has been a significant increase in the propor- tion of revenue deficit in GFD in respect of the Centre, Revenue deficit of the Centre consi- tuted 46.2% of GFD in 1992-93 but rose to 58.2% and 59.6% in 1993-94 (RE) and 1994- 95 (BE) respectively. As regards capital out- lay, there was &substantial decrease in its share from 33.9% of GFD in 1992-93 to 22.6% in 1993-94 (RE) but rose to 25.7% in 1994-95 (BE). During the corresponding period the proportion of revenue deficit of the States in their GFD rose only marginally from 24.5 per cent in 1992-93 to 26.0 per cent in 1993-94 (RE) and 27.1 per cent in 1994-95 (BE). As regards capital outlay, the corresponding pe- riod witnessed a marginal increase from 51.0 per cent of GFD in 1992-93 to 52.3 per cent in 1993-94 (RE). This however declined to 50.4% in 1994-95 (BE). The substantial in- crease in revenue deficit in the case of the Centre during the first three years of the Eighth Plan was largely the result of significant in- crease in the burden of non-plan revenue ex- penditure on account of heavy interest payments.
Budgetary Support to Plan 2.25 The projected budgetary support to the Eighth Plan at 1991-92 prices amounts to Rs. 1,88,475 crore, or 43.4 per cent of the ap- proved Eighth Plan outlay. The remaining 56.6 per cent is projected to come from the Internal and Extra Budgetary Resources (IEBR) of CP- SEs for their plans and own resources of States for financing their plans.
2.26 As mentioned in the preface to the Eighth Five Year Plan (Vol. 1) budgetary support is a crucial factor in the determination of outlays of sectors which do not have any access to internal resources or borrowings. Thus sectors like education, health, family welfare, agricul- ture etc. depend almost exclusively on budget- ary support for financing their plan outlays. Even in the case of sectors like power, rail- ways, coal etc. in the infrastructure sector, where the public enterprises generate interal
472
resources and have recourse to borrowings, a minimum budgetary support is necessary to protect the plan outlays of these sectors. As brought out in para 2.11, plan expenditure in key sub-sectors of the infrastructure like power and roads fell far short of the pro-rata level of 60 per cent of the approved outlay during 1992-95, and higher oultay on those sectors during 1995-97 pre-supposes more budgetary support.
2.27 The budgetary support to Central Plan (excluding Union Territories) amounts to Rs. 1,03,725 crore, which accounts for 55.0 per cent of the total budgetary support to central plan envisaged in the Eighth Plan. As per the approved budgetary support under different heads of development, bulk of this budgetary support goes to the social sector (including Rural Development ) which accounts for 5 1. 8 per cent (Rs.53,678 crores) of total budgetary support to Central Plan, followed by infra- structure sector (21.7 per cent or Rs.22,487 crores) and Agriculture & Allied Activities (I 0.5 per cent or Rs. 10,894 crores). Within the Social Sector, Rural Development accounts for 45.0 per cent of the total budgetary support for Social Sector followed by Education (13.9%), Family Welfare (12.1%) and Water Supply and Sanitation (10.7%). As regards infrastructure sector, power accounts for maxi- mum share of 39.8 per cent of the total budg- etary support to infrastructure followed by Railways (23.9%), Surface Transport (13.0%) and Coal and lignite (11.6%).
2.28 The budgetary support to States goes in the form of Central Assistance for State Plans, which consist of: formula- based Normal Cen- tral Assistance; Additional Central Assistance for Externally Aided Projects; Special Central Assistance for Area Programmes; and Trans- ferred Centrally Sponsored Schemes. The share of budgetary support for State Plans en- visaged in the Eighth Plan accounts for 41.7 per cent of the total budgetary support to the Eighth Plan. However, during the first three years of the Eighth Plan, the share of States in the overall budgetary support to the Eighth Plan (42.4%) was higher than that during the comparable period of the Seventh (33.4%) and the Sixth (33.2%) Plans.
2.29 In the case of Union Territories the budg- etary support envisaged in the Eighth Plan amounts to Rs.6,250 crore, or 3.3 per cent of the total budgetary support to the Eighth Plan.
