Advice and dissent on India’s fiscal path

  1. The report of the Fiscal Responsibility and Budget Management (FRBM) review committee (chaired by N.K. Singh) was made public in mid-April 2017, three months after submission to the government at the Centre
  2. The report prescribes a fiscal path over a six-year period of fairly severe fiscal tightening going up to the year 2023
  3. What it prescribes for the period beyond is a bit unclear, and is one of the issues raised in a detailed note of dissent by a key member of the committee, the chief economic adviser (CEA)
  4. The other members of the committee included important functionaries like the serving governor of the Reserve Bank of India
  5. The major point (of several) in the CEA’s dissent note, which is totally valid, is that the medium-term debt and FD targets have to be specified, and the consistency requirement between the two formally upheld, since debt is the accumulation of fiscal deficits over time, mediated by the nominal rate of GDP growth
  6. For example, the Maastricht treaty operating target for the FD at 3% of GDP was consistent with an eventual debt target of 60% of GDP in an economy growing at a nominal rate of 5.26%, which was judged feasible for the European Union member states
  7. Exactly like a slide in a children’s park, the fixed FD moves the economy asymptotically towards the steady state debt level targeted
  8. The FRBM committee’s target for the general government FD, not stated in the draft Bill but specified in chapter 4, is set at 5% of GDP
  9. There is some confusion about how the FD target will be split between the Centre and states, with chapter 4 saying 2.5% each, but chapter 5 showing states going down to 2% by 2023, and further down to 1.7% by 2025
  10. An FD held steady at 5% will move the economy at that nominal GDP growth rate towards a resting debt level of 48.5% of GDP
  11. Another issue correctly flagged by the CEA is that the FD target of 5%, through a back-of-the-envelope calculation first used by the 12th Finance Commission, is based on very uncertain estimates of the household financial savings rate
  12. The CEA then goes on to recommend the primary deficit (PD, obtained by subtracting interest on the public debt from the FD), as the appropriate operating target towards any prescribed debt destination
  13. Fiscal rules in terms of the primary deficit call for projection not merely of GDP growth, but also the rate of interest on public debt. To invoke the growth theory expectation that these two rates will be equal in the long run is to ignore medium-term realities and the frequent experience in many countries of cross-over between the two
  14. The FD is the best operating target, since it in effect folds in the required adjustment in the primary deficit when unanticipated changes happen in the relative positioning of growth and interest rates
  15. The national debt target of 60% is split into 40% for the Centre, 20% for states
  16. State borrowing through securities is under the operational control of the Centre
  17. There have been instances of off-budget borrowing by states beyond approved limits through parastatals, not adding to outstanding state debt, but serviced through the budget
  18. States were also, with full official sanction, permitted (even pressured) to borrow beyond routine limits so as to enable them to take over the debt of power utilities over a two-year window, 2015-17, under the Ujwal DISCOM Assurance Yojana (Uday) scheme
  19. The FRBM committee is to be commended for having unearthed state-level malpractices, but without taking on board the impact of resolution of all parastatal debt, the stable debt path projected for states seems more a hope than a realistic vision
  20. On the revenue deficit (RD), the committee prescribes a target of 0.8% of GDP for the Centre, but the CEA’s dissent note sees no need for a separate RD limit
  21. Dual limits on the FD and RD were adopted in India so as to protect capital expenditure, given by the difference between the FD and the RD
  22. The key element in the terms of reference given to the committee was counter-cyclicality in fiscal targeting, which is particularly difficult in India, given the timing of release of growth estimates
  23. This will be the problem every year, since the budget exercise will not have at hand revised estimates for the year just concluding, nor a reliable growth forecast for the forthcoming year
  24. But why not shift calibration from growth to rainfall? Rainfall deficiency has so far been treated fiscally in the disaster relief category
  25. It is that too, but calls for much more. Unless the frequency of rainfall deficiency in the south of India is addressed through capital enhancement for preservation of precipitation and recovery from wastewater, the human (and growth) consequences in an otherwise dynamic region will be unimaginable
  26. The drought this year in Tamil Nadu and neighbouring states has to be addressed through a national war effort—which necessarily calls for fiscal accommodation


Very important. Note all the highlighted terms and read about them. There are many points in newscard which can come handy in mains in answers related to Economy and why India’s fiscal targets have been unrealistic. Also read points 24 to 26 for Mains carefully. India is having a large proportion of population engaged in agriculture and formulating policies around rainfall will be beneficial for all stakeholders as country still lacks good irrigation facilities and most of the peasants are still dependent on Monsoon for their crops.

Hold fiscal deficit at 3% of GDP till 19-20: NK Singh panel

  1. Source: Report of the Fiscal Responsibility and Budget Management (FRBM) Review Committee chaired by former Revenue Secretary NK Singh
  2. It was set up to comprehensively review and give recommendations on the FRBM roadmap for future
  3. The Centre can take a pause on the fiscal consolidation front over the next three years by maintaining a fiscal deficit to GDP ratio of 3% till 2019-20
  4. Reaching a fiscal deficit to GDP ratio of 2.8% in 2020-21, 2.6% the next year and 2.5% in 2022-23
  5. Background: Govt has set a fiscal deficit target of 3.2% of GDP in 2017-18, marginally better than the 3.5% clocked last year
  6. The FRBM law enacted in 2003 had originally envisaged attaining a fiscal deficit of 3% of GDP by 2008-09, but amendments over the years had revised the year for achieving the same target to 2017-18
  7. Deviation: Deviations from the stipulated fiscal targets should not be more than 0.5%
  8. RBI: Governor Urjit Patel was not in favour of such a large deviation & was inclined to only permit a 0.3% deviation from the target
  9. Escape clause: Allow the government to skip the fiscal deficit target for a particular year, in situations that include national security concerns, acts of war, national calamities, a collapse of the agriculture sector and far-reaching structural reforms with unanticipated fiscal implications
  10. The escape clause can also be triggered if real output growth in the economy slips by 3 percentage points from the average of the previous four quarters
  11. Buoyancy clause: So that fiscal deficit must fall atleast 0.5% below the target if real output grows 3% faster than the average of the last four quarters
  12. New law: The existing FRBM Act and rules be scrapped and a new Debt and Fiscal Responsibility Act be adopted
  13. Council: The creation of a Fiscal Council that the government must consult before invoking escape clauses


Important for mains as well as prelims. Remember the salient recommendations to quote in mains.

