17

FISCAL POLICY STRATEGY STATEMENT

this achievement was indeed noteworthy. It
established governments intent and ability in fiscal
1.
The moderation in economic growth which
management.
started in 2011-12 and continued in 2012-13 impacted
the macro-economic situation in the current year. 5.
There was general consensus that sustained
Indian economy did escape the immediate fall-out of high levels of fiscal deficit causes diverse forms of
global financial crisis in 2008-09 and responded well macroeconomic imbalances and calls for immediate
recording high growth rate of 8.4 percent and 9.3 corrective action. Public debate centered around the
percent in the immediate years. However, continuing fact that high fiscal deficit tends to heighten inflation,
global economic uncertainty and negative outlook at reduces room for monetary policy actions, and
domestic level led to phase of sub optimal economic dampens private investment. The moderation in GDP
growth. Sustained inflationary pressure further added growth to sub 5 per cent level needs to be seen in the
to the negative outlook in the macro-economic larger macro-economic context. India has also been
scenario in the country.
witnessing one of the difficult inflationary phases in
2.
Further the current financial year also witnessed recent times; especially retail sector inflation has been
pressure on Rupee valuation vis-a-via Dollars as early sticky. Growing fiscal deficit in such macro-economic
warning signal of US tapering of quantitative easing situation would be detrimental to growth in the longer
emanated in the second quarter. While RBI intervened run, as was evidenced in years following stimulus.
to control sliding Rupee value with swift monetary Hence, paradigm shift towards fiscal consolidation
policy actions, Government initiated steps to contain became imperative for providing impetus to growth
the widening trade gap. Both actions yielded result by as well as taming inflation.
end of the calendar year with CAD improving 6.
The fiscal consolidation initiated as part of midsubstantially.However, inflationary pressures and year course correction in the previous financial year
RBIs action to contain rupee slide resulted in formed the basis of budget presented in the current
tightening of interest rates both in the short-term and financial year 2013-14. FY 2013-14 targeted the fiscal
long-term. Rising cost of funding impacted deficit at 4.8 percent, having achieved similar level in
investments as well as profitability;impacting the the previous year itself. Realistic allocation was made
investment scenario. Moderation in economic growth for major subsidies, while providing necessary
also posed fiscal challenges through sluggish tax increase in other non-plan expenditure. Similarly,
collections.
increase was provided in plan expenditure for
programme implementation and to protect vulnerable
Fiscal Consolidation
sections of society. Tax revenue was provided
3.
It may be recalled that in the financial year 2012- reasonable increase, aside of additional resource
13, government undertook mid-year course correction mobilization through surcharges. However,
following Kelkar committees recommendation on government remained firmly resolved to carry forward
Roadmap for fiscal consolidation. Rules were framed the task of fiscal consolidation as laid down under the
under the Amended FRBM Act, 2012 adopting revised
Amended FRBM rules.Government also initiated
targets for fiscal consolidation. Government undertook
action to reign in the twin deficits posing threat to
drive to contain fiscal deficit through concerted effort
growth viz. fiscal deficit and current account deficit.
for mobilization of resources on one side and curtailing
While, fiscal deficit was contained in relatively short
spending to remain within sustainable levels of deficit.
span in latter half of FY 2012-13, efforts on the trade
The deficit was controlled by over one trillion,stating
side started coming in by end of second quarter in the
Governments intent of controlling twin deficits.
current financial year. However, in the early part of
4.
Efforts of the government bore fruits. While, the current year, rupee came under pressure.
revised estimates in 2012-13 pegged fiscal deficit at Following, signs of tapering of US quantitative easing
5.2 per cent, marginally above the budget estimates coming in May and June 2013, there was rather sharp
of 5.1 per cent. Provisional accounts for 2012-13 depreciation of rupee vis-a-via US dollars.
established that actual deficit was much lower at 4.8 Depreciation of almost 10 per cent within few days
per cent. Against the backdrop of serious concerns and 31 per cent in the major part of second quarter
of deficit breaching 6 per cent in September, 2012, put strain on the economy.
A.

Fiscal Policy Review

17

18
7.
Reserve Bank had to intervene with measures
to hike short term interest rates through marginal
stand-by facility (MSF) and introduce certain temporary
regulations to retain the sliding value to the currency
against major currencies of the world. Government
responded with key initiatives to attract foreign
investments, provide confidence to industry and curb
gold imports. Action of the central bank and
government taken in tandem led to significant
improvement of the macro-economic situation and by
end of October, 2013 normalcy was restored. In
calibrated manner RBI withdrew restrictions imposed
on call money market. MSF was restored to standard
levels vis-a-via repo rate. By this time, it also became
apparent that the trade gap will be much less than
earlier quarters and that current account deficit will
be very much within manageable limits. Trends on
gold imports started showing positive signs. It was
therefore evident that the position with regard to foreign
exchange and adverse trade deficit, which posed
major threat in the second quarter, would no longer
be an issue. Rupee also stabilized against dollar
finding new level of equilibrium. Improving exports with
South-East Asian countries and moderating imports
via gold added to the feel good factor. Further, highest
levels of FII inflows in last months of the calendar year
2013 also added to comfort levels. RBI created
separate reserves to meet any exigency arising out of
tapering of quantitative easing by the US reinforcing
markets confidence in the domestic currency. Inflation
moderated in the fourth quarter of the financial year.
8.
Fiscal deficit once again came into focus in the
third quarter. Inflationary pressure and the rupee
depreciation added to rising interest rates.
Consequently, growth rate continued to remain under
pressure. On the fiscal side, rising interest rates
increased the cost of borrowing and also impacted
tax revenues. With slowing of major sectors including
manufacturing, mining, industrial performing at sub
optimal levels, the revenues from Central Excise and
Customs grew marginally over last year. In fact,
Central Excise recorded negative growth over the
previous year and Customs increased by narrow
margin. Service Tax showed some growth over last
year, but fell short of its budgeted level. Similarly,
corporate tax underperformed due to declining
profitability. Therefore, by end of the calendar year
2013, there was substantial pressure on resources.
In the three quarters, there was a shortfall of about 5
per cent for collections up to the month as percentage
of the annual target, when compared with collections
up to the period in previous years.