2.30 During 1992-95, the budgetary support to Central Plan amounted to Rs. 58,930 crore, which accounts for 56.8 per cent of the ap- proved Eighth Plan budgetary support for Cen- tral Plan. In pro-rata terms this meant a shortfall in utilisation of budgetary support to the extent of Rs.3,302 crore at 1991-92 prices and Rs.4,746 crore at current prices. In the case of States, the Central Assistance for their Plans amounted to Rs.45,221 crore (as per the fig- ures in the Union Budget) or 57.6 per cent of the Central Assistance for State Plan envisaged in the Eighth Plan, thereby indicating a short- fall of the order of Rs. 1,879 crore at 1991-92 prices and Rs.2,698 crore at current prices.
2.31 External aid constitutes a significant pro- portion of budgetary support to public sector plan. External aid generally accounts for around 20% of the budgetary support to Cen- tral as well as State Plans (Central assistance), One major area of concern in regard to external aid has been the significant amount of the undrawn balance. which stood at Rs.26824 crore as on March 31, 1995. The trends in the utilisation of external aid separately for Centre and States can be seen from the figures given in Annex. 2.8. There has been an improvement in the pace of utilisation of external aid in the State sector as a result of promotional meas- ures taken by the Government of India, namely, release of 100% aid for all sectors and release of advance additional Central Assis- tance at the beginning of the year to the extent of 25% of the expected annual disbursement of aid. However, problems relating to land acquisition for projects, paucity of counterpart funds to meet domestic component of total cost, etc. affect the absorptive capacity of both Centre and State Governments which in turn slow down the pace of utilisation of foreign aid.
Plan of CPSEs 2.32 The Plan outlays of CPSEs account for about 70-75% of the total Central Plan Outlay Part of the budgetary support to Central Plan goes towards the financing of plan outlays of CPSEs. This now forms 20 - 25 per cent of the total budgetary support to Central Plan. The budgetary support is extended to CPSEs by way of both equity and loan. Equity compo- nent generally accounts for 55 to 60 per cent of the total budgetary support to CPSEs. Though the stated aim is to eliminate the de- pendance of CPSEs on budgetary support, the need to continue budgetary support persists because (i) CPSEs in infrastructure like power,
473
transport, etc. are unable to recover the eco- nomic cost of rendering the goods/services produced by them, and (ii) there is a felt need for helping sick units with minimum necessary plan support.
Prospects for 1995-97 2.33 Analysis of plan expenditure has revealed severe shortfalls in plan expenditure in the State Sector. As regards the Central Sector, inspite of relatively less severe shortfalls in overall terms, serious shortfalls occurred in the social sector, certain key infrastructure sectors and in some other important sectors like agri- culture and irrigation, which depend either exclusively or significantly on budgetary sup- port. In the case of both Centre and States there were noticeable shortfalls in Agriculture & Allied Activities as well as in Irrigation & Flood Control. In order to make good these shortfalls it is necessary to step up plan outlays significantly during the remaining period of Eighth Plan.
2.34 The overall resource requirement, which takes into account the shortfall in plan expen- diture during the first three years as well as the pro-rata outlay for the last two years, amounts to Rs. 206145 crore at 1991-92 prices. The resources for financing plan outlays of the CPSEs which form part of the central Plan should mainly come from the Internal and Extra Budgetary Resources of the Central Pub- lic Sector Enterprises for the Plan of CPSEs and from States' own resources for their plans. While profit making/resource rich CPSEs would be able to meet the approved outlay, other CPSEs, especially those in the infastruc- ture sector will not be able to protect their approved outlay in the absence of more budg- etary support. Similarly, the plan outlays in respect of Ministries/Departments in the social sector require considerable step up in their plan outlays to enable them to make good the short- fall in the last two years of the Eighth Plan. Thus, budgetary resources would be required on a substantially larger scale during the last two years of the plan. This is turn pre-supposes more favorable Balance from Current Reve- nues which can be secured through more reve- nue collection and/or reduction in non-plan revenue expenditure.
