Tarun Das Lecture GFS-2

8/9/2019 Tarun Das Lecture GFS-2

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UNSIAP TARUN DAS SESSION 3-4 GFS 1

GFS 1986Basic Concepts andCase Study for India

Presented by

Prof. Tarun Das

IILM, New Delhi-110001.Presently ADB Adviser, MOF, Mongolia.

Formerly, Eco. Adviser, MOF, India.


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Contents1. GFS 1986 Accounting Systems2. Case Study for India3. Fiscal Responsibility and Budget

Management Act 2003 of India4. Workout Session for India


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1.1 GFS 1986 Accounting System1. GFS 1986 basically deals with compilation

of statistics on govt finances. The focus ison formulation of budget, which is theaccount of govt revenues and expenditure,and govt receipts and payments.

2. Receipts and Revenues- All revenues arereceipts, but all receipts are not revenues.Receipts are classified as current receiptsand capital receipts.

Current receipts are those receipts whichdo not have obligations for repaymentssuch as taxes and duties, interest earnings,rents, dividends, profits, grants etc.


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1.2 GFS 1986 Accounting SystemCapital receipts consist of loans fromdomestic and foreign sources and haveattendant obligations of amortization andinterest payments.

3. Expenditures and payments- Similarly, all

expenditures are payments, but allpayments are not expenditure. Repaymentsof loans are not expenditure.

4. Requited and unrequited transactions-Requited transactions are those in which

money is paid or received in exchange of goods or services. But, transfers and grantsare unrequited expenditure as nothing isreceived in return of money.


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1.3 Summary table of govt operations


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1.6 Government Deficit/ Surplus


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1.7 Implications of government deficit


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2.1 Case Study for India1. India is in the process of migrating to GFS

2001, but still it uses GFS 1986 system andcash accounting for budget formulation.

2. Both Receipts and Expenditure have twoaccounts- Revenue and Capital.

3. Revenue Account is the current account and is closed within a year.4. On the other hand, Capital Account is not

normally closed within a year and continuesfor a number of years until all obligationsare met by the govt.5. Govt has no obligations to anybody forrevenue receipts. But, govt has obligationsfor capital receipts.


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2.2 Basic Concepts6. Like receipts, expenditure has also two

accounts- revenue and capital.Revenue expenditures relate to current expenditure such as wages and salaries,

maintenance, subsidies, grants, interest payments. These expenditures do not leadto asset creation or value additionCapital expenditures (such asexpenditures on plant, machinery, land,property etc.) lead to asset creation andvalue addition.


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2.3 Other classifications7 . Plan and non-plan expenditure- If any project

or program is approved by the Indian PlanningCommission as a part of the National Five YearPlan or Annual Plan, expenditure for that project or program is called Plan Expenditure and allother expenditures are classified as Non-PlanExpenditures.

8. Developmental and non-developmental-Internationally, expenditures are classified asDevelopmental and Non-Developmental

Expenditures. Any expenditure which leads tohigher production and economic development iscalled developmental expenditure, all others areclassified as Non-Developmental expenditures.


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2.4 Classification of ExpenditureThere is no one-to-one correspondence among

these classifications.Cross-Classification of expenditure in Budget 2006-0 7 (Rupees billion)

Type Plan Non-plan TotalRevenue 1438

(26%)3444

(61%)4882

(8 7 %)Capital 290

(5%)468

(8%)7 58

(13%)Total 1 72 8

(31%)3913

(69%)5640

(100%)


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2.5 Classification of Expenditure-Some typical examples

(a) Interest payments- Revenue, non-plan,non-developmental expenditure(b) Food subsidy- Revenue, non-plan, non-

developmental expenditure

(c) Fertiliser subsidy- Revenue, non-plan,developmental expenditure(d) Construction of national highways- Capital,

plan, developmental expenditure

(e) Construction of border roads for defenseand national security- Capital, plan, non-developmental expenditure


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2.6 Classification of Expenditure-Some typical examples

(f) Salaries of staff of a National University-Revenue, plan, developmental expenditure(g) Salaries of staff of a National University

under construction- Capital, plan,developmental Expenditure

(h) Construction of government hospitals/government schools- Capital, Plan,developmental expenditure

(i) Grants for private hospitals/ private schools Revenue, non-plan, developmentalexpenditure

(j) General grants to subnational Govts-Revenue, non-plan, non-developmental


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2.7 Classification of Receipts

1. Revenue and capital receipts2 .Revenue receipts- Taxes and Non-taxesTaxes- Direct (personal income, corporateincome, dividends tax etc.) and indirect (customs, excise, services tax, VAT etc.)Non-taxes- Interest receipts, profits,dividends, fees, service charges, grants etc.

3. Capital receipts include recovery of loans,disinvestment of government equity, market

and other borrowings, use of public funds4. Non-debt creating receipts include allrevenue receipts, recovery of loans anddisinvestment of govt equity.


