Categories: MUMBAI UNIVERSITY IDOL NOTES

Indian Public Finance-II

Hey Mumbai University SYBA IDOL students! Today, we’re diving into the fascinating world of Economic Public Finance , continue exploring the chapter – “Indian Public Finance-II“.

We’ll start by looking at the sources of public borrowing and debt liabilities. This will help us understand where the government gets its money when it needs to borrow and what kinds of debt it carries.

Next, we’ll discuss the meaning of deficits and explain the different types of deficits. This includes understanding what a fiscal deficit, revenue deficit, and primary deficit are, and how they affect the economy.

We’ll then cover the Appraisal of the Fiscal Responsibility and Budget Management (FRBM) Act. This Act was introduced to help manage the country’s finances responsibly. We’ll explore its main features and evaluate its impact on fiscal management.

Following that, we’ll dive into the concept of fiscal federalism. This involves understanding how financial responsibilities and resources are shared between the central government and state governments in India.

Finally, we’ll review the measure recommendations of the Fourteenth Finance Commission. We’ll look at the key recommendations made by this Commission and how they aim to improve financial relations and resource distribution between the central and state governments.

So, SYBA IDOL Mumbai University students, get ready to unwrap the mysteries of “Indian Public Finance-II” with customized IDOL notes just for you. Let’s jump into this exploration together.

Question 1:- What are the Sources of Public Borrowing and Debt Liabilities?

Introduction:

Public borrowing is a crucial aspect of how governments manage their finances. It involves raising money to fund various projects, services, and development activities. The borrowed money can come from different sources and be categorized based on various criteria. Understanding these categories helps in evaluating the implications of public debt on the economy.

Sources of Public Borrowing:

Internal Debt: Internal debt is money borrowed from within the country. This means the government gets funds from its own citizens, banks, and financial institutions located domestically. This type of borrowing is usually used for funding domestic projects and services.
External Debt: External debt refers to money borrowed from foreign sources. This includes loans from other countries, international financial institutions, or foreign private investors. External debt is often used for large projects or to stabilize the economy.

Types of Debt Based on Duration:

Short Term Debt: Short term debt needs to be repaid within one year. It is used for immediate financial needs or to cover short-term gaps. Examples include Treasury bills and short-term loans.
Long Term Debt: Long term debt is repaid over a period longer than one year. It typically involves regular interest payments and is used for long-term investments, such as infrastructure projects. Examples include bonds and long-term loans.

Types of Debt Based on Use:

Productive Debt: Productive debt is borrowed for investments that are expected to generate economic returns. For instance, funds used to build highways or educational institutions can lead to economic growth and increased revenue.
Unproductive Debt: Unproductive debt is used for expenses that do not generate returns or contribute to economic growth. Examples include borrowing to cover budget deficits or non-essential spending, which may increase the overall debt burden without providing economic benefits.

Conclusion:

Recognizing the sources and classifications of public debt is essential for understanding government financial management. Internal and external debts, short-term and long-term debts, as well as productive and unproductive debts each have different impacts on economic stability and growth. Effective debt management ensures that borrowed funds are used in ways that benefit the country and support long-term economic health.

Question 2 :- What the meaning of deficits? Explain various types of deficit

Introduction:

Deficits occur when a government’s spending surpasses its revenue. This means that the government is using more money than it is collecting from sources like taxes and other incomes. Understanding different types of deficits helps in evaluating the financial health of the government and its fiscal management. This answer explains various types of deficits and their implications.

Types of Deficits:

Budget Deficit:A budget deficit happens when the government’s total spending is greater than its total revenue. The formula to calculate the budget deficit is: Budget Deficit=Total Expenditure−Total Revenue \text{Budget Deficit} = \text{Total Expenditure} – \text{Total Revenue}Budget Deficit=Total Expenditure−Total Revenue

This deficit can be financed by borrowing money or creating new money. A budget deficit indicates that the government needs additional funds beyond its income.

Revenue Deficit: A revenue deficit occurs when the government’s revenue expenditure exceeds its revenue receipts. In simpler terms, it shows that the government’s income from taxes and other sources is not enough to cover its spending on public services and obligations. This type of deficit highlights a shortfall in the government’s regular income compared to its routine spending.

Capital Deficit: A capital deficit arises when the government’s capital expenditure exceeds its capital receipts. Capital expenditure involves spending on long-term projects like infrastructure development. Capital receipts include funds from loans and proceeds from selling government assets. A capital deficit indicates that the government is spending more on these long-term projects than it is receiving from these sources.

Fiscal Deficit: The fiscal deficit is a broader measure of the government’s borrowing needs. It is calculated as the difference between total expenditure and total revenue, excluding any borrowings. The formula is:
Fiscal Deficit=Total Expenditure−Total Revenue\text{Fiscal Deficit} = \text{Total Expenditure} – \text{Total Revenue}Fiscal Deficit=Total Expenditure−Total Revenue

This deficit shows the extent to which the government relies on borrowing to meet its expenses. A high fiscal deficit can indicate a reliance on debt to cover spending.