Panel to suggest norms for Bitcoins, virtual currencies

  1. Committee: The department of economic affairs in the Ministry of Finance has constituted an inter- disciplinary committee chaired by Special Secretary (Economic Affairs)
  2. Aim: To examine the existing framework for virtual currencies and to close the regulatory gaps to keep a check on virtual currencies, including Bitcoins
  3. It will have representatives from the departments of revenue and financial services and the ministries of home Affairs as well as electronics and Information Technology
  4. It will also include experts from the RBI, the central government’s think tank NITI Aayog and the country’s largest bank, State Bank of India.
  5. The panel has been asked to submit its report within three months
  6. Terms of reference: To take stock of the present status of Virtual Currencies both in India and the world over
  7. To examine the existing regulatory and legal structures governing them and suggest measures for dealing with such currencies
  8. To examine how to cope with money laundering opportunities as well as consumer protection concerns that could arise from the use of virtual currencies
  9. Background: The circulation of Virtual Currencies which are also known as Digital/Crypto Currencies has been a cause of concern
  10. RBI has also cautioned users, holders and traders of virtual currencies (VCs), including Bitcoins, about the potential financial, operational, legal, customer protection and security related risks that they are exposing themselves to
  11. Advisory: In its latest advisory issued this February, the RBI had said it has not given any licence or authorisation to any entity or company to operate such schemes or deal with Bitcoin or any virtual currency
  12. As such, any user, holder, investor, trader, etc. dealing with Virtual Currencies will be doing so at their own risk


Important for prelims as well as mains. Know about Bitcoins here and the associated risks here.

Doubts raised over second IFSC’s viability

  1. News: The Commerce Department has asked the Department of Economic Affairs (DEA) to comment on the feasibility of having more than one International Financial Services Centre (IFSC) in India
  2. It has also sought comments from the DEA on the viability of the Maharashtra government’s proposal for an IFSC in Mumbai
  3. The IFSC: Proposed to be set up at the Bandra Kurla Complex in the country’s financial capital
  4. If it gets all the required clearances, it will be the second such centre in India following the Gujarat International Finance Tec-City (GIFT City) in Gandhinagar
  5. Potential: According to the state government, once approved, the Mumbai IFSC would potentially generate employment for 1.3 lakh people and attract investments to the tune of ₹12,014 crore within ten years
  6. It can even enter into collaborations with the GIFT City International Financial Services Centre as Mumbai has the advantage of being the country’s de facto financial capital
  7. Problem: Citing examples in other countries has said even advanced nations have been finding it difficult to develop more than one major international financial centre in their respective territory.
  8. Therefore, India, which is yet to have full capital account convertibility, may find it even tougher to make more than one IFSC viable
  9. The issue in detail: In its initial proposal, the Maharashtra government (and the concerned body, the Mumbai Metropolitan Region Development Authority) had sought a relaxation of the minimum land norm of 50 hectares of contiguous and vacant land because what could be made available then for the proposed Mumbai IFSC was only 32 hectares of such land
  10. The State government sought the Centre’s nod to ease the land norms by considering the built-up area instead of contiguous and vacant land. The State wanted the Mumbai IFSC to be a multi-services SEZ like the GIFT City
  11. Revised proposal: However, as the Centre had expressed reluctance to grant the Mumbai IFSC a ‘special exemption’ from the land norm, Maharashtra then sent a revised proposal stating that it is in possession of about 52 hectares for the IFSC
  12. Non-developable: This included 32-33 hectares of commercial land as well as 19-20 hectares of ‘non-developable’ green area
  13. The Commerce Department has now asked the Maharashtra government to explain and clarify the term ‘non-developable’
  14. The department wants to know whether it will include area falling under the Coastal Regulation Zone, where there are curbs on construction, development and industries, and therefore could attract objections from agencies in charge of environment and pollution


Important for prelims as well as mains. The details of the issue are just to make you aware of the happenings. Not actually important for exam.


The regulatory mechanism:

  1. The DEA, in the Finance Ministry, is the nodal agency for formulation and monitoring of economic policies at the macro-level such as the ones relating to the functioning of the financial services sector in the country like banking, insurance and capital markets, including stock exchanges
  2. IFSC-related matters fall within the jurisdiction of financial sector regulators such as the Reserve Bank of India, Insurance Regulatory and Development Authority and Securities and Exchange Board of India as well as the Finance Ministry
  3. The Special Economic Zone (SEZ) Act is pertinent in this case as IFSC is set up in a SEZ, and therefore, the Commerce Department has a crucial role here as it is the nodal body at the Centre for SEZ-related matters
  4. The SEZ Act merely states that the Centre can approve only one IFSC in a SEZ, and does not bar more than one IFSC in the country

You can switch from EPF to NPS

  1. More than eight crore members of the Employees’ Provident Fund, can now opt to move their retirement savings to the National Pension System over two years
  2. NPS is overseen by the Pension Fund Regulatory and Development Authority (PFRDA)
  3. Finance Minister Arun Jaitley had promised such an alternative for employees in the Budget for 2015-16
  4. Why move? Terming members of EPF and Employees’ State Insurance Corporation (which provides medical care to organised sector workers) as “hostages, rather than clients”, the finance minister had said such workers’ incomes suffer due to high statutory deductions towards EPF and ESIC


Not very important for exam but being an extension of budget announcement, it can be a prelims tit-bit too.


The NPS or the National Pension Scheme is a contribution scheme launched by the Indian government, which offers a large variety of investment options to employees. The scheme helps individuals make decisions with regards to where they should invest their pension wealth. The National Pension Scheme’s main objective is to lower the liabilities of the Government of India with regards to total pension as well as to ensure that the country’s citizens would earn a stable income following their retirement along with helping them earn decent returns on their investment.

The NPS was launched on the 1st of January 2004 and was aimed at individuals newly employed with the central government, but not including ones in the armed forces. From the year 2009 however, the NPS was made open to every Indian citizen between the age of 18 and 60.