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2.8 Different Concepts of Deficits

Revenue deficit=

Revenue expenditure lessrevenue receipts

Capital deficit= Capital expenditure lesscapital receipts

Budget deficit= Total expenditure less totalreceipts= R evenue deficit +Capital deficit Gross Fiscal Deficit= Total expenditure lessNon-Debt receipts= Total Expenditure less

(R

evenue receipts+recovery of loans+disinvestment of govt equity)Gross Primary deficit= Gross Fiscal Deficit lessinterest payments


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2.9 Different Concepts of Deficits

Net Fiscal Deficit= Gross Fiscal Deficit lessNet LendingNet Primary Deficit= Net Fiscal Deficit lessNet Interest PaymentsNet Lending = Loans given by the centralgovt to the States and PSUs less recoveries of past loans from themNet Interest Payments = Interest paymentsless interest receipts

Net R

BI Credit to the central govt =R

BI sholdings of Treasury Bills, govt of India datedsecurities, rupee coins, and other loans andadvances taken by the govt from R BI.


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2.10 Indian Budget 2006-07Items R s. Billion

1. R evenue receipts (a+b) 4035(a) Tax revenues 3 272(b) Non-tax revenues

(b1) Interest receipts7 63 2 06

2 .Capital receipts, of which 1605(a) R ecovery of loans(b) Disinvestment

8038

(c) Borrowings & other liability 148 7

3 .Total receipts (1+ 2 ) 5640

4. R evenue expenditure(a) Interest payments

488 213 98


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2.11 Indian Budget 2006-07

Items R s. Billion5.Capital expenditure

5a. Loans to states and PSUs7 58102

6. Total expenditure (4+5) 56407 .R evenue deficit (4-1) 84 7

8.Capital deficit (5- 2 ) -84 79.Budget deficit= ( 7 +8)=(6- 3 ) 010. Gross fiscal deficit

=(6-1- 2 a- 2 b)= 2 c148 7

11. Primary deficit= (10-4a) 8912 . Net lending =(5a- 2 a)13 . Net fiscal deficit = (10-1 2 )14. Net primary deficit=(1 3 -4a+1b1)

221465273


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3.1 Fiscal Responsibility & BudgetManagement (FRBM) Act 2003FR BM Act 2 003 and F R BM R ules 2 004 cameinto force w.e.f. 5 July 2 004.The Act mandates the Central govt toeliminate revenue deficit by March 2 009 and

to reduce fiscal deficit to 3 % of GDP byMarch 2 008.Under section 7 of the Act, the central govt is required to lay before both houses of Parliament Medium Term Fiscal PolicyStatement, Fiscal Policy Strategy Statement and Macro Economic Framework Statement along with the Annual Financial Statement and Demand for Grants.


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3.2 FRBM Rules 2004

R eduction of revenue deficit by 0.5%of GDP or more every year.R eduction of gross fiscal deficit by0. 3 % of GDP or more every year.No assumption of additional debt exceeding 9% of GDP for 2 004-05 and

progressive reduction of this limit byat least one percentage point of GDPin each subsequent year.


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3.3 FRBM Rules 2004No guarantee in excess of 0.5% of GDP in any financial year.Four fiscal indicators to be projectedfor the medium term. These include

revenue deficit, fiscal deficit, taxrevenue and total debt as % of GDP.Greater transparency in the budgetaryprocess, rules, accounting standardsand policies having bearing on fiscalindicators.Quarterly review of the fiscal situation.


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3.4 FRBM Rules 2004The rules mandate the CentralGovernment to take appropriatecollective action in the case of revenueand fiscal deficits exceeding 45% of

the budget estimates, or total non-debt receipts falling short of 40% of the budget estimates at the end of half year of the financial year.The rules also prescribe the formatsfor the mandatory statements.


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3.5 Current Fiscal Background(as % of GDP)

Item 2 005-06 Actual

2 006-0 7 BE

2 006-0 7 RE

2 007 -08BE

1. R evenue

Deficit

2 .6 2 .1 2 .0 1.5

2 .FiscalDeficit

4.1 3 .8 3 .7 3 .3

3 .PrimaryDeficit

0.4 0. 2 0.1 (-) 0. 2


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3.6 Medium Term Fiscal Indicators

Items 2006-07 RE 2007-08 BE 2008-09Target

2009-10Target

1.Revenue Defas % of GDP

2.0 1.5 0.0 0.0

2.Fiscal Deficitas % of GDP

3.7 3.3 3.0 3.0

3.Gross tax rev.as % of GDP

11.4 11.8 12.3 12.7

4.Year-enddebt stock (%of GDP)

64.4 61.4 58.6 56.0


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4.1 Indian Budget 2007-08Items R s. Billion1.Tax revenues 40 3 92 .Non-tax revenues

2 a.Interest receipts82 5193

3 . Capital receipts3 a. R ecovery of loans3 b. Disinvestment of govt. equity

194115417

4 .R evenue expenditure4 a. Interest payments

557 91590

5.Capital expenditure5a. Loans to States and PSUs 122 64 56.Memo item: GDP at current mp 4 573 0


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4.2 Workout Session-1Given data on Indian Budget 2007-08 in Slide-

4.1, estimate the following in Rs.billion andexpress these as percentage to GDP:1. R evenue deficit 2 . Capital deficit 3 . Budget deficit 4 . Gross Fiscal Deficit 5. Gross Primary deficit 6. Net lending7 . Net interest payments8. Net Fiscal Deficit 9. Net Primary deficit

U se the following Excel File:U NSIAP Tarun Das Session-4 GFS Workshop-1


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Thank you Have a Good D ay

Documents

Tarun Das Lecture GFS-2