FY 2013-14 shows increase in plan spending by about

5 percent in the respective months as compared with
five year moving average for corresponding period.
Implementing agencies were encouraged to expedite
grounding of various schemes as the middle phase
of plan period was underway. Non-plan spending as
a percentage of budgeted level, on the other hand,
maintained same levels as in previous years. As a
result, spending increased marginally while resource
mobilization lacked pace during first nine months of
the financial year.
10. The difference between the pace of expenditure
and revenue became apparent by end of first half of
the financial year. By end of September, 2013 the fiscal
deficit had reached almost 75 per cent of the budgeted
level as against 65 per cent in the previous year. By
November end 2013, fiscal deficit reached 94 per cent
level and there was major concern that year end fiscal
deficit may be much above the budgeted level. Lower
than expected tax receipts and market sentiments
made slippage on resources imminent. Therefore,
higher pace of plan spending threatened breach of
deficit targets. Under the prevailing macro-economic
scenario likelihood of breach of deficit target was taken
as negative signal.
11. However, government re-affirmed its
commitment to the path of fiscal consolidation and it
was clearly stated that fiscal deficit was a red line and
that under no circumstance would it be allowed to be
breached. The tax receipts, especially from direct
taxes showed improvement in December, 2013 and
the deficit which reached 94.1 per cent in November,
2013 maintained at the same level by the year end. At
the same time, government reassessed the plan
funding with various ministries as part of pre-budget
consultations. It was decided that government
spending has to be contained so as to meet any
exigency arising out of shortfall in resource
mobilization. As a result, austerity measures were
reinforced to cut non-plan spending by ten per cent
Plan expenditure was similarly rationalized keeping in
view the balances with implementing bodies and
overall resource position. Due care was taken to
ensure that programmes implementation does not
suffer on account of such rationalization.

12. While rationalization of expenditure was being

worked out, concerted efforts were also being made
to mobilize revenue to the maximum extent. Due to
prevailing macro-economic conditions downward
revision of tax revenue, especially on the indirect
taxation side was imminent efforts were being made
9.
In the current financial year there was front to limit the shortfall. Government undertook measures
loading of plan spending. The expenditure pattern in to mobilize resources through direct taxes, non-tax

19
revenue and disinvestment. As a result of containing
expenditure on one side and mobilizing resources on
the other the deficit which posed threat of breaching
at one point was in fact narrowed to lower than
budgeted level in the revised estimates. Favourable
trade deficit, easing of inflationary pressure and stable
foreign exchange with increase in foreign inflows
actually reversed the sentiment prevailing in
December, 2013. By January 2014, government
efforts to reign in the fiscal had infused much
confidence in the market. Governments ability to keep
fiscal position under check and avoid any breach of
deficit under even severe stress of falling revenues
was laudable and appreciated both at the domestic
and global level. As in last financial year, government
demonstrated its efficacy in controlling the fiscal.
13. Government has re-affirmed its commitment to
the path of fiscal consolidation. Both the financial years
viz. 2012-13 and 2013-14 were similar in terms of
challenges posed on the management of fiscal
matters. On both occasions government could instil
confidence in the market by demonstrating that it is
firmly in control of its finances.Despite several
pressures on both domestic and global fronts,
Government demonstrated its commitment to the
process of fiscal consolidation, having performed
consistently better than the estimated level. Proactive
policy decisions led to containment of twin deficits,
softening of inflation, stable exchange rate and higher
investment flows. It is expected that early signs of
recovery of growth, if sustained over the next financial
year and with stable global economic order should
translate in to revival of growth rate. The budget 201415 is being presented against backdrop of a decade
low growth rate. It is expected that continuing fiscal
consolidation forward, with effective policy measures
to attract investments in key sectors of infrastructure
and manufacturing will be key drivers for revival of
growth during 2014-15.

tapering of quantitative by end of 2013. This

demonstrated resilience of the domestic economy as
compared to the vulnerability in earlier part of the
financial year. Relentless pursuance of policy
reforms, along with effective monetary and fiscal policy
measures brought about a major change in the macroeconomic conditions in relatively short span. The fiscal
consolidation by the government in two successive,
and difficult, financial years demonstrated its resolve
to tackle major challenges. Fall in gold imports, rising
exports, stabilizing crude oil prices, high levels of
Investment inflows in last quarter of FY 2013-14, point
towards unambiguous, though tentative, turnaround
in the economy. Growth, which had fallen to sub five
per cent level, is poised to recover to above six per
cent in FY 2014-15 and resume path of higher levels
in successive years.

15. Interim budget 2014-15 is being presented

against a lower than expected GDP growth in FY 201314. The fiscal policy of 2014-15 has been calibrated
with two fold objectives first, to aid economy in growth
revival; and second, to continue on the path of fiscal
consolidation by containing fiscal deficit so as to leave
space for private sector credit as the investment cycle
picks up. Having contained the spending within
sustainable limits in current financial year, budget
2014-15 maintains the plan expenditure at the
budgeted estimates of FY 2013-14. Against the actual
expenditure in 2012-13 and revised estimates in 201314, this allocation marks an increase of about
16.7 per cent and is expected to adequately meet the
requirements. A growth of 8.3 per cent has been
provided for Non-plan expenditure in BE 2014-15 over
RE 2013-14 keeping in view the requirements for
Defence, Subsidies, Interest payments, Finance
Commission Grants and increase in salaries and
pensionary payments etc. This would result in overall
expenditure increase of 10.9 per cent in BE 2014-15
over RE 2013-14. As a result of these measures,
fiscal deficit is estimated to come down to 4.1 per cent
B. FISCAL POLICY FOR 2014-15
of GDP, improving over the target set in the roadmap
14. Despite several challenges witnessed in first half for fiscal consolidation announced by the government.
of the financial year 2013-14 accompanied by not so As percentage of GDP, total expenditure is estimated
to be 13.7 per cent in BE 2014-15 as against 14.0 per
encouraging macro-economic trends, government
cent in RE 2013-14.
steadfastly adhered to firm and pro-active policy
stance, which started yielding results by fourth quarter. 16. Apart from containing growth in expenditure, the
Unambiguous, if feeble, signs of economic recovery reduction in fiscal deficit is planned to be achieved in
started emerging by turn of the calendar year. conjunction with targeted revenue augmentation both
Assisted by encouraging trends on the inflation side through tax and non-tax revenues. Tax to GDP ratio
and surging foreign inflows, together with better than estimated at 10.9 per cent of GDP in BE 2013-14 is
expected results on the twin deficit both fiscal and estimated to fall to 10.2 per cent of GDP in RE 2013trade, created reversal of macro-economic 14, due to slowdown in economic growth. However,
fundamentals. Exchange rate was robust enough to with streamlining of tax administration accomplished
withstand pressure when US Fed actually started in FY 2013-14, and the recovery in GDP growth

