Assam Public Finance and fiscal Policy

Assam Public Finance and fiscal Policy

Basic Understanding of Public Finance

Public finance as a concept may be understood on two levels –

  1. as a practical activity of all components of public administration and
  2. As a theoretical area.
  • The term “public finance“ may be defined as the identification of specific financial relationships and functions running between public administration bodies and institutions (i.e. public sector entities – the state) as one party and in mutual interaction with other entities of the economic system as the other party (i.e. private entities – households and companies).
  • These relationships and functions may be considered special as they include:
  1. Procuring public goods (production and provision);
  2. arranging and funding various transfers (particularly in the social area);
  3. Directing entities existing in the economy towards socially desirable behaviours; for instance through taxes, penalties, subsidies and other stimuli and charges.
  • In order to arrange the funding of the above-mentioned areas, there is a fiscal system (public budgeting system) whose aim is to collect the required amount of public revenue. Public revenue serves, at various levels of public budgets (governmental, regional and local), to fund public expenditures.
  • Public expenditures, public revenue and particularly taxes may be considered to be the fundamental elements of public finance. Important terms derived from these three elements include deficit, public debt, budgetary policy and fiscal policy.
  • The development of public finance is connected with economic mechanisms that should ideally lead to the effective and fair allocation of limited resources.

Public Finance – Causes of Development

  • The reason for developing public funding is the state intention to soften the drawbacks resulting from economic decisions made by individual entities (households and companies). It uses fiscal tools (public revenue and expenditure) to accomplish this.
  • Certain behaviour is classified as the “quasi-fiscal funding principle”, where publiclaw goods are funded from off-budgetary resources (e.g. the public-law television in the Czech Republic is funded from television licence fees).
  • Another important term that relates to public finance, and that is also a strong argument for its development, is market failure.
  • The market system follows supply and demand through the price mechanism. It is a system that has developed itself, and that has strong ties with the interactions between people and companies.
  • All these entities strive to maximize their benefit (welfare). The greatest benefit is strongly interconnected with reaching the economic optimum condition.
  • A system that reaches the optimum is considered, in the neoclassical economics concept, to be efficient, fair and stable.
  • The ideal condition is called the Pareto optimum. This exists in an economy when none of the involved entities can improve its position without worsening another entity’s position. If any of the entities intends to improve its position, it is possible for it to do so only to the detriment of another entity. The existence of perfect competition is a necessary requirement for reaching the optimum.
  • The three above-mentioned elements (efficiency, stability and fairness) are connected with microeconomics from the viewpoint of efficiency, connected with macroeconomics from the viewpoint of stability, and connected with sciences outside economics from the viewpoint of fairness. The perception of fairness is investigated by other social sciences, and is closely linked to ethics, etc.
  • If no conditions exist for reaching a market-efficient solution, or the conditions are simply violated for any reason, market failure will ensue.
  • It consists of the following:
  1. The allocation of resources is not efficient,
  2. The economy in the area of macroeconomics indicators oscillates around the desired values and
  3. The distribution of wealth and income may diverge from the consensus on fairness.
  • It is then up to the state to perform its fiscal function (the public finance function) in those three areas in order to preferably eliminate or at least reduce market failure. Specifically, those are microeconomic failures from the allocation function perspective, macroeconomic failures from the stabilization function perspective, and the redistribution function then falls into the area of market failure caused by outside economies.
  • If the conditions for perfect competition are not met, a malfunction in the price mechanism will arise, which disturbs the allocation mechanism. Some failures can be eliminated without public finance intervention through auto-regulation (the internalization of externalities). However, others are part of the government’s allocation function and its fiscal tools (taxes and governmental purchases or transfers).Assam Public Finance and fiscal Policy
  • Macroeconomic failure is indicated by instability in the economic system that usually suffers from cyclical inflation, a high rate of unemployment, low or even negative growth of production or problems in the foreign trade balance, etc.
  • The above-mentioned macroeconomic cases of instability are why governments perform the state stabilization functions (stabilization fiscal functions).
  • The state uses several tools to perform the stabilization function. The basic classification is a division into monetary and fiscal tools. The monetary tools include open market operations, the setting of basic interest rates, determining the level of mandatory minimum reserves, etc. Fiscal tools may include public expenditure, public revenue and ways of funding deficits.
  • The causes of market failure outside the economy relate to reaching fairness in society through the distribution of wealth and income. With the distribution of wealth, the market does not practically perceive fairness. In this case, the state performs a redistributive role with 5h3 principles of solidarity, social conscience, charity, etc. based on the social consensus.
  • The state performs the redistribution function through two basic categories of tools. The first includes revenue (tax) and the other expenditures (transfers, grants and subsidies).
  1. First, a tax transfer mechanism may be implemented through a combination of progressive taxation of high incomes and transfers (subsidies) in favour of low income households.
  2. Secondly, this can occur through the taxation of luxury goods combined with subsidies on goods for the low-income population.