Rail Bhavan, North Block spar after Budget merger

  1. Context: Issues between Rail and Finance ministries in less than a fortnight after the historic merger of the Rail Budget with the Union Budget
  2. Dividend: The Finance Ministry has asked the Railways Ministry to hereafter remit the annual dividends it receives from the 14 central public sector units (CPSUs) under its purview
  3. The Railways ministry has shot back arguing that giving away the dividends from the CPSUs – estimated at about ₹850 crore for 2017-18 – would hit its earnings
  4. Saving on dividend payments to the MoF was one of the biggest arguments made in favour of scrapping the separate Rail Budget


Keep track of the issue as it develops. Important for prelims and mains both. To revise news related to the rail budget merger, click on the Ministry of Finance: Important Updates story, of which this news is a part of. Additional stories with relevant news can be found here – Railway Reforms

[op-ed snap] Not On A War Footing


  1. Having made no reference to the defence budget in his budget speech last year, much to the chagrin of many, Finance Minister Arun Jaitley made an almost passing reference to it when he presented the 2017 Union budget on February 1
  2. Many defence analysts, and even the standing committee on defence, have been rooting for defence outlays to be pegged at 3% of GDP

Underpinnings of the issue:

  1. It would adversely affect modernisation of the armed forces
  2. Unfortunately, repeated underutilisation of the capital budget weakens the case for higher allocations for new acquisitions
  3. Underutilisation of the capital budget is because of the finance ministry’s machinations, which wouldn’t let big contracts be approved, so it could withdraw huge sums from the MoD to meet the fiscal target
  4. Underutilisation of the capital budget is likely to be close to Rs 7,000 crore; for the last year, it was double
  5. There is no doubt the allocated amount would be insufficient if all contracts in the pipeline get signed during the next fiscal
  6. But apparent inadequate allocation for maintenance of equipment currently in use is an important concern
  7. There is an immediate requirement for funds for this purpose
  8. Similar is the case with war wastage reserves, including ammunition stock

Make in India:

  1. There has been focus on “Make in India” in defence as well
  2. Projects can be undertaken by Indian industry for indigenous design and development of prototypes of defence products with government funding
  3. Since its introduction, no development contract has been signed so far for any “Make” project
  4. With a meagre allocation of Rs 44.63 crore for assistance to prototype development, it seems the MoD isn’t expecting many projects

Some other provisions of the budget:

  1. The budget is not just about numbers. It is also a statement of the government’s vision
  2. The finance minister chose to refer to two quite innocuous schemes:
  • Centralised Defence Travel System
  • Interactive Pension Disbursement System
  1. However, there was no mention of important policy issues like the strategic partnership scheme and defence technology fund
  2. More than 50% of the total expenditure on defence will go in salaries and pensions, is serious enough to warrant a statement on how the government intends to cope

Way forward:

  1. An outcome-oriented monitoring of utilisation of outlays is needed, as recommended by the standing committee last year
  2. This is the only way to ensure that the focus shifts from ensuring full utilisation of funds to spending these wisely on the desired outcomes

The budget allocations are a reflection of the government’s desires and visions. USA allocates its biggest portion of budget in defense. India too needs to loosen its pockets on defense services, specially when we are living in an era of nuclear technology with neighbours like China and Pakistan.


Though a direct question may not be possible, it is certainly important to understand the issue.

[op-ed snap] The message in the median


  1. The Union Budget for 2017-18 has been presented against the background of a difficult international environment
  2. The environment is spiced with growing protectionism, poor investment climate in the country due to the stressed balance sheets of corporate and banking sectors, and severe distress caused by the demonetisation move
  3. The quick estimate of national income released by the Central Statistical Organisation showed that even while the impact of the demonetisation is not considered, the growth rate of all sectors except agriculture and public administration were slowing down
  4. The Economic Survey estimates that the decelerating in growth due to the demonetisation is a quarter to half percentage point

A premium on prudence:

The Budget had a number of new features:

  1. It was advanced by a month and the process of passing the Budget completed within the financial year
  2. The merger of the Railway Budget with the main Budget helps to plan and develop the transport sector as a whole
  3. The abolition of the Plan and Non-Plan distinction, which was the recommendation of the Expert Committee on Efficient Management of Public Expenditure in 2013. This helps to look at each of the sectors in a holistic manner and avoids distortions in allocating resources between maintenance of existing assets and creation of new assets
  4. The Budget speech also refers to the Outcome Budget being placed in Parliament. It remains to be seen to what extent the Outcome Budget provides a link between outlays and outcomes

Pointers of the budget:

  1. For 2016-17, the revised estimate of fiscal deficit at 3.2% of GDP is marginally lower than the budgeted, but that is mainly due to the change in the GDP estimate
  2. For 2017-18, the path of adjustment required reducing the deficit to 3%
  3. There has been a clamour for initiating economic revival by taking measures to boost private consumption expenditures through transfers or tax cuts
  4. The FM has not ventured into the much-advocated universal basic income primarily because it is not easy to cut subsidies and transfers commensurately to release resources for the purpose
  5. At the same time, he has done little to rationalise explicit subsidies which at ₹2.7 lakh crore constitute 1.6% of the GDP
  6. Subsidies claim as much as what has been allocated to defence and are just a little lower than capital expenditures
  7. In a situation where the growth scenario is severely hampered by a poor investment climate, and has been sustained only by private consumption which too has fallen sharply after the demonetisation, it was hoped that the Budget would make a substantial increase in capital expenditures but that hope has been belied
  8. Much of the economic revival depends on the Union government’s spending on infrastructure
  9. The aggregate capital expenditure in 2017-18 as a ratio of GDP is just about 1.8%, which is the same as in 2016-17 (revised estimate)
  10. In fact, even within this, the capital expenditure under defence is about 0.5% of GDP — as much of it will be for imported equipments, the impact of that on the economy is negligible

Mixed bag of tax sops:

  1. On tax proposals, the picture is mixed. Reduction in the rates of tax for companies with less than ₹50-crore turnover to 25% from the existing 30% brings in benefits to 96% of companies
  2. At the same time, very little has been done to rationalise tax preferences and reduce the rate to 25% for all corporates by 2019, which was promised by the Finance Minister in the 2015-16 Budget
  3. The point is, it is important to rationalise the tax system and avoid loading it with several objectives which only complicate the structure and provide avenues for evasion and avoidance
  4. As far as personal income goes, the reduction in the tax rate to 5% for individuals up to ₹5 lakh income provides some relief
  5. At the same time, the scope of surcharge has now been expanded to people with taxable income of ₹50 lakh to ₹1 crore at 10%
  6. The present 15% surcharge on those earning more than ₹1 crore will continue

Indirect Taxes:

  1. On indirect taxes, given that the GST is scheduled to be rolled out in July 2017, some rationalisation in excise duty could have helped to smoothen the transition
  2. There are 300 commodities exempt from excise duties and the list could have been pruned

Expectations ahead:

  1. The Finance Minister had to demonstrate that he will continue to wage the war against black money and take the bull by the horns by reducing the limit for cash donations to political parties
  2. In a large country like this, it is not difficult to find people to make surrogate donations
  3. Thus, it is not certain if the measure to cap individual donations in cash at ₹2,000 is merely cosmetic
  4. The disappointment with the budget is the lack of measures to revive the economy in the prevailing difficult global and domestic environment


A question is never directly asked on budget in UPSC exam, but you have to refer to it time and again as pointers in the answers. The Budget is an imperative part of civil service preparation. It gives an understanding of the economy and points out towards the trend of the government expenditure and priorities.

