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Economics 

 

Ideas to cover

  • Quick revision
  • Deficit financing
  • FRBM Act
  • NK Singh committee
  • Other types of budgets
    • Gender budgeting
    • Output and Outcome budgeting

 

TEST QUESTIONS

 

Deficit Financing

  • Supporting a deficit budget by a government
  • Needed because?
  • Balance cyclical disturbances
  • Developmental needs and creation of assets
  • Welfare economies

 

Means of Deficit Financing

 

  • Various methods can be used

– External Aids – preferably soft interest

  • g. soft loans from various agencies JICA, ODA, WB,

– External grants

– best as they are one sided with no repayment liabilities

India do not get much of these post 1975

– External borrowings

  • Brings in Hard currency
  • No crowding out effect

– Internal borrowings

  • Has negative implications such as crowding out effect
  • If overdone has double negative impacts – Lower private investment and lower demand e.g. in India 1970s 80s
  • e.g. T-bills, G-secs etc.

 

Means of Deficit Financing

 

  • Various methods can be used

– Printing currency – Last resort

  • Many limitations such as:
  • Government can not go for the expenditures in foreign currency through it without impacting forex market
  • Inflation increases proportionally

 

Impact of Fiscal Deficit

 

  • Positive -> push to government investment -> better education, irrigation, infrastructure etc. -> lower structural hurdles in economy
  • Negative -> if expenditure from deficit financing is not managed correctly then problems:
    • excessive inflation (with impact on all sectors including external sector)
    • if its used for high revenue expenditure -> leakages etc.; borrowing from next generations
    • crowding out investments if financed from internal market
    • Interest burden -> can go into debt trap

 

management act 2003

 

  • India followed a high fiscal deficit policy for most of its post-independence history
  • But high fiscal deficit caused twin problems of high inflation and BoP crisis
  • Because of this and IMF’s loan conditions govt. started a fiscal path of:
    • reducing the deficits
    • prioritizing expenditure
    • augmenting resources by tax base widening etc.

 

management act 2003

 

  • But successive governments failed to deliver on the new fiscal path because of no defined mandate and lack of political will
  • FRBMA 2003 was enacted -> came into effect in 2004
  • Highlights:
    • Revenue deficit = 0 by March 31, 2008; then to build a targeted revenue surplus – FD = 3% by 2008
    • annual targets for the reduction of FD and RD (RD to be cut by .5% and FD by .3% per annum)
    • FD,RD to exceed targets only for national security, calamity and exceptional grounds
    • Publishing 3 statements -> Fiscal policy strategy statement, Medium term Fiscal Policy statement and Macroeconomic framework statement

 

management act 2003

 

  • Again FD and RD targets could not be met because of global financial crisis and increased government borrowing
  • Exceptional circumstances not defined -> problem

 

FRBM review

 

Pros of FRBM:

  • Provide targets for macroeconomic stability
  • Legal mandate
  • Induced some fiscal discipline

Disadvantages:

  • rigid targets
  • Exceptions based on extra-economic causes

 

FRBM review

 

  • In 2016 -> FRBM review committee Chairman: NK Singh
  • Major highlights:
    • Public debt to GDP ratio should be considered as a medium-term anchor for fiscal policy in India
    • Fiscal deficit as the operating target: The Committee advocated fiscal deficit as the operating target to bring down public debt. For fiscal consolidation, the centre should reduce its fiscal deficit from the current 3.5% (2017) to 2.5% by 2023.
    • Revised RD target – 0.8% in 2023
    • Formation of Fiscal council to advice on fiscal consolidation
    • Escape clause to counter cyclical issues i.e. shifted to a range.
  • 5% as escape clause for fiscal deficit target

 

FRBM review

 

  • Escape clause:
  • flexibility to adjust with cyclical fluctuations (boom/recession) is incorporated under the “escape clause” (in the case of recession) where temporary and moderate deviations can be made from the baseline fiscal path
  • permitted under exceptional circumstances and in reaction to external shocks

 

Gender Budgeting

 

  • Gender-responsive budget acknowledges the gender patterns in society and allocates money to make policies and programmes gender-equitable
  • Ongoing process of keeping a gender perspective in policy/programme formulation, its implementation and review
  • Dissection of the Government budgets to establish its gender differential impacts and to ensure that gender commitments are translated in to budgetary commitments.

Gender Budgeting

 

Why Gender Budgeting?

  • National budgets impact men and women differently through the pattern of resource allocation
  • Women, constitute 48% of India’s population, but they lag behind men on many social indicators like health, education, economic opportunities, etc.
  • They warrant special attention due to their vulnerability and lack of access to resources.
  • The way Government budgets allocate resources, has the potential to transform these gender inequalities.