20
expected in FY 2014-15, tax to GDP ratio of 10.7 per
cent is targeted in BE 2014-15. This implies a growth
of 19.0 per cent over RE 2013-14; however it is only
11.6 per cent growth over the budget estimate of FY
2013-14. Moderation of GDP growth in last few years
had led to lower than budgeted performance; it is
expected that with revival of growth in the economy to
above 6 per cent levels, with existing tax provision,
this target can be achieved. It is noteworthy that
additional measures introduced last year on the
service tax, corporation and surcharges will continue
in 2014-15 as well.
Growth of 4.9 per cent has
been provided for non-tax revenue in BE 2014-15 as
compared to BE 2013-14. However, as compared to
RE 2013-14 there is marginal decline of 6.5 per cent.
This has to be seen against the fact that RE 2013-14
included special dividends in certain cases and also
higher dividend pay-outs by Banks etc. Since, the
proceeds from dividend from PSUs and Banks are
assumed at same levels, the Non-tax revenue is
assumed with marginal increase over last years
budget estimates. Moreover, a significant increase
was provided in the budget estimate of Non-tax
revenue in 2013-14. Having achieved the target then,
it is expected that in 2014-15 there will be marginal
increase on an elevated base.
17. On the expenditure front, apart from measures
taken to control increase in spending, certain key policy
decisions relating to subsidies have been taken by the
Government in FY 2013-14. Government continued
with the policy of gradually increasing the diesel prices
to eliminate under recovery. In fact, in the begining of
second quarter of FY 2103-14 the difference between
administered prices and market prices narrowed
substantially. However, sharp depreciation of rupee
in second again widened the gap between the
administered prices and market prices. Inflationary
pressures and other macro-economic factors made
it difficult to affect sharp price correction. However,
Government continued with the policy of calibrated
correction in the prices. Stabilization of external
exchange and stable international crude oil prices
helped in the process of rationalization of diesel prices.
It is expected that the gap between administered price
and market price of diesel would be eliminated by early
FY 2014-15. Thereafter, both petrol and diesel would
be deregulated and linked to market prices, leaving
PDS Kerosene and LPG subsidy. Government also
brought cap on subsidized LPG to 9 per connection
annually. However, owing to public demand the cap
was revised to 12 cylinders towards end of FY 2013-14.
18. Government has also reduced the burden of rollover by providing additional amount to cover part dues
of the OMCs pertaining to last quarter, despite the
normal practice of carrying fourth quarter payment to

the next financial year. Similarly, additional amount

has been provided to meet the requirement for Food
Security Bill. Considering the fact that number of State
governments has to pass necessary legislation and
take administrative measures to implement the Food
Security Act passed by the Central government in
middle of FY 2013-14, the additional allocation is
expected to be more than adequate to meet the
requirement in FY 2014-15. Despite additional
allocation for subsidy as discussed above, the fiscal
policy for financial year 2014-15 has been calibrated
to achieve the path of fiscal consolidation.
Tax Policy
19. During the fiscal consolidation period, the taxGDP ratio improved significantly from 9.2 per cent in
2003-04 to 11.9 per cent in 2007-08. This has been
achieved through rationalization of the tax structure
(moderate levels and a few rates), widening of the tax
base, and reduction in compliance costs through
improvement in tax administration. The extensive
adoption of information technology solutions and reengineering of business processes has also fostered
a less intrusive tax system and encouraged voluntary
compliance. These measures resulted in increased
buoyancy in tax revenues till 2007-08 and helped in
achieving fiscal consolidation through revenue
measures alone. Due to the stimulus measures
undertaken largely on the tax side during the global
economic crisis in 2008-09 and 2009-10, as a
measure to insulate Indian economy from the adverse
impacts of global economic crisis and slowdown in
domestic growth, the gross tax revenue as percentage
of GDP declined sharply to 9.7 per cent in 2009-10.
20. Further, due to high international prices and as
a measure to insulate consumers and to reduce under
recoveries government had to further reduce taxes/
duty on petroleum products in 2011-12. As a result
the gross tax receipts as percentage of GDP in 201112 declined to 9.9 per cent from 10.2 per cent in 201011. With partial roll back of stimulus measures in
indirect taxes and additional revenue measures in
direct taxes, it was estimated that tax receipt as
percentage of GDP would improve to 10.9 per cent in
2013-14. However, global uncertainties and exchange
rate volatility and growth rate lower than expectations
in 2013-14, the tax-GDP ratio has been revised to 10.2
per cent. Tax buoyancy has come down to nearly one,
meaning thereby that tax collection has failed to keep
pace with the growth in GDP. This is more pronounced
in case of Indirect taxes than in Direct tax collection.
Continuing forward on the path of fiscal consolidation
with a view to narrow the gap in government spending
and resources, the tax-GDP ratio has been targeted