2.35 Since budgetary support available for plan is a residual amount (difference between revenue and capital receipts on the one hand and non-plan expenditure on the other), more budgetary resources for the plan of the Centre of the Centre as well as the States can come through only in two ways : (a) higher residual amount either through more revenue and/or less non-plan expenditure, and (b) higher fiscal deficit to allow for larger amount of capital receipts. The prospects in this regard are discussed in the following paragraphs.
2.36 The Central budgetary support for the fourth year (1995- 96) of the Eighth Five Year Plan has already been fixed at Rs.48,500 crore (B.E), which is higher than that in 1994-95 (BE) only by 4.3% In nominal terms. Of the aggregate amount of Rs.48.500 crore (B.E.) for 1995-96, total budgetary support for the Central Plan has been fixed at Rs.28,994 crore while total Central assistance for State and UT Plans has been fixed at Rs. 19,506 crore. Reve- nue expenditure is expected to comprise about 60% of total Plan expenditure in 1995-96, up from about 57% in 1993-94.
2.37 In assessing the resource availability question for the Annual Plan of 1996-97, LC. the final year of the Eighth Plan, the most important issue would be that of forecasting the tax revenues in respect of the four major central taxes viz., Income Tax, Corporation Tax, Union Excise and Customs Duties. The buoyancies of the major Central taxes have been computed, as detailed in Annex. 2.10, and have been applied to the respective bases to arrive at the projected tax revenues during 1996-97. It may be pointed out here that the Tenth Finance Commission (TFC) Report (p.168) has also made separate estimates of buoyancy of the major Central taxes. The pe- riod of analysis of those estimates is 1983-84 to 1992-93 whereas our period of analysis is 1980-81 to 1994-95. Our buoyancy estimates and those of the TFC in respect of the direct taxes are fairly close. For income tax and co- poration tax we have the figures of 1.14 and 1.28 as against the TFC figures of 1.103 and 1.310. In respect of Union excise duties our buoyancy estimates are marginally lower(0.98 as against the TFC estimate of 1.013) which is mainly due to some rate reduction and ration- alisation of the excise duty structure. As re- gards customs duties our estimate of 0.72 Is significantly lower as compared to the figure of 1.389 in the TFC report. This is owing to two factors viz, (i) while the TFC has regressed Customs duties on GDP, we have chosen the value of imports as the explanatory variable and (ii) there has been a continuing across the board reduction in import tariffs after 1992- 93, the terminal year of the TFC analysis. For
474
purposes of tax projections it is assumed that during 1995-96 GDP grows at a rate of 5.6%, with an inflation rate of 9%. For the terminal year of the Plan i.e. 1996-97, a GDP growth rate of 6%, with an inflation rate of 7%, is projected.
2.38 The remaining Central taxes which in- clude, among others, Interest Tax, Expenditure Tax, Wealth Tax, Gift Tax, etc. constitute only a small fraction, about 2.5%, of the gross tax revenue of the Centre. These have been as- sumed to grow at the same rate as nominal GDP. Of the gross tax revenues available to the Centre, a part of it, 77.5% of personal income tax and 47.5% of Union Excise duties, consti- tutes States' share as per the Tenth Finance Commission (TFC) dispensation. To the bal- ance amount must be added the non-tax reve- nue to arrive at the total revenue receipts available with the Centre. Non-tax revenue has also been assumed to grow pari passu with nominal GDP.
Non-Plan Expenditure 2.39 The three principal items of non-plan expenditure are interest, defence and subsi- dies. Interest payments and defence expendi- tures in 1996-97 are projected at Rs.58,000 crore and Rs.29.000 crore, representing in- creases over 1995-96 B.E. figures by 11.5% and 13.7% respectively. As regards subsidies, a perusal of the data from 1985-86 reveals that while the average growth of subsidies during 1985-89 was at a rate of 23%, the growth rate has been arrested significantly during 1990- 95. It may pot be unreasonable to expect that barring some unforeseen events subsidies in 1996-97 will not go beyond Rs. 11,300 crore, growing at the same rate as observed over the last four years taken as a whole. As regards other non- Ian expenditure (NPE) the major items are postal deficits, exchange loss under FCNR accounts scheme, general services, so- cial services, economic services, non-plan grants to states and UTs, non-plan loans to states and UTs, non plan capital outlay and non plan loans to public enterprises. These have been assumed to grow at the same rate as in the post reform years. The projections of the non- plan grants to States have been carried out as per the recommendations of the Tenth Finance Commission.
