centre should provide grants-in-aid to states out of the Consolidated Fund of India and also in case of special provision of states. Finance Commission is also assigned the duty of suggesting measures to augment the resources of states and ways to supplement the resources of Panchayati Raj institutes and municipalities.

Apart from its recommendations on the sharing of tax proceeds between the Centre and the States which will apply for a five-year period beginning April 1, 2015, the Commission has been asked to suggest on:

• Pricing of public utilities such as electricity and water in an independent manner and also look into issues like disinvestment, GST compensation, sale of non-priority PSUs and subsidies.
• Measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth including suggestions to amend the Fiscal Responsibility Budget Management Acts.
• With regard to debt-stressed states, the Commission has been asked to suggest steps for augmenting revenues of states which are lagging.
• Review the present arrangements as regards financing of Disaster Management with reference to the funds constituted under the Disaster Management Act, 2005(53 of 2005), and make appropriate recommendations thereon.

In making its recommendations on various matters, the Commission shall generally take the base of population figures as of 1971 in all cases where population is a factor for determination of devolution of taxes and duties and grants-in-aid; however, the Commission may also take into account the demographic changes that have taken place subsequent to 1971.

Fourteenth Finance Commission

14thFinance Commission recommendations-

1.   The share of states in the net proceeds of the shareable Central taxes should be 42%.This is 10%points higher than the recommendation of 13th Finance Commission.

2.   Revenue deficit to be progressively reduced and eliminated.

3.   Fiscal deficit to be reduced to 3% of the GDP by 2017–18.

4.   A target of 62% of GDP for the combined debt of centre and states.

5.   The Medium Term Fiscal Plan (MTFP) should be reformed and made the statement of commitment rather than a statement of intent.

6.   FRBM Act need to be amended to mention the nature of shocks which shall require targets relaxation.

7.   Both centre and states should conclude 'Grand Bargain' to implement the model Goods and Services Act (GST).

8.   Initiatives to reduce the number of Central Sponsored Schemes (CSS) and to restore the predominance of formula based plan grants.

9.   States need to address the problem of losses in the power sector in time bound manner.

14th finance commission strengthening federalism-

• 42% devolution of divisible pool of union taxes will ensure more Autonomy to states in their fiscal and financial matters.
• No sector specific grants to ensure the independence of states.
• Decline in Centrally Sponsored Schemes will give more autonomy to state in framing their own policies.
• Decline in Plan Transfer (plan transfers have been accused of being politically discriminatory) and more transfer via Constitutional Means (Article 280).
• Devolution of funds to local bodies.
• Biggest gainers are the states with low per capita SDP.

15^th Finance commission

The Union Government with the approval President of India has constituted 15th Finance Commission which will make recommendations for the five years commencing 1 April 2020 till 31 March 2025. The commission will recommend devolution of shareable central taxes to States. It will also review several important aspects of federal fiscal finance. It will make its report available by 30th October 2019.

NK Singh, former bureaucrat and ex-Member of Parliament will be Chairman of 15th Finance Commission. Its other members are Shaktikanta Das, Former Secretary Economic Affairs; Dr Anoop Singh, Adjunct Professor of Georgetown University. Besides, Dr Ashok Lahiri, Chairman of Bandhan Bank and Dr Ramesh Chand, NITI Aayog Member will be the Part-time its members. Arvind Mehta will be Secretary to the Commission.

Terms of Reference of Commission

The Commission will make recommendations on distribution of net proceeds of taxes between Centre and States, the principles which should govern grants-in-aid of revenues of States out of Consolidated Fund of India. It will also suggest measures needed to augment Consolidated Fund of State to supplement resources of Panchayats and Municipalities in State on basis of recommendations made by Finance Commission of State.

It will also review current status of finance, debt levels, cash balances, deficit and fiscal discipline efforts of Centre and States and recommend fiscal consolidation roadmap for sound fiscal management. While making its recommendations, it will look at resources of Central Government and State Governments for five years commencing on 1st April 2020 on basis of levels of tax and non-tax revenues likely to be reached by 2024-25.

It is imperative for commission to examine implications of GST on finance of the Centre and states. It will look at impact of GST, including payment of compensation for possible loss of revenues for 5 years. It may also consider proposing measurable performance-based incentives for States, at appropriate level of government.