21
at 10.7 per cent in the BE 2014-15 with a growth rate
of 19.0 per cent. The Voluntary Compliance
Encouragement Scheme for Service Tax has brought
in additional amount of ` 7,700 crores. While half of
the amount has accrued in 2013-14, remaining amount
will be realized in FY 2014-15.
Indirect Taxes
21. As part of Interim budget no major changes are
proposed in the duty structure or rate. It is proposed
to continue with all the measures introduced in the
last financial year. However, the turnaround in
economic activity evidenced in the first quarter of this
calendar year in terms of improving softening inflation,
improving exports and better industrial and
manufacturing and expectation of recovery of growth
rate provides scope for achieving the targets. While,
the performance in last three quarters in 2013
witnessed subdued collections, some of the lost
ground was covered in the fourth quarter of the
financial year 2013-14. Going forward, it is expected
that with the revival of growth in 2014-15, the budgeted
target of 4.8 per cent of GDP will be achieved.
22. In the medium term, the most significant step from
the point of view of broadening the tax base and
improving revenue efficiency through better compliance
is the introduction of Goods and ServicesTax (GST).
As far as Central taxes viz. Central Excise duties and
Service Tax are concerned, a fair amount of integration
has already been achieved, especially through the
cross-flow of credits across the two taxes. It would be
possible to realize full integration of the taxation of goods
and services only when the State VAT is also subsumed
and a full-fledged GST is launched.
23. There are several administrative measures
initiated to streamline the administrative set-up.
Government has approved massive expansion of field
staff. Additionally several initiatives have been taken
on information technology side. Recognizing the fact
that globalization is both a challenge and an opportunity,
sustained efforts have been made by the Indirect Tax
Administration to introduce trade facilitation measures.
This years new initiative is introduction of Information
Technology based Risk Management System (RMS)
for exports. Further, e-payment of duty/tax has been
made mandatory for all those manufacturers and
service providers who paid duty / tax of more than ` 1
lakh in the previous financial year. These steps are
aimed at reducing human interface and cut down
transaction cost, making Indian business
internationally competitive. Concurrently, clearance in
major Customs Clearance Ports and Air Cargo
Complexes in the country has also been made
available on 24x7 basis.

24.
Several specific proposals in the Budget 201314 to recalibrate the tax effort on indirect taxes will be
continued in FY 2014-15, so that fiscal consolidation
may be achieved in the short term.
Direct Taxes
25. Tax collection is a product of two factors- tax
rates and tax base. Government policy on Direct Taxes
has been to broaden this base while maintaining
moderate tax rates. As part of the Interim budget no
change is being proposed in the rate of personal
income tax and the rate of tax for the domestic and
foreign companies in respect of income earned in the
financial year 2013-14. Similarly, the surcharge on
personal income-tax and corporation tax will continue.
26. Expansion of tax base is a continuous process
and involves measures on both legislative and
administrative fronts. No legislative measures are
proposed at present. However, a number of
administrative measures have been taken to improve
compliance and augment revenue collections,
such as:

Extensive use of technology is being made

for collection of information.

360 degree profiling of taxpayers and

potential taxpayers is being done for collating
and correlating information of the sources
of income and spending habits.

Information technology tools are being

developed for monitoring information and
maintenance of database.

Utilization of information collected from

returns of income and other sources and
specific targeted action is taken against tax
evaders.

The CPC at Bengaluru has become fully

functional, thereby efficient processing of
returns has been ensured.

CPC-TDS at Vaishali Ghaziabad has made

significant improvement in the compliance
by the tax deductors.

27. The above measures shall continue to be

effective in the financial year 2014-15. Moreover the
Department has also undertaken a restructuring
exercise in the current FY. 2013-14. This would result
in better resource management and effective use of
information technology. This is expected to contribute
significantly in augmentation of revenue collection from
direct taxes.
28. In 2013-14 direct taxes have shown lower growth
as compared to the targeted growth rate of

22
19 per cent. This is more pronounced in the corporate
tax collection than in personal income-tax collection.
It is mainly due to the fact that net profitability of
business and trade has been diminishing on account
of rising inflation as compared to real GDP growth rate
and higher cost of funds borrowed. These factors of
inflation do not affect wages which mainly contribute
to personal income tax collection. Consequently, the
estimates are revised down-wards by ` 31,791 crores,
being 0.3 per cent of GDP.
Contingent and other Liabilities
29. In terms of Article 292 of the Constitution, Central
Government gives guarantees for the repayment of
borrowings upon the security of the Consolidated Fund
of India. The FRBM Act mandates the Central
Government to specify the annual target for assuming
contingent liabilities in the form of guarantees.
Accordingly, FRBM Rules prescribe a ceiling of 0.5
percent of GDP for incremental guarantees that the
Government can assume in a particular financial year.
The Central Government extends guarantees primarily
for the purpose of improving viability of projects or
activities undertaken by the Government entities with
significant social and economic benefits, to lower the
cost of borrowing as well as to fulfill the requirement
in cases where sovereign guarantee is a precondition
for bilateral/multilateral assistance. As the statutory
corporations, government companies, co-operative
institutions, financial institutions, autonomous bodies
and authorities are distinct legal entities, they are
responsible for their debts. In the process of
guaranteeing their financial obligations the Government
has the commitment to assess the fulfillment of such
obligations and adequately disclose them. The
disclosure is being made by the Government as per
statutory requirements decided on the advice of
Comptroller and Auditor General.

select sectors and reviewing the requirement of

guarantee vis-a-vis other forms of budgetary support
or comfort. Additional measures to further streamline
the process of assuming risk could include charging
of risk based premia disincentive for willful default,
other part sharing of risk by the Government and
insisting on guaranteed debt cost to be near the bench
marked Government Securities rate.
31. The Stock of contingent liabilities in the form of
guarantees given by government has increased in
absolute terms from ` 1, 07,957 crore at the beginning
of the FRBM Act regime in 2004-05 to ` 233769 crore
at the end of 2012-13. FRBM ceiling on guarantees
which can be assumed by Government during a FY
has resulted in reduced contingent liability to GDP ratio.
Ratio which stood at 3.3 percent in 2004-05 is now
reduced to 2.3 percent in 2012-13. The disclosure
statement on outstanding Guarantees as prescribed
in FRBM Rules, 2004 is appended in the Receipt
Budget at Annex 5(iii). During the year 2012-13, net
accretion to the stock of guarantees was ` 36938
crore, amounting to 0.37 percent of GDP, which is
within the limit of 0.5 percent set under the
FRBM Rules.