2.40 Finally a critical question pertains to the extent of fiscal deficit that the Government may like to aim at for the year 1996-97. Con- trolling aggregate expenditure has been a ma- jor plank of the Government's post reform policy of bringing down fiscal deficits. Given the compulsion on the current expenditure side, this has however had the unfortunate impact of bringing about cuts in capital expen- diture, particularly in infrastructure and the social sectors. There is wide consensus that a much more appropriate objective would be to ensure that the revenue deficit be curbed. This would bring about fiscal compression in a more desirable manner in that it would be carried out without cutting down on capital expenditure on infrastructure and the core sec- tors. Table 3 presents the fiscal and revenue deficits as a percentage of GDP from 1990-91 onwards. In this context it is worth mentioning that the principal reason for the revenue deficit being high is the substantial amount of interest payments on accumulated debts. If one were to focus on primary deficit, i.e. fiscal deficit less interest payments, there has in fact been a significant compression starting 1991-92 bar- ring a year of sharp increase during 1993-94 The real problem however is that the primary deficit has gone down owing to significant cuts in capital expenditure, which would have ad-
Table - 3
Fiscal and Revenue Receipts
Primary
Year Fiscal Deficit Revenue Deficit Deficit
(% of GDP) (% of GDP) (% of GDP)
1990-91 8.3 3.5 4.3
1991-92 5.9 2.6 1.6
1992-93 5.7 2.6 1.3
1993-94 7.4 4.3 3.0
1994-95 (B.E) 6.6 3.7 1.9
1995-96 (B.E) 5.5 3.4 0.5
475
verse effects for the long term gowth prospects of the economy.
2.41 While it is undoubtedly true that there has been a reduction of the Centre's fiscal deficit from 8.3% of GDP in 1990-91 to 5.5% in 1995-96 (B.E ) it is important to emphasise that the overall borrowing requirement of the Cen- tre, States and UTs (including the extra budg- etary resources of PSUs) has been relatively steady. In order to have a more disciplined fiscal regime it is imperative that the overall public sector borrowing requirement, and not the fiscal deficit alone, be reduced.
Table 4
Budgetary Transactions of the Centre, States
and UTs
(Including extra budgetary re-
sources of PSUs for financing their
Plans)
Year Gap of total outlay
over current revenue
(as % of GDP)
1980-81 9.0
1981-82 8.3
1982-83 9.5
1983-84 9.6
1984-85 11.1
1985-86 10.4
1986-87 12.7
1987-88 11.6
1988-89 11.2
1989-90 12.0
1990-91 12.3
1991-92 10.6
1992-93 10.2
1993-94 11.7
1994-95 (R.E) 11.3
2.42 One disconcerting feature of the Plan expenditure is the growing revenue compo- nent arising mostly from the implementation of a large number of staff-oriented schemes. In the Central Sector, the revenue component constituted about one-third of the total plan expenditure on the eve of the Seventh Plan but rose to nearly 60 per cent in 1994-95. This calls for a critical review of schemes so as to facili- tate Identification of steps aimed at containing growth in the revenue component of Plan ex- penditure by substantial reduction in the mul- tiplicity of schemes. Such a review may also be helpful in initiating action aimed at achiev- ing not only economy in expenditure but im- provement in productivity. A similar review is equally necessary in the State sector.
2.43 An examination of the Tax : GDP ratio (see table 5) at the All India level from the period 1985-86 reveals that while the ratio had reached 17.10 per cent in 1987-88 and was 17.01 per cent in 1989-90, it has systematically come down in the post reform years from 16.76 per cent in 1991-92 to 15.5% as In 1994- 95 (R.E). As regards Central taxes as a percent- age of GDP, while the ratio had reached around 11.3 per cent in 1987-88 it has steadily climbed down to about 9.9 per cent during the past two years. Assuming that the Central revenue mo- bilisation effort in the terminal year of the Plan were to be increased by one percentage point to 10.9 per cent, which would still be well below the levels achieved in the years preced- ing economic reform, the additional tax mobi- lisation would be well in excess of Rs. 10,000 crores.