Budget 2017: Arun Jaitley likely to take the stimulus route to economic growth

  1. Union Budget 2017 is likely to significantly increase public investment in infrastructure
  2. It would offer a fiscal stimulus to boost economic growth at a time when private investment shows no signs of a pick-up
  3. There is near unanimity that the economy needs to be spurred through higher public investment, unlike last year when there was a significant divergence of opinion over the need for fiscal stimulus
  4. Last year, chief economic adviser in the finance ministry Arvind Subramanian advocated a stimulus, but the minister decided to stick to the fiscal deficit target of 3.5% of gross domestic product (GDP), fearing a backlash from investors and rating agencies
  5. Different schools of thought have argued either in favour of fiscal consolidation and stability or for a less aggressive consolidation and for boosting growth


Brush up your budget basics and know what is Fiscal Consolidation, stimulus and what are the effects of stimulus.

Financial data management body mooted

  1. Who: A committee set up under the Dept of Economic Affairs
  2. What: It has recommended the creation of a statutory body that will standardise data from all financial sector regulators in a single database and will provide analytical insights based on the data
  3. The committee was to study the financial data management legal framework in India
  4. In its report, it suggests the passage of a Bill in Parliament—the Financial Data Management Centre Bill 2016—to create the statutory body, as recommended by FM Arun Jaitley
  5. The powers of the Financial Data Management Centre (FDMC) will include the establishment, operation and maintenance of the financial system database
  6. It will also collect financial regulatory data and provide access to it.
  7. The body will also provide analytical support to the Financial Stability and Development Council (FSDC) on issues relating to financial stability
  8. Background: In 2015, when the FSDC first suggested the creation of such a body, the RBI had objected to sharing company-specific data with the body as it was not statutory in nature
  9. Hence sharing such data would be a breach of confidentiality
  10. Hence Dept of Economic Affairs re-examined the issue and obtained the Finance Minister’s approval to establish a statutory FDMC, following which a committee was formed to recommend the way forward


1. With a view to strengthening and institutionalizing the mechanism for maintaining financial stability, enhancing inter-regulatory coordination and promoting financial sector development, the Financial Stability and Development Council (FSDC) was set up by the Govt as the apex level forum in December 2010.

2. The Chairman of the Council is the Finance Minister and its members include the heads of financial sector Regulators (RBI, SEBI, PFRDA, IRDA & FMC) Finance Secretary and/or Secretary, Dept of Economic Affairs, Secretary, Dept of Financial Services, and Chief Economic Adviser. The Council can invite experts to its meeting if required.

3. Without prejudice to the autonomy of regulators, the Council monitors macro prudential supervision of the economy, including functioning of large financial conglomerates, and addresses inter-regulatory coordination and financial sector development issues. It also focuses on financial literacy and financial inclusion.

FRBM panel report in December; may suggest new deficit goalposts

  1. A government appointed committee to devise a roadmap for fiscal consolidation is likely to submit its report by next month
  2. The NK Singh-led committee to review the FRBM roadmap was set up by the Finance Ministry in May
  3. The 5-member committee is likely to call for a new law to replace the Fiscal Responsibility and Budget Management Act, 2003
  4. It will also suggest new goalposts for the Centre and States’ fiscal deficits

Union Budget to be presented around 1 February: Modi

  1. Source: PM Modi
  2. What: He confirmed that next year’s Union budget will be presented around 1 February
  3. Where: A PRAGATI (Pro-Active Governance and Timely Implementation) meeting
  4. The meeting was to review the work of projects and programmes of the government with state chief secretaries via video conferencing
  5. He asked the state governments to advance their budget schedule, too, so that they are aligned with the Union budget
  6. Last month, the Union cabinet decided to merge the railway budget with the Union budget

Cabinet approves merger of Rail, General budgets

  1. Ending a 92-year-old tradition, the Union Cabinet decided to merge the Railway budget with the General budget
  2. Autonomy: The merger of budgets would not impact the functional autonomy of the railways, but help in enhancing capital expenditure
  3. The cabinet also agreed, in-principle, to advance the date of its presentation in Parliament from the usual February end
  4. The actual date for presentation of the General budget for 2017-18 will be decided by the Govt after taking into account the coming Assembly elections
  5. The Cabinet has also decided to do away with the Plan/ Non-Plan expenditure classification in Budget 2017-18 and replace with ‘capital and receipt’

Special package announced for Andhra Pradesh

  1. Prime Minister made an announcement which, in practical terms, amounts to the treatment of residual Andhra Pradesh as a Special Category state
  2. The package is valid for five years- 2015 to 2020
  3. It revolves around various sections in the A.P. Reorganisation Act, the 14th Finance Commission report recommendations, oral commitment made by the then Prime Minister in February 2014 and the recommendations made by the Niti Ayog in 2015
  4. Centre would authorise the State to take charge of the construction while it would meet the financial needs
  5. CBDT would issue two specific notifications on tax concessions being extended to AP

Overhauling the budgeting process- a reforms agenda

  1. Rail budget: The practice of presenting a separate Budget for the railways is to be scrapped from 2017
  2. Budget documents getting slimmer with indirect tax proposals finding almost no mention after excise duties, service tax and cesses are subsumed under the proposed GST regime
  3. Plan v/s Non-Plan: Abolition of the distinction, to be replaced with capital and revenue expenditure, is also on cards
  4. Time: Until 2000, the Budget was announced at 5 pm & the practice was inherited from the pre-Independence era, when the British Parliament would pass the Budget in the noon followed by India in the evening on the same day
  5. In 2001, the NDA Govt under Atal Bihari Vajpayee changed the ritual and the then finance minister, Yashwant Sinha, presented the Union Budget at 11 am
  6. New financial year: Govt has already set up a committee to examine its feasibility, replacing the existing April-March period