32. Government is also assuming liabilities for

financing its activities by entering into annuity projects
in respect to some infrastructure development
activities. The commitments so made in these
projects will occupy the fiscal space for future
Governments and due care needs to be exercised in
assuming these liabilities for the sake of
intergenerational equity. As part of amended FRBM
Rules, Government discloses its commitment
liabilities towards such projects including project costs
and annual pay-outs under the annuity projects. These
commitments on account of on-going Annuity Projects
under Ministries/Departments are disclosed in the
prescribed format in Receipts Budget at Annexure-8.
30. For better management of contingent liabilities, The annuity projects contracted by Government have
Government guarantee policy enumerates various a total committed value of ` 101146.69 crore with
principles which need to be followed before new annual payment of ` 6525.65 crore.
contingent liabilities in the form of Sovereign
Guarantees are undertaken. As guarantees extended Government Borrowings, Lending and
by Government have the risk of its devolution on Investments
Government, the proposals are examined in the 33. Status Paper on Government Debt is published
manner of a loan being taken directly by the annually to improve transparency in dissemination of
Government. The principles enunciated in the policy information related to public debt. The third edition of
lay down framework for minimization of risk exposure the document was published in July, 2013. Prudent
of sovereign while undertaking these contingent debt management is corner stone of good economic
liabilities. The principles include assessment of risk policy and experience in other part of the world has
including the probability of a future pay-out, priority of shown that vulnerability of debt profile to international
the activity, institutional limits on guarantee for limiting shocks needs to be closely monitored in emerging
exposure towards select sectors and reviewing the global economic order. In India, debt policy is driven
requirement of guarantee for limiting exposure towards by the principle of gradual reduction of public debt to

23
GDP ratio so as to further reduce debt servicing risk
and create fiscal space for developmental expenditure.
Indian debt profile is characterized by reliance on
domestic market borrowings, with market determined
rates rather than administered rates. Development
of deep and wide secondary market for Government
securities is one of the key reforms in this regard.
34. One of the key features on countrys debt profile
is diminishing proportion of external debt as
percentage of total borrowing. External borrowing is
limited to bilateral / multilateral loans from select
development partners for financing development
projects. It has been decreasing in view of their
exposure norms and income norms and the only
significant bilateral partner as on date is Japan. The
external funding has reduced significantly from
` 10,560 crores in BE 2013-14 to ` 5,440 crores in
RE 2013-14, as many projects are in inception stage
and could not come up for payments while repayments
were as per schedule, resulting in decline of net
financing. The BE 2014-15 for external debt has
therefore been kept at ` 5,734 crores. With gradual
decline in net inflow from Multilateral Institutions in the
coming years, government would have the option of
exploring other sources of external debt for example
in the form of sovereign bond issuance to maintain a
reasonable mix of domestic and external debt in its
portfolio. However, a low share external debt in the
total debt insulates the debt portfolio from external
sector shocks and currency risks. Low interest rates
in the international financial markets in recent past
suggested that it may be beneficial to borrow from
international financial market. The decision to issue
foreign currency denominated sovereign bonds,
however, cannot be based on relative cost alone. The
need to access international capital markets should
be justified in the context of overall savings and
investment requirements of the economy. Therefore,
decision to issue sovereign bonds would require
establishing a regular and predictable schedule of
issuance leading to a build up of interest and
redemption payments, keeping in view balance of
payments (BoP) implications.
35. Developing a liquid and vibrant secondary market
for government securities and broadening the investor
base are the key factors to ensure that debt is raised
in a cost effective manner. The initiatives to
development market are undertaken with close
coordination with the Reserve Bank of India. Primary
issuance strategy of the Government remains
focussed on issuing new securities under benchmark
maturities and building volumes under existing
securities to improve liquidity in the secondary market.
During 2013-14, six new securities were issued

including inflation indexed bonds which constituted 3.9

per cent of total issuance during the year, implying
that more than 96 per cent issuances were in terms
of re-issues. Broadening of investor base is another
key factor in the stability of demand for government
securities. The Government introduced inflation
indexed bonds based on WPI for institutional category
in the starting of FY 2013-14 for market development
and price discovery. A separate series of Inflation
Indexed National Savings Securities-Cumulative
(IINSS-C) linked CPI inflation was introduced
exclusively for retail investors in the last week of
December, 2013.
36. Apart from greater focus on market borrowings,
the Government is also moving toward alignment of
administered interest rates with the market rates.
Interest rates on small savings are now linked with
yields in secondary market for dated securities. The
interest rates for every financial year are notified before
1st April. Collections under various small saving
schemes, net of withdrawals, during the financial year
form the source of funds for National Small Savings
Fund (NSSF). The net collection is invested in Central
and State Government Securities as per the
recommendation of the Committee on Small Savings
constituted in July, 2010. Redemption of these
securities is reinvested in Central and State
Government Securities in 50:50 ratio at prevailing rate
of interest. States are provided excess interest relief
based on their compliance with fiscal targets in
respective FRBM Act. Interest payment to subscribers
and cost of management constitute the expenditure
under the fund and interest on Central and State
Government Securities forms the income of the fund.
37. In 2013-14, net market borrowings at ` 4,84,000
crore were budgeted to finance 89.2 per cent of gross
fiscal deficit during 2013-14. Other sources of
financing such as external assistance, state provident
funds and National Small Savings Fund (NSSF) were
budgeted to finance the remaining 10.8 per cent of
GFD. During 2013-14, there was net inflow in the small
savings account. However, as the net collection is
invested in Central and State Securities as per the
committees recommendation and Thirteenth Finance
Commission (FC-XIII) norms, the amount was
required to be invested in State securities and net
financing for Central government was reduced at the
RE stage. As a result of lower realization than
budgeted from external debt and small savings, and
also to meet revised fiscal deficit target of 4.6 percent,
the net borrowing from auction treasury bills (ATBs)
was increased by ` 20,000 crore viz. from
BE 2012-13 of ` 9,000 crore to ` 29,000 crore.