Table 5
Tax: GDP Ratios
Total Tax Revenue Central
Taxes
(All India) Gross
1985-86 16.50 10.93
1986-87 16.91 11.21
1987-88 17.10 11.30
1988-89 16.91 11.24
1989-90 17.01 11.30
1990-91 16.49 10.82
1991-92 16.76 10.94
1992-93 16.24 10.62
1993-94 15.50 9.63
1994-95 (R.E) 15.50 9.87
1995-96 (B.E) 9.92
2.44 An analysis of the direct and indirect tax structure reveals that the buoyancy of indirect taxes, viz, Union excise and customs, has de- clined in the post reform years as compared to the pre 1991-92 period. As mentioned in the para above this has come about owing to some rationalisation of excise and custom duties, but there is a large scope for improving tax collec- tion and expanding the coverage of tax payers. Computations reveal that if the buoyancy ob- served in the pre reform years was to be main- tained the tax revenue collections, particularly in respect of Union Excise and Customs,
476
would have been higher by about Rs.20,000 crores.
2.45 There is wide consensus that a substan- tially higher mobilisation of direct tax reve- nues is imperative as part of the fiscal restructuring programme. This view also forms the core of the recommendations of the Tax Reforms Committee which reported in 1992. Now that the rate schedule in respect of personal income tax has been reduced to the top marginal rate of 40 per cent, as suggested both by tax theory as well as actual experience in several countries, what needs now to be done is to widen the tax base by bringing into the tax net all the potential income tax as- sessees such as professionals, shop keepers and traders who are outside the tax net. The experience with presumptive tax on income has not been particularly salutary as yet. This is not for lack of potential in this area. Better organisation and tighter enforcement would undoubtedly yield substantially higher reve- nues. One ought to seriously consider taxing fringe benefits. In the sphere of corporate taxes it is seen that a large number of corporate entities, even though showing substantial prof- its and giving regular dividends, are in the zero tax paying category. A number of fiscal schol- ars are of the view that one may introduce a "gross assets tax" as a minimum tax on busi- ness to garner resources for such companies. Such a tax has already been imposed in Mexico and Argentina. A minimum tax would serve as a check against avoidance of tax through ma- nipulation of accounts. Some other important avenues of taxation are taxation of services which constitute a large and growing sector of the economy, tax deduction at source (TDS) on dividends, agricultural taxation, and taxa- tion of urban property. In addition to all of the above there is considerable scope for resource mobilisation by upward revision of user charges in respect of electricity tariff, irriga- tion rates as well as charges for services pro- vided by Government hospitals.
2.46 In this context it would be particularly relevant to emphasise here that the total num- ber of income tax assessees comprises less that 1% of the population of the country. Some computations based on N. S. S. household con- sumer expenditure data (1987-88) suggest that about a third of the population with incomes above the exemption limit actually pay per- sonal income tax. This implies that substantial numbers of potential income tax assessees have to be brought into the fold of direct taxes.
This would call for a major effort in tax ad- ministration and enforcement. Further, it should be noted that while direct taxes com- prised about 2.7% of GDP in India during 1993-94, the recent average for 14 developing Asian countries was about 5 per cent of GDP. Thus a step-up in direct tax revenue in India by say I percentage point of GDP ought to be regarded as being entirely feasible.