Primary Deficit: The primary deficit is the fiscal deficit minus the interest payments on previous borrowings. It gives a clearer picture of the government’s current fiscal position without the impact of past debt. The formula is
Primary Deficit=Fiscal Deficit−Interest Payments\text{Primary Deficit} = \text{Fiscal Deficit} – \text{Interest Payments}Primary Deficit=Fiscal Deficit−Interest Payments

This measure helps in understanding whether the government’s current spending is sustainable, excluding the cost of previous borrowings.

Conclusion:

Understanding different types of deficits is important for assessing a government’s financial health. Budget, revenue, capital, fiscal, and primary deficits each provide insights into different aspects of government spending and revenue. Effective management of these deficits is crucial for maintaining economic stability and ensuring that the government’s financial policies are sustainable in the long term.

Question 3:- Write about Appraisal of Fiscal Responsibility and Budget Management (FRBM) Act

Introduction:

The Fiscal Responsibility and Budget Management (FRBM) Act was introduced in India to ensure that the government manages its finances responsibly. The Act aims to promote fiscal discipline, transparency, and accountability in budgeting and expenditure. This answer reviews the achievements and limitations of the FRBM Act to understand its impact on India’s financial management.

Achievements of the FRBM Act:

Fiscal Discipline: The FRBM Act has set clear targets for fiscal and revenue deficits. These targets help control the government’s spending and borrowing, ensuring that public finances are managed sustainably. By adhering to these targets, the government can maintain better control over fiscal imbalances.

Transparency: The Act requires the government to provide detailed reports on its financial activities. This includes the Macroeconomic Framework Statement, Fiscal Policy Strategy Statement, and Medium-term Fiscal Policy Statements. These reports make government budgeting and financial management more transparent, allowing the public and stakeholders to see how money is being used.

Regular Reviews: Under the FRBM Act, the Finance Minister must review the government’s receipts and expenditures every quarter. These regular reviews ensure that the government stays accountable for its fiscal performance. If there are issues or deviations from the targets, corrective actions can be taken in a timely manner.

Flexibility in Targets: The FRBM Act allows for some flexibility in the deficit targets under exceptional circumstances. For example, if there are national security issues or natural disasters, the government can adjust its fiscal targets. This flexibility helps the government respond effectively to unexpected challenges without compromising overall fiscal discipline.

Limitations of the FRBM Act:

Rigid Targets: Some critics argue that the targets set by the FRBM Act are too rigid. This rigidity can make it difficult for the government to respond to economic downturns or emergencies effectively. In times of crisis, strict adherence to these targets might limit the government’s ability to take necessary actions.

Implementation Challenges: There have been problems with consistently implementing the FRBM Act. At times, the government has deviated from the targets, especially during periods of economic stress. This inconsistency can undermine the effectiveness of the Act in maintaining fiscal discipline.

Focus on Deficits: The FRBM Act mainly focuses on reducing fiscal deficits. However, it may not fully address the quality of government spending or the need for productive investments that can boost economic growth. Simply reducing deficits does not guarantee that the money is being used effectively.

Limited Scope: While the FRBM Act deals with fiscal deficits, it does not cover other important aspects of public finance, such as managing public debt or ensuring efficient spending. This limited scope means that some areas of financial management might not be adequately addressed.

Conclusion:

The FRBM Act has achieved significant progress in promoting fiscal discipline, transparency, and regular financial reviews in India. However, it also faces challenges, such as rigid targets and implementation issues, which can limit its effectiveness. Addressing these limitations can enhance the Act’s ability to manage public finances more comprehensively and effectively.

Question 4:- Explain the concept of fiscal federalism

Introduction:

Fiscal federalism is an important concept that deals with how financial responsibilities and resources are shared between different levels of government within a federal system. This includes how money is collected, how it is spent, and how resources are managed across various tiers of government. Understanding fiscal federalism helps us see how governments work together to ensure economic stability and growth.

Key Aspects of Fiscal Federalism:

Revenue Allocation: Revenue allocation is about deciding which level of government gets to collect taxes and generate money. Each level of government—central (or federal), state, or local—has specific tax responsibilities. For example, the central government might collect income taxes, while state governments might collect sales taxes. Proper revenue allocation ensures that each level has enough money to carry out its duties effectively.

Expenditure Responsibilities: Different levels of government have different spending responsibilities. The central government often handles national matters such as defense and foreign relations, while state or local governments manage local issues like schools, roads, and health services. This division allows each level of government to focus on areas that best meet the needs of its population.

Intergovernmental Transfers: To help regions that might not have enough revenue, fiscal federalism includes intergovernmental transfers. These are payments or grants from the central government to state or local governments. These transfers help ensure that all regions, even those with less money, can provide essential services to their people. This system aims to balance out differences in resources and needs across different areas.

Coordination and Accountability: Effective fiscal federalism requires good coordination between different levels of government to avoid overlapping or wasting resources. Each level must be accountable for its own financial management and the results of its spending. This ensures that public money is used efficiently and responsibly.

Constitutional Framework: In many federal countries, the constitution outlines how powers and responsibilities are divided. For instance, in India, Article 246 and the Seventh Schedule of the Constitution specify the roles and powers of the central and state governments. These roles are divided into categories like the Union List, State List, and Concurrent List, which helps in clearly defining what each level of government is responsible for.