Govt mulls presenting Budget by Jan-end

  1. Why? To complete the exercise before the beginning of the new financial year
  2. Impact: There would be no need for a Vote on Account and a full Budget can be approved in one stage before March 31
  3. Constitution: Does not mandate any specific date for presentation of the Budget
  4. Traditionally: The Union Budget has for decades been presented on the last working day of February and the two-stage process of parliamentary approval takes it to mid-May
  5. Stage 1: As the financial year begins on April 1, the Govt in March takes Parliament approval for Vote on Account for a sum of money sufficient to meet expenditure on various items for two to three months
  6. Stage 2: The Demands and Appropriation Bill, entailing full-year expenditure and tax changes, is then passed in April/ May

Why a new schemes approval system?

  1. Plan v/s non-plan: After doing away with this distinction at the end of 12th FYP (announced in Budget 2016-17), a plan non-plan neutral appraisal and approval system is imperative
  2. This spread of resources: It is because Ministries had started operating small and multiple schemes & as a result it hampered realisation of any meaningful outcomes

New norms for clearing public-funded schemes

  1. News: The Finance Ministry has issued new norms for the appraisal and approval of public-funded schemes as well as to improve the delivery of goods and services to citizens
  2. Approval: No new scheme or sub-scheme can be initiated without the prior in-principle approval of the Department of Expenditure
  3. This will not apply to the announcements made in the Budget Speech for any given year
  4. Empower ministers to approve expenditure proposals of up to Rs 500 crore, up from the previous limit of Rs 150 crore
  5. Administrative Ministries should continuously endeavour to merge, restructure or drop existing schemes and sub-schemes that have become redundant or ineffective with the passage of time

RBI Governor appointed by PMO on the recommendation of Finance Minister

  1. News: The RBI Governor is appointed by the Prime Minister’s Office (PMO) on the recommendation of the Union Finance Minister, the Centre informed Parliament
  2. While the Appointment Committee of Cabinet (ACC) guidelines for appointment of Deputy Governors are still the same, the composition of the search committee has been changed
  3. The RBI Act, 1934: Section 8(1)(a) provides that there shall be one Governor and not more than four Deputy Governors to be appointed by the central government on the central board of RBI
  4. Deputy Governors: Appointed on the basis of ACC-approved guidelines, which stipulate that the search committee constituted for the purpose will recommend the person to be appointed as a Deputy Governor
  5. Change: Now, a search committee, namely Financial Sector Regulatory Appointment Search Committee (FSRASC) has been constituted with the approval of ACC
  6. The committee will recommend names for appointment of Chairperson and Members of financial sector regulatory bodies, including those of the Governor and Deputy Governors

More spending autonomy for Ministries

  1. News: The threshold of non-Plan project expenditure that can be approved by ministries has been raised from Rs 150 crore to Rs 500 crore
  2. The Finance Ministry’s nod will be needed for expenditure between Rs 500 crore and Rs 1,000 crore, beyond which Cabinet approval would be required
  3. Impact: Expected to expedite the appraisal and approval process in the central government ministries/ departments

Tax receipts at Rs.14.6 lakh cr, exceeds estimates

  1. News: The govt collected Rs.14.6 lakh crore in taxes in financial year 2015-16, which is higher than the Budget Estimates and Revised Estimates for the year
  2. Reason: The bulk of the growth in total tax revenues was due to the increase in indirect tax collections
  3. Statistics: Indirect tax collections were 31.1% higher than in the previous financial year
  4. The total collection has exceeded the revised estimates and represents a growth of 17.6% compared to the last financial year

Fertiliser subsidy bill set to shrink next year

  1. News: The next financial year will see the govt’s subsidy bill shrink by about Rs.10,000 crore
  2. Reason: Cut in nutrient-based subsidy rates and the lower price of gas, the key feedstock in urea production
  3. Impact: The reduction in the subsidy bill could help the govt narrow its fertiliser subsidy arrears of about Rs.35,000 crore, which had been carried forward since 2012
  4. Challenge: Achieving a balanced nutrient ratio still remains a far cry, because of price disparity between urea and phosphatic fertilisers
  5. Statistics: The fertiliser subsidy has been estimated at Rs.70,000 crore for 2016-17

Even states are cutting capital expenditure

  1. News: Data on capital expenditure by the govts of 7 major states shows dramatic cut down in capex, just like the central govt
  2. These states include Tamil Nadu, Uttar Pradesh, Gujarat, Rajasthan, Kerala, Madhya Pradesh and Bihar, accounting for slightly over two-fifths of the country’s GDP
  3. Impact: The hope that states will revive capex is fast fading
  4. Statistics: The central govt in the Union budget for FY17 cut the capex growth to 4% compared with 21% in FY16

India’s current account deficit narrows to 1.3% of GDP

  1. News: India’s current account deficit narrowed to 1.3% of the GDP in the fiscal 3rd quarter, as compared to 1.5% in the last year
  2. Reason: Trade deficit during the Oct-Dec quarter narrowed to $34 billion from $38.6 billion during the same period in 2014-15
  3. Challenge: India’s merchandise exports have been declining continuously since Dec 2014 due to sluggish global demand and low commodity prices
  4. CAD: It shows the difference between domestic savings and domestic investment, and conveys the extent of this gap that needs to be bridged by foreign savings

Small savings rates slashed, PPF rate cut to 8.1% from 8.7%

  1. Context: In Feb, Govt. decided to revise interest rates on small savings every quarter
  2. News: Govt. has reduced the interest rates payable on small savings including PPF and Kisan Vikas Patra
  3. Impact: The move will hit the common man the most, as they are the ones who invest in small savings schemes

NPS can now be ‘technically’ tax-free, says pension regulator

  1. Context: Govt.’s bid to bring NPS on par with other pension products
  2. News: The retirement savings accumulated under the New Pension Scheme (NPS) can now be totally tax-free at the time of withdrawal under certain conditions
  3. Budget 2016: It made 40% of NPS accumulations tax-free
  4. How? Under NPS, 40% of corpus is mandatorily annuitised and that is tax free, and with budget announcement, 40% lumpsum withdrawal is also tax free. So, if anyone annuitise 60% of their balance, then it becomes totally tax-free
  5. Annuity: An annuity product allows investors to get a steady monthly income on their accumulated corpus