 

Evolution of GB in India

 

  • 2001
    • a study conducted by National Institute of Public
    • Finance and Policy on “Gender Related Economic Policy Issues”
    • Continuous study by NIPFP for the first time analyzed UB 2001-2002 from a gender perspective
  • 2002
    • Analysis of various state budgets by NIPCCD [National institute of public cooperation and child development]
    • Gender analysis of budgets started regularly

 

Evolution of GB in India

 

  • 2003
    • suggestion that ministries/departments should have a chapter on gender issues in their annual report
  • 2004
    • Order to establish “gender budgeting cell” in all Ministries/Departments by 2005 to serve as focal points for coordinating gender budgeting initiatives within their Ministries and across Departments
    • PC advised ministries/departments to clearly bring out scheme-wise provisions and physical targets in the Annual Plan proposals for 2005-06 and to carry out an incidence analysis of Gender Budgeting from next financial year

 

Evolution of GB in India

 

  • 2005 [formalization of gender budgeting]

– Expenditure division, MoF started publishing a note on gender budgeting in expenditure profile

  • Part A reflect “women specific schemes” – 100% allocation for women
  • Part B reflect “pro women schemes” – at least 30% allocation for women
  • 2010-12 -> integration of gender and outcome budget pursued [so targets and sub-targets for women related issues in outcome budget]
  • Continuous strengthening of Gender budgeting cells and study on gender sensitive planning, budget formulation and implementation

 

Evolution of GB in India

 

  • Currently about 56 ministries/departments have established GBCs at the Union Level
  • Efforts continue to institutionalize Gender budgeting at state levels
  • Ministry of Women and Child Development (MWCD) released a Handbook on Gender Budgeting in 2015, which provides exhaustive guidance for operationalising GRB in practice

Evolution of GB in India

 

Impact of Gender Budgeting

 

  • States with gender budgeting showed significantly greater reduction in spousal violence between 2005-06 and 2015-16 than those without it
  • linked to increased primary school enrolment for girls in India (IMF report, 2016)
  • NFHS data shows faster decline in maternal mortality rates in states following gender budgeting than others

 

Various Examples of Gender Budgeting

 

  • Targets in MGNREGA for women employment [at least 1/3rd of beneficiaries must be women]
  • Women centric schemes such as UJJWALA yojana – women health
  • One woman in every SHG will also be eligible for a loan of up to Rs. 1 lakh under the MUDRA Scheme
  • Interest subvention for women loans
  • Stand Up India Scheme – women entrepreneurship
  • Beti Bachao, Beti Padhao Working Women Hostels (WWH)

Etc.

Challenges

 

  • Insufficient Allocation
  • The total resource envelope dedicated to the gender budget in 2019-20 amounted to INR 1,317 billion, 4.7% of the total budget expenditure, and just 0.63% of GDP
  • The gender budget was, on average, about 5.2% of the total expenditure, and about 0.7% of the GDP, over the 2008-09 to 2019-20 period.

 

Challenges

 

  • Concentration in a few sectors
  • Over the last decade four ministries – Rural Development, Education, Health and MWCD have received between 85-90% of the Gender Budget expenditure
  • Flagship government schemes that received maximum allocation in 2019-20
  • Implies not all ministries/departments are implementing gender budgeting in their budgets

Challenges

 

  • Inefficient implementation

– Though it is mandatory to release the GBS, there are no accountability mechanisms mandating impact assessment of allocations for female beneficiaries

inadequate training for government officials

 

Suggestions

 

  • Increase allocations for women focused programmes
  • Improve targeting
  • Create a ranking for state-level gender budgets (competitive governance)
    • quality of gender budgets, impact analyses, and gender audits of these allocations
    • Capacity building and technical support should be provided to Statelevel Gender Budget Cells
  • Improve accountability – PC recommended in 2012
    • Outcome Budget should be gender mainstreamed
    • Gender audits of centrally sponsored schemes and flagship programmes should be undertaken to measure impacts
    • This also necessitates increased efforts for the collection of gender disaggregated data at national, state and district levels
  • GB highlights economic investment into women empowerment, this must also be complemented by societal change towards acceptance of gender equality to be sustainable

 

Output-Outcome budget

 

  • Budget shows the government’s priorities and commitments to different causes
  • However budget outlays do not automatically translate into works on ground
  • Thus, while budget highlights the financial plan for schemes and sectors, it must also justify it through planning certain monitorable results

 

Output-Outcome budget

 

  • To instill accountability, the government started publishing a output/performance budget which tied outlays to monitorable targets

– E.g. Sarva shiksha abhiyan – 1000cr

  • Output – building of 50 schools in rural areas

– MGNREGA  – 50000cr

  • Output – employment to xyz people
  • Creation of xyz assets
  • However, mere physical outputs again do not automatically translate into policy outcomes

 

Output-Outcome budget

 

  • So a better approach is to bind outlays to intended outcomes during the year and medium term

– E.g. Sarva shiksha abhiyan – 1000 crore

  • Increasing literacy to xy %
  • Increasing GER to xy %

– MGNREGA – 50000 cr

  • Improve rural income
  • Reduce poverty by providing rural livelihood
  • Outcomes -> end products and results of various Government initiatives and interventions
  • Outcomes are expected results not only in terms of monetary units or physical infrastructure but also in terms of qualitative targets and achievements

 

Output-Outcome budget

 

  • With effect from FY 2007-08, the Performance Budget and the Outcome Budget hitherto which were presented to Parliament separately by Ministries/Departments, were merged and presented as a single document titled “Outcome Budget” in respect of each Ministry/ Department
  • From FY 2017-18 onwards, the Outcome Budget of all Ministries have been combined into one single document released by MoF in collaboration with NITI Aayog
  • Outcome Budget broadly indicates the outcomes of the financial budget of a Ministry/Department, indicating actual deliverables linked with outlays targeted during the year and in the medium term