Fiscal Reforms in India Since Independence

Fiscal policy refers to the taxation and expenditure decision of government. It includes various policies like export policy, investment policy, disinvestment policy, expenditure policy etc. to achieve the development of nation. Broadly, during the first 30 years of independence, between 1950 and 1980, the fiscal deficits of both the Central and the State Governments were not excessive. There was a significant deterioration in the fiscal situation in the 1980s, accompanied by large and automatic monetisation of government deficits. The fiscal reforms in India address both revenue as well as expenditure related policies.

fiscal reforms in India

Goals of Fiscal Policy

The major goals of fiscal policy are:

Fiscal Reforms in India

The government of India has initiated fiscal reforms in India from time to time to achieve the above stated goals but major fiscal reforms were started aftermath of 1991 economic crisis. The focus is on to raise revenue through taxation and improving the quality of public expenditure.

Revenue Reforms

Until 1980’s the direct tax rate was very high which induced people to evade taxes and create Black economy. Tax rate of income tax and corporate tax have been lowered to moderate level so that tax buoyancy is achieved through better compliance and minimum exemptions.

  • Excise duties and custom duties have been progressively reduced to make Indian Exports competitive in international market.
  • Service tax was introduced
  • GST
  • Fringe Benefit Tax
  • Minimum Alternate Tax (MAT)

Expenditure Reforms

Fiscal Reforms 1950’s

The objective of economic policy during the 1950s and 1960s was mainly to increase the growth rate of the economy through increasing public investment and overall economic planning. Taxation was used as an instrument for reducing private consumption and for transferring resources to the Government to enable it to undertake large-scale public investment in an effort to spur economic growth. Furthermore, taxation policy was geared towards achieving the economic objectives of:

  • promoting employment through grant of tax incentives to new investment
  • reducing inequality through progressive taxes on income and wealth
  • reducing pressure on balance of payments through increase of import duties
  • stabilizing prices through tax rebate in excise duties on consumption goods

The fiscal deficits of both the central and the state governments were not excessive. This was a period of revenue surplus in general.

Fiscal Reforms 1970’s

Fiscal policy during the 1970s consciously focused on achieving greater equity and social justice and both taxation and expenditure policies were employed towards this end. Accordingly, income tax rates were raised to very high levels, with the maximum marginal rate of income tax moving up to 97 per cent and, together with the incidence of wealth tax, it even crossed 100 per cent

Fiscal Reforms 1980’s

During the 1980s, Indian public finances were in a state of disarray with the fiscal pattern destabilising the relationship between the economy and the budget. This resulted in persistently large deficits which were seemingly intractable. Considerable fiscal deterioration took place during the 1980s and eventually became unsustainable, though the growth rate did rise significantly with enhancement in public investment in infrastructure. During this phase, expenditure of the Government was seen as an instrument having a bearing upon aggregate demand, resource allocation and income distribution. The Government sought to reduce its deficit through tax increases. Customs duties were hiked to augment revenue and to protect domestic industry. There was a structural change in the government budgets during the 1980s. The emergence of revenue deficit in 1979-80 in the Centre’s Budget continued to enlarge during the 1980s, raising concerns over the rising public debt and interest payments and the consequent constraint on the availability of resources for meeting developmental needs. The 1980s witnessed a steady increase in market borrowings along with an increase in Reserve Bank’s support to such borrowing, thus compromising monetary policy

Fiscal Reforms since 1990’s

India’s reform program included wide-ranging reforms. These reforms can be classified as:

  • Banking Sector Reform: It includes measures like:
    1. Liberalization, like dismantling the complex system of interest rate controls, eliminating prior approval of the Reserve Bank of India for large loans, and reducing the statutory requirements to invest in government securities;
    2. to increase financial soundness, like introducing capital adequacy requirements and other prudential norms for banks and strengthening banking supervision
    3. To increase competition like more liberal licensing of private banks and freer expansion by foreign banks
    4. Reduced CRR, SLR
    5. Introduction of prudential norms
    6. The Board for Financial Supervision was The Board for Financial Financial Supervision Supervision was set up within the RBI to attend exclusively to supervisory functions
    7. Removed barriers for entry of private sector banks
    8. Opening of payments bank and small finance banks
  • Capital Market Reforms: several steps have been taken after 1980’s to attract investments from foreign investors. This resulted in significant expansion of capital market in the 1980s. the market capitalization of companies registered in BSE rose from 5% of GDP in 1980s to 13% in 1990s. The financial market was further liberalized after Narasimham Committee were accepted by government. SEBI, which was originally established as a non-statutory body in 1988, was established as full-fledged market regulator. Based on Chandrashekhar Committee recommendations, Sebi, in June 2014, merged different classes of investors such as  FIIs, their sub-accounts and qualified foreign investors (QFIs) into a  new category called foreign portfolio investors (FPIs) and simplified the registration rules for FIIs’ entry into the capital market.
  • Insurance Sector Reforms: Insurance sector experienced drastic changes during the late 1990s and 2000 onwards. On the recommendation of Malhotra  committee  the  amendments  comprised  of  the  establishment  of  IRDA  (Insurance  Regulatory Development  Authority) in the year 2000 through the enactment of the IRDA Act 1999. The motive of this authority primarily was to look after the development and regulation of the insurance sector. Analogous to RBI, as the prime governing body for the banking  sector, this was made solely to deal with the insurance  Thereafter for every insurance company it was mandatory to get itself registered in IRDA and would abide to the norms  and  conditions  formulated  by  it.  Various  other  statues  like  Insurance  Act  1938,  General  Insurance Business Nationalization Act (GIBA) 1972, LIC act 1956 were also marked by several amendments. Thereafter, the insurance sector thrived immensely under the supervision of IRDA. Now, the public sector companies that were previously working under General Insurance Company of India broke their alliance and started operating independently thereby increasing the competition in  the insurance market. As  anticipated these developments resulted in the hiatus of monopoly by the public sector in the insurance sector, thereby carving out a pathway for other private ventures to explore the opportunities that lie un-availed in the insurance sector. It further gave them an idea of how to harness the hidden potential that lies within the insurance sector. This liberalization gave birth to the competition in the insurance industry and now the spark in insurance sector was ready to set ablaze the industry
  • Reducing the corporate tax rate on both domestic and foreign companies to the current level of 35 per cent and 40 per cent, respectively, from a level of 65 per cent and 70 per cent in 1980-81
  • Rationalisation of capital gains tax and dividend tax: duty on non-agricultural products from a level of more than 300 per cent during the period just prior to reforms to the level of 25 per cent as announced in the Union Budget 2003-04

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