24
38. The rollover risk in the Government debt portfolio
continues to be low with weighted average maturity of
outstanding dated securities close to 10 years.
Furthermore, the share of short-term debt in
outstanding dated securities at end-January 2014 was
just 4.4 per cent and debt maturing in next 5 years
was less than 30 per cent of total debt, indicating a
low level of rollover risks. Notwithstanding a low
rollover risk, the Government is continuing its efforts
to elongate the maturity profile of its debt portfolio.
During the 2013-14, weighted average maturity of
primary issuance of issuance was raised to 14.5 years
from 13.5 years in the previous year. Noticeably, the
increase in weighted average maturity was achieved
without substantial increase borrowings costs. The
weighted average yields of primary issuance during
2013-14 saw only moderate increase to 8.47 per cent
from 8.36 per cent in the previous year, which may be
seen in the backdrop of hardening of interest rates in
the economy due to global factors and monetary
tightening by Reserve Bank during the year. The
increased maturity of primary issuances without a
substantial increase in borrowings cost reflects the
greater demand for longer tenor securities by
insurance companies and provident funds which will
continue to support the Government efforts to elongate
its maturity profile in medium term.
39. Pursuing with Governments commitment to
carry on with the fiscal consolidation measures, the
fiscal deficit for 2014-15 is budgeted to decline to 4.1
per cent of GDP. Total borrowings requirement for
2014-15 has been budgeted at ` 5,28,631 crore or
4.1 per cent of GDP. Net market borrowings of
` 4,57,322 crore has been budgeted to finance nearly
86.5 per cent of fiscal deficit. In nominal terms, net
borrowing is decreased by 2.5 per cent over the
previous year. In terms of GDP, however, they are
budgeted to decline to 3.6 per cent as compared with
4.1 per cent in the previous year. Borrowings under
other sources of financing are budgeted at 13.5 per
cent during 2014-15.
40. In terms of debt financing, the borrowings
strategy during 2013-14 will continue to rely on
domestic sources with external sources financing only
1 per cent of the fiscal deficit. Nearly, 99 per cent of
GFD of ` 5,42,499 crore would be financed from the
domestic sources. Borrowing strategy will continue
its focus on raising resources through on market
oriented instruments to meet both the short-term and
medium term borrowings requirements of the
Government. Apart from ` 4,57,322 crore proposed
to be raised through dated securities, a provision of
` 34,554 crore is also made to be realised through
treasury bills. In addition to providing a greater

manoeuvrability for cash management, treasury bills

also provide benchmark and momentum to trading
activity in the money market therefore facilitating the
financial and corporate sector in meeting their shortterm cash requirements. In addition, Small Savings,
State Provident Fund and other receipts from Public
Account would finance remaining portion of the deficit,
about 6.9 percent of the deficit.
41. There is no balance estimated at the end of
financial year 2012-13 under Market Stabilization
Scheme (MSS). Net accretion in MSS to the tune of
` 20,000 crore is however estimated in BE 2013-14.
42. Cash management framework is an essential
ingredient of the overall debt management strategy.
Government is moving toward a market based cash
framework with reduced dependence on the central
bank. With the introduction of Cash Management Bills
in 2010-11, cash deficit requirements are now largely
managed through the market. It has been decided
that cash surplus of the central government will be
invested by RBI in the market, beyond the current
account necessary to meet day to day requirements.
Government is continuously improving and refining its
cash flow projections, which is a primary requirement
of effective cash management. As part move toward
establishment an independent debt management
office, Government has adopted a nuanced approach.
The Middle Office established in the Ministry of
Finance, has evolved and strengthened. Making further
progress toward transparency and dissemination of
information, Government began publishing a
Handbook of Statistics on the Central Government
Debt in November 2013, which will be updated on
annual basis. Government already brings out a Status
Paper on Government Debt, annually.
43. In view of redemption pressures in coming
years, particularly during 2015-16 to 2017-18, the
Government in coordination with Reserve Bank made
progress during 2013-14 in putting in place an active
debt management strategy to manage its debt portfolio.
In 2013-14, the buyback / switching operations were
undertaken whereby the securities worth about
` 30,000 crore maturing in 2014-15 and 2015-16 were
switched for longer tenor securities and securities
worth ` 15,000 crore maturing in 2013-14 also
scheduled for buy-back towards end of FY 2013-14.
Continuing further with active debt management
strategy, it is proposed to undertake buyback / switch
of another ` 50,000 crore securities of shorter tenor
during 2014-15. Buyback of the debt serves twin
purposes of effective cash management and
smoothening of maturity profile. It is expected that
Switching / Buy-backs will ease redemption pressure

25
in the initial part of ensuing financial year. Moreover,
with redemption pressure rising over next three
financial years, active debt management synchronized
with cash management will help in managing
redemptions with optimal costs.
44. As per the decision taken by the Government
disinvestment proceeds from Central PSUs from the
financial year 2013-14 onwards are being used only
for select capital investments. Therefore, National
Investment Fund (NIF) has been constituted in FY
2013-14, as a fund in Public Account to hold all
proceeds from disinvestment. The fund can be utilized
for limited purposes of acquiring assets as authorized
by the Government. This ensures that only the nature
of capital assets owned changes without depleting the
asset base, as the disinvestment proceeds by
reduction in capital assets of Government on one side
will be matched by increase in the stock of its capital
assets in other approved areas. As per the BE 201314 ` 40,000 crores was proposed to be transferred to
NIF for financing Bank recapitalization and Investments
in Railways. However, due to lower realization under
the disinvestment, RE 2013-14 has now been revised
to ` 16027 crores, to finance investments in railways,
while bank recapitalization financing was taken
through GBS. In BE 2014-15, disinvestment target
for NIF has been projected at ` 36,925 crores.