Fiscal Policy Meaning

  • Arthur Smithies defines fiscal policy as “a policy under which the government uses its expenditure and revenue programmes to produce desirable effects and avoid undesirable effects on the national income, production and employment.”
  • Though the ultimate aim of fiscal policy in the long-run stabilisation of the economy, yet it can be achieved by moderating short-run economic fluctuations.
  • In this context, Otto Eckstein defines fiscal policy as “changes in taxes and expenditures which aim at short-run goals of full employment and price-level stability.

Objective of Fiscal Policy

  1. To maintain and achieve full employment.
  2. To stabilise the price level.
  3. To stabilise the growth rate of the economy
  4. To maintain equilibrium in the balance of payments.

To promote the economic development of underdeveloped countries

Data of Assam Fiscal situation in 2016 (Based on CAG report)

Following are the significant changes during 2015-16 over the previous year:

  • Revenue Receipts grew by 4,276 crore (11 per cent) over the previous year. The increase was contributed by Tax Revenue 656 crore (15 per cent), Non-Tax Revenue by 328 crore (eight per cent) and State‟s share Union Taxes and Duties by 4,502 crore (105 per cent). The increase was however, offset by decrease in Grants-in-Aid from Government of India (GOI) by 1,210 crore (28 per cent). The Revenue Receipts at ` 42,457 crore was more by 2,596 crore than the assessment made in Medium Term Fiscal Plan (MTFP) (` 39,861 crore).
  • The increase of 656 crore in Tax Revenue in 2015-16 as compared to previous year was mainly on account of increase of taxes on Sales, Trade etc. as well as State Excise by 143 crore each, Land Revenue by 87 crore and taxes on vehicles by 78 crore. The Tax Revenue as a percentage of GSDP (4.51 per cent) was significantly lower than the assessment of XIV FC (7.20 per cent). It was also lower than the projections made by the State Government in its MTFP (5.63 per cent).
  • The significant increase in receipt of State‟s share in Union Taxes and Duties by 4,502 crore (36.65 per cent) was mainly due to more assignment of net proceeds under Corporation Tax (983 crore), Taxes on Income other than Corporation Tax (590 crore), Customs (702 crore), Union Excise Duties (1,128 crore) and Service Tax (1,093 crore). However, the decrease in receipt of Grants-in-Aid from GOI by 1,210 crore (nine per cent) was mainly due to less allocation of funds for State plan schemes.
  • Revenue Expenditure decreased by 2,067 crore over the previous year Of this decrease, Non-Plan Revenue Expenditure (NPRE) decreased by 2,111 crore, which was however, offset by increase under Plan Head by 44 crore. The major sectors that registered significant decrease include Secretariat – General Services (302 crore), Public Works (262 crore), Welfare of Scheduled Castes, Scheduled Tribes, Other Backward Classes and Minorities (352 crore), Relief on Account of Natural Calamities (330 crore), Secretariat – Economic Services (141 crore) and Compensation & Assignment to Local Bodies & Panchayati Raj Institutions (618 crore).
  • Recoveries of Loans and Advances increased marginally by 500 crore (5,000 per cent) whereas disbursement of Loans and Advances decreased by 371 crore (59 per cent).
  • Public Debt Receipts and Repayments increased by 916 crore (20 per cent) and 342 crore (21 per cent) respectively over the previous year.
  • During 2015-16, both Public Account Receipts and Disbursement decreased by 2,088 crore (12 per cent) and 729 crore (four per cent) over the previous year.
  • Total inflow during 2015-16 was 64,167 crore against 60,563 crore in 2014-15 registering an increase of six per cent while total outflow during 2015-16 was 57,578 crore as against 61,624 crore in 2014-15 registering a decrease of seven per cent.