Learn about National Pension System

  1. NPS is an easily accessible, low cost, tax-efficient, flexible and portable retirement savings account
  2. Agency: The Pension Fund Regulatory and Development Authority, under the administrative control of the Finance Ministry
  3. Statistics: It has 1.18 crore members, including state and central govt employees
  4. It has assets of over Rs.1.15 lakh crore

Proposal to tax EPF withdrawn

  1. Context: Govt.’s move to tax EPF withdrawals saw a severe backlash, both in and outside Parliament
  2. News: Govt. has withdrawn the proposal of taxing 60% of EPF withdrawals
  3. Reason: Govt accepted the argument that employees should have the choice of where to invest the EPF withdrawals
  4. Objective: The proposal sought to encourage people to join pension scheme, as withdrawal from the the EPF was tax free, if invested in annuity
  5. Criticism: Taxing EPF withdrawal will reduce the retirement savings of the working class

Special cell set up to gather data on subsidies of other nations

  1. News: The govt. has set up a special cell to compile information on subsidies given by other countries to their industry
  2. Background: In order to tackle slowdown in global trade, several countries have taken measures to protect their domestic industries from unfairly low-priced imports
  3. Objective: The information will help impose duty on subsidised imports and protect local industry
  4. It will also enable Indian industries to file applications before the govt seeking imposition of anti-subsidy duties on subsidised imports of items
  5. Subsidies: Under the WTO norms, it refers to financial contribution by the govt or state agencies resulting in advantages to those players availing it

Budget 2016: A pro-poor push in hard times

  1. News: Budget for 2016-17 attempted to address the distress in the rural economy that has hit demand creation and new investments
  2. Context: nearly Rs. 2.75 lakh crore enhanced outlays for programmes in the social sector, farmer welfare and the rural sector
  3. Target: Finance Minister chose to stick to the fiscal consolidation road map and set a 3.5 per cent of GDP target for 2016-17
  4. Other reforms: in taxation, foreign direct investment, dispute resolution in PPP projects and banking
  5. LPG connections: for BPL families, variable pollution cess on new cars, 60% of EPF savings to be taxable
  6. Healthcare scheme: to protect the poor from high healthcare costs with a cover of Rs. 1 lakh and an additional cover of Rs. 30,000 for senior citizens
  7. Aadhaar Bill: to give legislative backing to the Aadhaar scheme for identifying residents on the basis of their biometrics

Be cautious on new accounting system: CGA

  1. News: The Controller General of Accounts has cautioned the govt before adopting the accrual methods of accounting, due to the costs involved and only few of its departments can benefit
  2. Importance: Accrual accounting is a means to the reforms in public financial management
  3. How? It includes greater accountability and a greater need for operations of the govt to be on commercial lines
  4. Challenge: It will require considerable preparatory work and capacity building of accounting personnel
  5. Criticism: There are inadequacies in the way the budget heads of accounts are currently classified, which needs to be modernised

Learn about Accrual accounting system

  1. Explanation: The accrual accounting recognises the transaction at the time it is made, thereby providing a more current picture
  2. Under it, revenues are reported on the income statement when they are earned
  3. Expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid
  4. Benefit: The method provides a more accurate picture of the company’s current financial position
  5. Challenge: However, it is a more complex and is more expensive and time-consuming to implement

Learn about current accounting system

  1. Explanation: It is based on cash accounting, which recognizes a transaction only when money changes hands
  2. For instance, the revenues are reported on the income statement when the cash is received and expenses are reported when the cash is paid
  3. It is followed by both the union and state governments
  4. Criticism: The XII Finance Commission had pointed out several problems with the current accounting system.
  5. It highlighted the importance of shifting to accrual accounting, which was also reiterated by the XIV Finance Commission

Private finance vital for India to reach climate goals: Survey

  1. News: India will find it hard to meet its variety of obligations to tackle climate change without substantial help from private sector
  2. Context: Successful implementation of the Paris Agreement, SDGs goals and the ambitious targets set out in INDCs will require huge financial resources, cannot be met through budgetary sources alone
  3. Relevance: Leveraging private finance along with public finance, both international and national, will be critical
  4. Benefit: This could benefit from the renewed global focus on adopting and developing green technology
  5. UN’s SDGs: Lay the onus on countries to make significant progress on a wide range of goals including ending poverty and hunger and combating climate change
  6. Survey also notes: Mission on Climate Change and Health is being developed and a National Expert Group on Climate Change and Health has been constituted

Rich feed off subsidies worth over Rs. 1 lakh crore: Economic Survey

  1. News: India’s rich feed off subsidies worth over Rs. 1 lakh crore a year that are meant for the poor
  2. Subsidies on: 6 commodities, 2 public utilities — the Railways and electricity — and 1 small savings scheme, the Public Provident Fund
  3. Context: Form of explicit subsidisation, which is surprisingly substantial in magnitude
  4. Relevance: Rich avail of an 88% subsidy on kerosene and 86 per cent subsidy on LPG
  5. Survey classification: Population on the basis of consumption data collected by National Sample Surveys.
  6. Poor refer to the bottom 30 per cent of the population and the rich the top 70 per cent

Economic Survey estimates 7 to 7.5% growth rate for 2016-17

  1. News: The Survey projected a 7-7.5% GDP growth rate in the next fiscal which could accelerate to 8% in a couple of years
  2. The fiscal deficit target of 3.9% of GDP seems achievable, despite the challenges and lower than projected GDP growth rate during 2015-16
  3. Expectation: There are two factors that can boost domestic consumption- increased spending, if the 7th Pay Commission is implemented and return of normal monsoon
  4. Challenge: Indian economy is currently facing the twin balance sheet problem – the impaired financial positions of the PSBs and some corporate houses

Economic Survey against raising income tax exemption limits

  1. Context: The Economic Survey 2015-16 tabled in Parliament
  2. Proposal: The survey suggests that the govt should refrain from raising exemption limits on income tax
  3. Reason: A natural growth in income will lead to increase in the number of taxpayers, provided exemption limits are not raised
  4. Proposal: It called for a review and phasing out of the tax exemption raj
  5. Reason: It often leads to redistribution toward the richer private sector
  6. Challenge: A cross-country comparison shows that India currently has the lowest number of taxpayers, nearly 85% of the economy still remains outside the tax net