State Treasury will infuse greater ownership of Plan

schemes to State/UT governments and greater
accountability on them to make timely and need based
releases to local Implementing Agencies (IEs) and also
to monitor the implementation of schemes more
closely.
Provision of Flexi funds:

47. In another major initiative, government decided

to earmark at least 10 per cent of the outlay of CSS
on flexi funds. Central Ministries concerned shall keep
at least 10 per cent of their Plan budget for each CSS
as flexi-funds, except for schemes which emanate
from a legislation (e.g. MGNREGA), or, schemes
where the whole or a substantial proportion of the
budgetary allocation is flexible (e.g. RKVY).The
introduction of a flexi-fund component within the
Centrally Sponsored Schemes (CSS) has been made
to achieve the following objectives: i) to provide
flexibility to States to meet local needs and
requirements within the overall objective of each
programme or scheme; ii) to pilot innovations and
improved efficiency within the overall objective of the
scheme and its expected outcomes; and iii) to
undertake mitigation/restoration activities in case of
natural calamities in the sector covered by the CSS.
In order to enforce financial discipline to achieve the
stated objectives, it has been decided that the flexifunds of a CSS in a particular sector; a) shall not be
Initiatives in Public Expenditure Management
diverted to fund activities/schemes in other sectors,
Restructuring of Centrally Sponsored Schemes:
b) shall not be used to substitute States own non45. In a major initiative towards improving the Plan or Plan schemes/expenditure, and c) shall also
efficacy of plan schemes, Planning Commission not be used for routine operational expenditure of State/
implemented the restructuring of centrally sponsored UT governments.
schemes and direct releases through State Treasury.
Direct Benefit Transfer
As a part of streamlining, 126 CSS haven restructured
into 66 schemes which includes 17 Flagship 48. In a move to ensure accurate targeting of the
programmes. The restructuring of schemes, to be beneficiaries, cut down wastage, duplication and
affected from next financial year i.e. FY 2014-15 leakages, enhance efficiency in disbursal of funds, and
onwards, shall add to more effective application of efficacy of use of government money, it was decided
resources as plan allocations shall be more in October, 2012 that individual benefits from the
concentrated. This will also result into more focused government would be directly transferred into the
monitoring of implementation of schemes by the Aadhar linked bank account of the beneficiaries.
Accordingly, the scheme of Direct Benefit Transfer
administrative ministries.
(DBT) was rolled out from 1 January 2013 in 43
Direct releases to State/UTs with Legislature:
identified districts in 26 selected schemes of 8
46. All Plan schemes under which central assistance Ministries. About 97 lakh beneficiaries in 121 districts
is provided to States/UTs are to be restructured and stand to benefit under DBT till end of the year 2013.
budgeted as Central assistance to State/UT plans w.e.f The measure is expected to achieve process re2014-15 BE onwards. For all such schemes funds engineering of Government schemes for simpler and
will be placed with the Administrative Ministries for faster flow of information and funds.With an aim to
transfer to the States through the Consolidated Fund improve subsidy administration, DBT in LPG subsidy
of the States/UTs with Legislature concerned. This (DBTL) began in 20 districts on 1-06-2013 and
mode of transfer may be implemented in a phased thereafter in 5 phases (up to 01.01.2014). It has
manner in 2014-15 (BE).The routing of money through covered 291 districts across the country. Districts with

26
higher Aadhar penetration were given preference in
selection. Once DBT-LPG is rolled out completely
across the 291 districts, it will cover over 7 crore
consumers making it one of the largest cash transfer
programme in the world.
49. One of the major initiatives in the area of
disbursement of government money is the
implementation of an electronic payment system
through a Government Electronic Payment Gateway
(GePG) by the Pay & Accounts Offices (PAOs) of
Central Civil Ministries/Departments. Under this ePayment System, payments by PAOs are directly
credited into beneficiarys account thus reducing the
beneficiarys dependency on government offices /
officials to receive their dues/payments. The system
helps in quick realization of their dues. By eliminating
the need for issuance of Demand drafts for outstation
payments, this initiative has greatly reduced the
quantum of government money floating idly in the
system which has a direct positive impact on
government cash position. This is one of the first
security compliant, digital signature based payment
system in Government and covers 363 PAOs in 50
Central Ministries/Departments through 22 banks. It
is now being rolled out for CDDOs of CPWD and has
been implemented in 5 CDDOS on pilot basis.Apart
from being an important tool for good governance and
reduction of corruption, this measure will also be a
boost to environmental protection by eliminating paper
based physical instruments of payments and scrolls.

75.9 per cent in 2007-08. This was primarily due to

buoyancy in the national economy getting reflected in
railway traffic also and the average growth in railway
expenditure. However, after 2007-08, the OWE and
pension payment soared consequent upon
implementation of the 6th Central Pay Commission
(CPC), whereas the momentum of growth in earnings
witnessed earlier could not be maintained. As a result
the Operating Ratio deteriorated to the extent of 95
per cent. The Railway Plan could be sustained by
drawing down from the Railway Reserves Funds. In
fact, the balances in Railway Reserve Funds become
negative to the extent of ` 2,100 crore and ` 385 crore
during 2010-11 and 2011-12 respectively. Ministry of
Finance provided a loan of ` 3,000 crore in 2011-12 to
bridge the negative balances in the Railway Funds.