Importance of Fiscal Federalism:

Efficiency: Fiscal federalism helps local governments manage local needs more effectively. When local governments handle their own resources and responsibilities, they can allocate money and services in ways that directly benefit their communities. This can lead to better and more efficient public service delivery.

Equity: By redistributing resources through intergovernmental transfers, fiscal federalism helps address regional inequalities. It ensures that less developed or poorer areas get the support they need, helping to balance out differences between rich and poor regions.

Stability: A well-designed fiscal federalism system can contribute to overall economic stability. By balancing responsibilities and powers between different levels of government, it helps maintain a stable economic environment and prevents any one level of government from becoming too dominant or overextended.

Conclusion:

Fiscal federalism is a key framework that governs how financial responsibilities and resources are shared among different levels of government. It ensures that money is collected and spent efficiently and fairly, meeting the diverse needs of different regions. While it helps in efficient resource allocation, regional equity, and economic stability, it also requires careful coordination and accountability to function effectively. Understanding fiscal federalism is essential for appreciating how governments manage their finances and work together to support economic growth and stability.

Question 5:- What are the measure recommendations of Fourteenth Finance Commission?

Introduction:

The Fourteenth Finance Commission of India was established on January 2, 2013, to review and recommend improvements to the fiscal framework of the country. Its goal was to enhance the financial health of both central and state governments and to promote a more equitable distribution of resources. The Commission made several important recommendations to achieve these objectives. This answer outlines the key recommendations of the Fourteenth Finance Commission and their implications.

Key Recommendations of the Fourteenth Finance Commission:

Increase in States’ Share in Central Taxes: The Commission recommended raising the states’ share in the central tax revenues from 32% to 42%. This was a significant increase and aimed to provide states with more financial resources. By giving states a larger share of the central taxes, the Commission intended to empower states financially and enable them to better meet their responsibilities.

Delinking Centrally Sponsored Schemes (CSS): The Commission suggested delinking eight Centrally Sponsored Schemes (CSS) from central support. This would give states more control over these schemes and allow them to implement them according to their own priorities. While over 30 CSS schemes were identified for potential delinking, not all have been delinked due to national priorities.

Distribution of Grants to Local Bodies: The Commission recommended that grants to states for local bodies be distributed based on the 2011 population data. The formula suggested 90% weight for population and 10% for area. This approach aimed to ensure a fairer distribution of resources to local bodies, helping to address regional disparities.

Revenue Compensation under GST: To address potential revenue losses from the Goods and Services Tax (GST), the Commission recommended a compensation scheme for states. This involved 100% compensation for the first three years, 75% in the fourth year, and 50% in the fifth year. This recommendation aimed to support states in adjusting to the new GST system without facing significant financial losses.

Creation of a GST Compensation Fund: The Commission proposed setting up an independent GST Compensation Fund through legislative action. This fund would help manage the compensation payments to states, ensuring a smoother process and greater transparency in handling GST-related financial adjustments.

Fiscal Consolidation Roadmap: The Commission recommended a roadmap for fiscal consolidation, suggesting that the fiscal deficit should be capped at 3% of Gross Domestic Product (GDP) starting from the financial year 2016-17. This target aimed to promote fiscal discipline and reduce overall government borrowing.

Flexible Provisions for State Borrowings: To provide states with more flexibility, the Commission suggested allowing some extra borrowing beyond the annual fiscal deficit limit of 3% of Gross State Domestic Product (GSDP). This would enable states to manage their finances more effectively while still adhering to overall fiscal limits.

Establishment of an Independent Fiscal Council: The Commission recommended setting up an independent Fiscal Council to review and assess the fiscal policy implications of budget proposals. This Council would ensure that budget proposals are consistent with fiscal rules and policies, promoting better financial oversight and planning.

Amendments to the Electricity Act: The Commission suggested amendments to the Electricity Act of 2003 to allow penalties for delays in subsidy payments by state governments. This recommendation aimed to improve the financial management of the electricity sector and ensure timely payments of subsidies.

Independent Regulators for the Road Sector: To enhance regulation in the road sector, the Commission recommended establishing independent regulators. These regulators would oversee tariff setting, quality regulation, and other functions, ensuring better management and oversight of road infrastructure.

Evaluation of Government Ownership and Disinvestment: The Commission also recommended evaluating government ownership and considering disinvestment in Central Public Sector Enterprises. This would help in assessing the role of government enterprises and exploring opportunities for reducing government stakes where appropriate.

Conclusion:

The recommendations of the Fourteenth Finance Commission were aimed at strengthening India’s fiscal framework, enhancing the financial autonomy of states, and promoting cooperative federalism. By increasing states’ share in central taxes, delinking centrally sponsored schemes, and implementing other measures, the Commission sought to improve resource allocation and financial management. Addressing these recommendations helps in creating a more balanced and effective fiscal system, ultimately supporting economic stability and growth in the country.

Important Note for Students :– Hey everyone! All the questions in this chapter are super important!

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