Economic Survey bats for GM crops

  1. Background: Currently, commercial cultivation of Bt cotton is allowed and there is a moratorium on Bt brinjal
  2. Proposal: The survey favoured the use of hybrid and GM seeds along with better MSP, irrigation and national market facilities to boost crop yields
  3. How? The regulatory process needs to be evolved in order to address safety concerns of GM crops
  4. Proposal: Incentivise raising of production of pulses and oilseeds
  5. Reason: The country is heavily dependent on imports for such crops

Project Insight to fight black money

  1. Context: NDA govt’s fight against domestic black money
  2. Project: It is focused on extensive data mining and processing the details of country’s 22.94 crore PAN allottees, with the specific intention of monitoring fund flows across identities and accounts
  3. Aim: To generate an actionable audit trail of high value transactions by way of sequenced transaction history of an individual or entity, where a PAN number has been quoted, in any part of the country
  4. It will be implemented phase-wise during the 3-year period spanning 2016-18
  5. Nodal Agency: Income Tax Department

Learn about EPF, GPF and PPF

  1. General Provident Fund: It is offered to government employees, who can contribute a certain percentage of their salary
  2. Employees Provident Fund: It is mandatory for all organisations with 20 or more employees earning up to Rs. 15,000 a month. However, those earning over the Rs.15,000 ceiling can contribute to EPF on a voluntary basis
  3. Public Provident Fund: It is a savings cum tax savings account offered in India. The fund offers reasonable returns along with income tax benefits

Govt. may penalise higher PF savings

  1. News: The upcoming Budget may penalise voluntary investments of more than Rs.1.5 lakh parked in the Employees’ PF and General PF accounts
  2. Reason: To channelize savings to other alternatives such as the National Pension System
  3. The PFRDA currently has assets of Rs 1.10 lakh crore under its watch and reports to the Finance Ministry
  4. The Employees’ PF Organisation works under the Labour Ministry and has over Rs.10 lakh crore under its administrative control
  5. Experts: It is not a good idea as it would be unfair to deprive an investor of the income that got accumulated on his investments
  6. Criticism: The tax treatment for NPS investments are currently taxable at the time of retirement as opposed to EPF savings that are tax-free

FM inaugurates non-tax revenue e-portal

  1. Context: PMO’s target to switch at least 90% of all official transactions to paperless mode by the end of 2016
  2. Reason: One major way to curb black money is to discourage cash transactions in favour of electronic transactions
  3. News: Finance Minister launched a new e-platform for non-tax receipts
  4. Advantage: It will reduce a lot of the manual work and almost instantly enable the payment at the different categories
  5. Sources of Non-tax revenue: Dividends paid by PSUs, the Reserve Bank of India, etc

Increase excise duty on oil, petroleum for more revenue

  1. Context: To accelerate India’s economic growth by increasing infrastructure spending in 2016-17 budget
  2. Where? Focus on low gestation projects like rural roads, canals, bridges which can result in immediate economic benefits
  3. Finances: Increasing its revenue by excise hikes on oil and petroleum products
  4. Bring revenue deficits under control through an effective tax implementation and collection system
  5. Impact: It can give the govt room to raise infrastructure-related spending

Policy for capital goods introduced

  1. News: The government introduced a National Capital Goods Policy
  2. Purpose: To spur capital goods sector and the Make in India initiative. It aims to turn the country into a world class hub for capital goods
  3. Objective: To increase production of capital goods from Rs. 2.30 lakh crore in 2014-15 to Rs. 7.50 lakh crore in 2025
  4. To raise direct and indirect employment from the current 8.4 million to 30 million by 2025
  5. Key Elements: Availability of finance, raw material, innovation and technology, productivity, quality and environment-friendly manufacturing practices, increasing skill availability, promoting exports and creating domestic demand

Fiscal management far better this year than earlier: CGA

  1. Context: Controller General of Accounts review of fiscal management in India
  2. The News: Expenditure by various departments was spread through out the year as opposed to the huge spending in last 2 quarters in previous years
  3. Criticism: Huge spending in last 2 quarters shows that it was wasteful expenditure; in order to exhaust the budget
  4. Challenge: Timely reporting of the consolidated picture of govt accounts is missing in India
  5. The present govt has ensured that funds are released right upfront, in the beginning

Revenue target to be met, says Adhia

  1. Context: Centre expects to meet the target of Rs.14.49 lakh crore for revenue collection from taxes for the current financial year
  2. How? – The surplus in indirect taxes will be enough to make good the expected shortfall in direct tax collections
  3. Indirect Tax Collection: The govt expects to garner over Rs. 40,000 crore more than the target set for indirect tax collection
  4. This gives an indications of high level of economic activities taking place in the economy
  5. Direct Tax Collection:  The collection from direct taxes is up just 10.9% as compared to last year

Jaitley asks States to raise infra outlay

  1. Finance Minister urged the States to boost spending on infrastructure creation and anti-poverty programmes
  2. Why – Govt. is under pressure to raise public investments to revive the economy
  3. How – By leveraging the increased devolution from the implementation of the 14th Finance Commission’s (FFC) recommendations
  4. State’s Demand –  To release the compensation for phasing out the central sales tax
  5. Do you know? – After FFC recommendations were implemented, the Centre’s share in 58 social development programmes was reduced
  6. This included the important schemes like Sarva Shiksha Abhiyan and the Integrated Child Development Services

Let’s know about National Investment and Infrastructure Fund

  1. NIIF is a fund created by the Govt of India for enhancing infrastructure financing in the country.
  2. The mandate of the NIIF includes investment in commercially viable and stalled projects.
  3. Corpus – Rs. 40000 crore; govt and other investors would contribute Rs. 20000 crore each.
  4. NIIF would be a fund of funds, so there will be multiple alternate investment funds underneath such as stressed-assets fund, renewable energy fund, etc.

Govt. sets up Tax Policy Council headed by Finance Minister

  1. The Govt has created a Tax Policy Research Unit (TPRU) and Tax Policy Council to be chaired by the Union Finance Minister.
  2. The decision is based on the recommendation of the Tax Administration Reform Commission.
  3. Objective- To bring consistency, multidisciplinary inputs, and coherence in policy making.
  4. The TPRU will be a multi-disciplinary body with the objectives of carrying out studies on various topics of fiscal and tax policies.
  5. It will provide independent analysis, prepare and disseminate policy papers and background papers on various tax policy issues.