52. Due to various measures taken including

additional resources mobilization through rationalizing
the fare and freight tariffs, the financial position of the
Railways has started showing signs of improvement
in the subsequent years. The entire loan of ` 3,000
crore has also been returned with interest to general
revenues in 2012-13. The revenue earnings of the
Railways at ` 140450 crore are likely to register a
growth of 13.6 per cent in RE 2013-14 over the
previous year, whereas the OWE and the pension
expenditure at ` 120760 crore is estimated to increase
by 15.3 per cent. The internal resource generation is
likely to be ` 14,496 crore in 2013-14 RE against
` 15144 crore in RE 2012-13. The Operating Ratio in
RE 2013-14 is likely to be at 90.8 per cent. Traditionally
Railway Budget
the passenger services of railways have been loss
50. Railway Budget is presented separately making and the under recovery has exceeded
however, the earnings and expenditure and all other ` 25,000 crore.
major financial figures are incorporated in the General 53. The plan investment in railways is funded through
Budget, Government support is provided to Railways
GBS, internal resources and extra budgetary resources
in the form of Gross Budgetary Support (GBS) and a (EBR). The 12th Five Year Plan for railways has been
return on this investment, called Dividend, is paid every
approved at ` 5.19 lakh crore, targeting investment of
year. The rate of Dividend is determined by the Railway
` 1.94 lakh crore through GBS, ` 1.05 lakh crore of
Convention Committee and is presently at 5 per cent.
internal resources and ` 2.20 lakh crore of EBR. An
There has been no default in the payment of dividend
amount of ` 64,305 crore has been provided in BE
in the last ten years. Railway Revenues are primarily 2014-15 as against investment of ` 59,359 crore in
earned through two major traffic streams, passenger
RE 2013-14 and ` 50,383 are in Actuals 2012-13. The
and freight. Some earnings are also contributed by plan resources are also targeted to be invested
parcels, commercial utilization of land, siding charges,
judiciously and operationally important projects will be
advertisement and dividend paid by Railways PSUs. provided assured funding during the 12th Plan. This
The earnings are utilized to meet the operating
will help the railways in not only removing the
expenses called Ordinary Working Expenses (OWE) infrastructure bottlenecks but also augment the
and pensionary charges. The remaining surplus is
revenue earning capacity of the system. Railways
used to pay dividend and balance is ploughed back have been provided additional budgetary support of
as plan investment for meeting safety and
` 1,000 crore in the current fiscal taking GBS from
development needs of the system.
General Revenues from ` 26,000 crore to ` 27,000
crore.
GBS of ` 29,000 crore provided to Railways in
51. Railway Finances improved in the last decade
in as much as that it attained the Operating Ratio of cludes ` 6,000 crore towards National Projects.

27
C.

POLICY EVALUATION

54. Fiscal consolidation initiated as part of mid-year

review in FY 2012-13, was fully implemented in the
FY 2013-14. Government notified the new FRBM
Rules in July, 2013 following FRBM (Amended) Act,
2012 as passed by the Parliament in the budget
session. Accordingly, legal status was provided to the
roadmap of fiscal consolidation announced by the
government earlier in 2012. Having successfully
implemented the policy change in FY 2012-13, and
rationalized expenditure in FY2013-14, including
realistic assessment of Subsidy requirement, it was
expected that fiscal consolidation in FY 2013-14 would
be achieved without any major fiscal stress.
55. However, two developments hindered the path
of fiscal consolidation in the current fiscal year. One
was due to the external shock in the early part of the
fiscal year due to likelihood of tapering of quantitative
easing indicated by US Fed in third week of May, 2013.
As discussed above, the announcement along with
growing trade deficit led to a panic reaction in the
market. Rupee depreciated steeply, by almost 31 per
cent within a month. Monetary policy response from
the central bank, RBI, over a period of three months
helped in containing the downward trend. At the same
time, government persisted with policy reforms for
greater investment as well filling the current account
deficit by imposing higher import duty on gold.
Combined efforts of the central bank and government
started bearing results after half year period. By end
of the calendar year, the value of rupee had stabilized
considerably, RBI had built up foreign exchange
reserve to provide adequate buffer for the quantitative
easing, portfolio investments were highest in the
month of December, 2013 and the trade gap had
considerably narrowed following decline in gold import.
The effectiveness of government policy measures was
clearly discernable in the reversal of trends by the
beginning of 2014. Resilience of the measures taken
can be gauged by the fact that by the time of actual
tapering of quantitative easing was initiated by US;
there was little impact on the currency.
56. None-the-less, in the intervening period of four
months from July to October, 2013 the adverse impact
of the exchange rate on the macro-economic situation
was substantial. RBIs intervention led to sharp
increase in short-term interest rates eroding private
investment and profitability. Along with inflationary
pressures, this impacted adversely hitherto sluggish
economic growth. In turn, there was pressure on
government receipts. Tax receipt, both Direct and
Indirect, were lower than the target. At the same,
macro-economic scenario was not favourable for
disinvestments, while dividend pay-out also was under

duress to lower project of profitability of PSUs. On

the expenditure side, plan spending maintained higher
level as compared to previous years. Third year of
the plan period show grounding of several schemes.
Moreover, due to expenditure rationalization in the later
part of previous financial year, spending in the current
year remained elevated since beginning, as unlike in
other years when typically there was drawdown in last
quarter in anticipation of next financial years
requirement.
57. As a result, there was higher spending and lower
receipts in the period April to December, 2013, leading
to higher proportional fiscal deficit as compared to
previous years. Therefore, having resorted to fiscal
consolidation in the later part of FY 2012-13,
government was confronted with similar situation in
FY 2013-14 as well. Once again, government
demonstrated its firm resolve to tame the deficit.
Efforts were intensified to mop up resources, while
taming the expenditure to reign in the widening gap.
While rationalization of Non-plan expenditure was
undertaken with a view to contain additional
requirements on subsidies within overall allocation, it
was decided to contain plan spending to meet shortfall
in total revenues, both on tax and non-tax side.
Concerted efforts on these lines undertaken along with
pre-budgetary exercise in November December,
2013 fructified in start of 2014 with fiscal frudence,
thus undertaken, it is expected that the fiscal targets
will be achieved in the FY 2013-14.
58. The financial year 2013-14 concluded with
positive indications on the twin deficit. Trade gap fell
beyond expectations of the market with dramatic fall
in gold imports. At the same time, position on fiscal
deficit was better than budgeted. After providing
sufficiently for subsidies, including higher allocation
to fuel subsidy towards part of last quarter estimates
which are normally paid in the next financial year,
government wasable to provide funds to meet
development programs adequately. RBI continued
with its tight monetary policy to tame in further the
weakening inflationary trends. However, market was
upbeat about positive signals, with many analysts and
international agencies reposing confidence in recovery
of growth to above 6 per cent levels in FY 2014-15.
Interim budget 2014-15 continues path of
consolidation by progressively reducing the fiscal
deficit to 4.1 per cent, while providing sufficient funds
for development programs. The fiscal policy is
calibrated with twin objectives of containing
government spending to achieve the projected fiscal
deficit targets and to carry forward the reforms process
to kick start a fresh investment cycle and revive the
growth process.