Review of the fiscal situation

  • To support the State Government towards urgent fiscal correction, Thirteenth Finance Commission (XIII FC) had worked out a fiscal consolidation roadmap for Assam requiring the State to eliminate Revenue Deficit and achieve Fiscal Deficit of three per cent of GSDP in each year of the award period.
  • Accordingly, Assam Fiscal Responsibility and Budget Management (AFRBM) Amendment Act, 2011 was enacted by the State which came into force with effect from 1st April 2010 retrospectively. As per the Act, the State Government was to eliminate Revenue Deficit by 2011-12 and maintain revenue balance or attain surplus thereafter and reduce Fiscal Deficit to three per cent of the estimated GSDP by 2010-11 and maintain the same level thereafter. Further, the Act also envisaged that the State Government would attain the total outstanding debt to GSDP ratio at 28.40 per cent in 2012-13 and maintain the same level in 2013-14. Further, the level of 28.50 per cent had to be maintained in 2014-15 and thereafter.

Assam Budget Highlight for 2017-18

  • The Gross State Domestic Product of Assam for 2017-18 at current prices is estimated to be Rs 2,58,337 crore. This is 15% higher than the estimate for 2016-17.
  • Total expenditure for 2017-18 is estimated to be Rs 85,923 crore, a 3.5% increase over the revised estimate of 2016-17. In 2016-17, there was an increase of Rs 4,764 crore (6.1%) in the revised estimate over the budgeted estimate.
  • Total receipts (excluding borrowings) for 2017-18 are estimated to be Rs 73,467 crore, an increase of 23.3% over the revised estimates of 2016-17. In 2016-17, total receipts fell short of the budgeted target by Rs 7,183 crore. This is driven by reduction in tax collections and grants from centre.
  • Revenue surplus for the next financial year is targeted at Rs 2,400 crore, or 0.93% of the state Gross Domestic Product (GDP). Fiscal deficit is targeted at Rs 7,702 crore (2.98% of state GDP). Departments of Health, Water Resources, and Rural Development saw increases in allocations for the year 2017-18. On the other hand, the Department of Roads and Bridges witnessed a decrease in allocation.

Policy Highlights

  • Incentives to promote industry: Government to provide up to 90% of one time expenditure incurred on capital expenses involved in setting up Business Process Outsourcing (BPO) centres in the state. Further, 100% reimbursement will be provided on stamp duty paid by BPO and information technology firms.
  • Promotion of banking: Rs 5,000 each will be given to tea plantation workers who have opened bank accounts.
  • Pay Commission: The government will retrospectively implement the 7th Pay Commission’s recommendations from April 1, 2016. The estimated burden on the state is expected to be Rs 2,200 crore. First instalment of the same will be released in April 2017.
  • Rs 5 crore has been allocated to provide two-wheelers to 1,000 top-ranking girl students who pass high school in 2017

Deficits, Debts and FRBM Targets for 2017-18

The Fiscal Responsibility and Budget Management (FRBM) Act, 2005 of the state provides annual targets to progressively reduce the outstanding liabilities, revenue deficit and fiscal deficit of the state government.

  • Revenue deficit: It is the excess of revenue expenditure over revenue receipts. A revenue deficit implies that the government needs to borrow in order to finance its expenses which do not create capital assets. However, the budget estimates a revenue surplus of Rs 2,400 crore (or 0.9 % of SGDP) in 2017-18. This implies that revenue receipts are expected to be higher than the revenue expenditure, resulting in a surplus. The estimate indicates that the state is within the target of eliminating revenue deficit, prescribed by the 14th Finance Commission.
  • Fiscal deficit: It is the excess of total expenditure over total receipts. This gap is filled by borrowings by the government, and leads to an increase in total liabilities of the government. A high fiscal deficit may imply a higher repayment obligation for the state in the future. In 2017-18, fiscal deficit is estimated to be Rs 7,702 crore, which is 2.98% of the SGDP.
  • Outstanding Liabilities: It is the accumulation of borrowings over the years. In 2017-18, the outstanding liabilities are expected at 19.31 % of SGDP
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