Let’s know more about Transfer pricing?

Transfer pricing agreements will lead to a positive environment and will bring greater certainty. This greater certainty will lead to more investments flowing into India.

  1. Transfer pricing refers to the setting of the price of goods or services sold between entities within an enterprise.
  2. For example, if a subsidiary sells good or services to its parent company, then the price set for this sale is the transfer price.
  3. This is one of the biggest tax issues is the world today.
  4. Pending cases and issues are also one of the biggest factors keeping foreign investors wary of India.
  5. All those companies, embroiled in transfer pricing issues, are off-shoring companies.

India, U.S. clear 100 transfer pricing cases under MAP

The MAP programmes with other countries like Japan and UK are also progressing well with regular meetings and resolution of past disputes.

  1. One of the significant steps taken by CBDT to boost investment sentiments among MNCs is the landmark Framework Agreement signed with the Revenue Authorities of USA in January, 2015.
  2. This agreement was finalised under the Mutual Agreement Procedure (MAP) provision contained in the India-USA Double Taxation Avoidance Convention (DTAC).
  3. The agreement seeks to resolve about 200 past transfer pricing disputes between the two countries in the IT Services [ITS] and IT enabled Services [ITeS] segments.
  4. The success of the framework Agreement in short period of one year has led to the US Revenue Authorities opening up their bilateral APA programme to India.

Let’s know about new methodology of calculating GDP

  1. Overall, there is a movement of GDP from production to consumption.
  2. It has shifted from final goods to gross value added and from factories to enterprise data under MCA.
  3. Enlarged the scope of financial sector with support of SEBI.
  4. The new methodology takes GDP at market prices into account, which includes indirect taxes and excludes subsidies.

The progress of PMJDY- deposits cross $4.5 billion mark

  1. The PMJDY accounts have deposits of Rs 30,638.29 crore (about $4.5 billion).
  2. As many as 20.38 crore bank accounts were opened as on January 20, 2016.
  3. Accounts with ‘Zero Balance’ have actually shown a significant decline – from 76.81% in Sept 2015 to 32% in Dec.
  4. Also, 8.74 crore of the accounts were seeded with Aadhaar and 17.14 crore account holders were issued RuPay cards.

Open multi-brand retail, e-commerce, education to more FDI: India Inc.

  1. Industry wants the govt. to further ease FDI norms, especially in sectors such as multi-brand retail, education and e-commerce.
  2. They also sought more liberalised norms for the insurance industry.
  3. They have raised concerns on the adverse impact of Free Trade Agreements on local manufacturing
  4. They also demanded support to boost manufacturing, exports and startups.
  5. On the education sector, it said 100% FDI should be allowed in all service companies ancillary to education

Govt. must focus on demand creation: CII

  1. Industry wants govt. to focus on creation of demand in the Budget.
  2. Private sector is not investing because:
    • There is a lack of demand.
    • They have excess capacities due to past investments.
    • The lack of positive sentiments due to the failure to get GST going.
  3. This is reflected in reports that manufacturing is at a 2-year low now.
  4. If these are addressed, there will be definitely a big pick-up in the economy.

Government to focus on access to social security for unorganised labour

The key challenges faced by Indian agriculture are the need to increase productivity by leveraging technology.

  1. To ensure access to health and social security benefits to three labour groups—organised, unorganised and those not employed or below poverty line.
  2. Need-based minimum wage is to be considered as essential part of social security.
  3. The trade unions recommended that contract or casual workers should not be deployed in jobs of a perennial nature.
  4. These workers should be paid the same wages and benefits as was being paid to regular workers doing the same work until they are regularised.
  5. In addition, the trade unions called for a control on spiralling prices and putting an end to government’s divestment in public sector companies.

PMO seeks inputs from economists to stem slowdown, raise profitability

  1. PMO is seeking inputs from govt economists to reassess both the fiscal and monetary policy issues.
  2. There has been a slowdown in India’s nominal GDP growth with latest estimates from the Central Statistics Office.
  3. The Finance Ministry’s mid-year analysis has also put the slowdown into the spotlight.
  4. The mid-year analysis underscored the need for “carefully reassessing” both fiscal and monetary policy stances.
  5. The reason due to which the slowdown in the nominal GDP growth is more pronounced is the decline in the GDP deflator.
  6. The PMO’s move to gain insight into the state of the economy is expected to lead to corrective changes.

Govt unveils medium-term debt strategy

  1. The govt. is planning to switch Rs 50,000 crore high cost debt into instruments of longer term maturity.
  2. The objective is to secure the govt’s funding at all times at low cost over the medium/long term while avoiding excessive risk.
  3. The MTDS is developed for the period 2015-16 to 2017-18 based on the outstanding govt market borrowing as on end March 2015.
  4. The borrowing cost in the domestic market is expected to be lower in 2015-16 due to reversal in the interest rate cycle.

What is MTDS?

  1. MTDS is a Medium-Term Debt Management Strategy recently unveiled by Finance ministry.
  2. The MTDS has been prepared in consultation with the Reserve Bank of India.
  3. The strategy document contains the objectives, risk analysis of govt. borrowings and strategy to be followed.
  4. Aim – To better manage public borrowing.

Govt. opacity leaves Rs. 8,000 cr expenditure unaccounted for

  1. The govt’s finances exhibit opacity in the way some of the funds have been spent.
  2. More than Rs 8,000 crore of expenditure have no accompanying explanation of how and where the money was spent.
  3. As per CAG report, there are 11 heads of govt. spending where more than 50% of the expenditure had no details.
  4. CAG has been highlighting this opacity to the govt. every year since 2008, but almost nothing has so far been done to address the issue.

India well prepared to deal with US rate hike: Finance Ministry

India is well prepared to deal with the impact of the U.S. Federal Reserve interest rate hike and the end of uncertainties will actually help policy makers in emerging economies.

  1. The U.S. Federal Reserve last night hiked interest rates by 0.25 per cent.
  2. This is the first hike in about a decade, signalling a recovery in the US economy.
  3. End of uncertainty and accommodative outlook for future will help policy makers in emerging economies.
  4. Fed’s confidence on recovery is good news for India’s exports, especially for the IT sector.

:( We are working on most probable questions. Do check back this section.

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