Resource Requirement for 1996-97 2.47 Keeping in view the projections of reve- nues and non-plan expenditure detailed in the paras above, and assuming alternative levels of fiscal deficit (5.1% & 5.5% of GDP), the extent of Central budgetary support available for the Plan have been worked out to be in the range of Rs.50998 crore to Rs. 63,561 crore for the terminal year of the Plan. These are de- tailed in Annex. 2.11. The salient features of this resource exercise may be enumerated here. All the alternatives are based on uniform projections of revenue receipts, using the his- torical buoyancy rates. The differences lie mainly in the projections of subsidies and non- plan expenditure. Alternatives 1 and 3 have projected subsidies for the year 1996-97 based on available information, at Rs. 12,400 crores. Alternatives 2 and 4 have projected a sum of Rs. 11,305 crores for subsidies, based on the trend observed during the post reform years. Similarly, for the other non plan expenditure (NPE), as discussed in para 2.39, the higher figure projected in Alternatives 1 and 3, at Rs.42,600 crore, is based on somewhat more liberal projections while Rs. 35,875 crore as projected in Alternatives 2 and 4 take into account the growth rate of expenditure in the post reform years. Given the above scenario, the amount of Central budgetary suport avail- able for the Plan would depend critically upon the extent of fiscal deficit that we choose to have. If for example, the fiscal deficit is to be pegged at 5.1% of GDP for the year 1996-97 the amount of Central budgetary support avail- able for the Plan would be of the order of Rs.50988 crores according to Alternative 1, whereas the amount would be Rs. 58808 crores as per Alternative 2. Similarly, if the extent of fiscal deficit were to be stepped up to 5.5 per cent of GDP then the amount of Central budg- etary support available for the Annual Plan of' 1996-97 would be Rs. 55741 crore as per Al- ternative 3 and Rs.63561 crore as per Alterna- tive 4.
2.48 A number of alternative scenarios have been examined by the Planning Commission
477
regarding the requirement of resources that would have to be financed by the Central budg- etary support for the Annual Plan of 1996-97. The first scenario is where there is a step up of budgetary support of 10% in 1996-97 over 1995-96 in nominal terms. The requirement of Central budgetary support for the Annual Plan of 1996-97 works out to Rs.53350 crore. In the second scenario we examine the question as to how much of resources would be required in 1996-97 so that the original targets of the Eighth Plan were to be fulfilled. The amount of Central budgetary support required would work out to Rs.69,908 crores. Finally, in the third scenario, we examined the assessment of the different Divisions of the Planning Com- mission regarding the minimal amounts of funds required in their respective sectors. This amount comes to Rs.64000 crores for 1996-97. Thus it may be argued that a figure of a mini- mum of Rs.64,000 crores may be regarded as being the absolute minimum for the terminal year of the Eighth Plan, if one would want to protect the Plan size particularly in the social and infrastructural sectors, as well as in agri- culture and rural development.
2.49 It would be pertinent to examine at this point the extent of Central budgetary support for the Annual Plan during the Eighth Plan period (Table 6). It is clear that there has been a significant decline in the Central budgetary support for the Plan as a fraction of GDP during the Eighth Plan years as compared to the Sixth and Seventh Plan years. After aver- aging at more than 5 per cent of GDP in the first three years of the Eighth Plan there has been a significant dip of Central budgetary support to 4.6 percent of GDP during 1995-96. This trend will have to be reversed in the final year of the Eighth Plan so that there is no curtailment in the Plan allocation, particularly in the social sector as well as in the infrastruc- ture sector.
2.50 If India has to enter into a phase of sus- tained growth of GDP of 6% or more in the years to come it cannot be gainsaid that sub- stantially higher amounts of allocations have to be made for the infrastructure and social sectors. Fiscal compression should never mean a compression of expenditure in these vital areas, and it should in fact be focussed instead at drastically curbing inessential revenue ex- penditure. The fact that the revenue deficit is in the range of 3.4% of GDP in 1995-96 (B.E) which is considerably higher than the average of 1.1 per cent during the Sixth Plan, and 2.6%
Table 6
Year Central Budgetary Average
Support for the
Plan as % of GDP
1980-81 6.6
1981-92 6.4
1982-83 6.7 6.7 VIth Plan
1983-84 6.8
1984-85 7.2
1985-86 7.6
1986-87 8.8
1987-88 7.3 7.2 VIIth Plan
1988-89 6.6
1989-90 6.0
1990-91 5.3 Annual
1991-92 5.0 5.15 Plan
1992-93 5.2 First 4
1993-94 5.5 5.15 years of
1994-95 5.3 VIIIth
1995-96 (BE) 4.6 Plan