FISCAL SYSTEM

Definitions
That part of government plicy which is concerned with raising revenue through taxation and with deciding on the amounts and purposes of government spending.
The government's policy in regard to taxation and spending programs. The balance between these two areas determines the amount of money the government will withdraw from or feed into the economy, which can counter economic .peaks and slumps.
Government spending policies that influence macroeconomic conditions These policies affect tax rates and government spending, in an effort to control the economy.
government policy for dealing with the budget-especially with taxation and borrowing
The policy of a government in controlling its own expenditures and taxation, which together make up the budget
Fiscal policv is the means bv \vhich a government adjusts its levels of revenue and spending in order to monitor and influence a nation's economy
Fiscal policy involves use of taxation and government spending to influence economy. In other words, fiscal policy relates to raising and spending money in quantitative and qualitative terms.
As far as fiscal resources are concemedt, taxes, user charges (power, water,. transport charges etc); disinvestment proceeds; borrowings from internal and ex~ernal sources are the main channels. Receipts and expenditure are divided into revenue and capital accounts. Expenditure is also shown as Plan and Non-plan items.
Fiscal system deals not only with the quantity but the quality of public finance as well. In other words, not merely how much is raised and spent but how has it been raised in the form of
taxes and within that indirect and direct taxes
disinvestment proceeds
borrowings from market and RBI
Also, the way the finances so raised are used- wastefully or productively.
How much is spent on plan heads and how much populistically etc also is studied.
Non-Plan expenditure is not a Constitutional term but is in use to emphasize on the point that government spends financial resources for consumption( maintenance) as well as asset creation. It includes expenditu"re on interest payments; defense: subsidies; and public administration.
A break up of the finances into revenue and capital streams is as follows:-
Revenue receipts are recurrent receipts. Revenue account includes the followIng receipts: taxes and non-tax sources. Taxes are income tax, corporation tax, excise duty, customs duty etc: non tax resomces include user charges ;interest receipts; .d!ridends; profitslli
Revenue account expenditure is essentially the non-plan expenditure that does not create assets. that is, - interest payments defence: subsidies and public administration. It is synonymous with maintenance and consumption expenditure as also welfare expenditure.
Capital account receipts are recoveries of l6ans and advances made by the Union Government to States, Uts and PSUs: fresh borrowings: is investment proceeds etc. As is clear, some of them are debt and some are non-debt.
Capital account expenditure is loans made to States, UTs and PSUs: expenditure for asset creation in infrastructure and social areas.
Fiscal policy can achieve important public policy goals like: growth; equity; promotion of small scale-industries; encouragement to agriculture; location of industries in rural areas; labour-intensive growth: export promotion: development of sound social and physical infrastruCture etc.
Definitions of Deficits
Revenue deficit is the difference between the revenue receipts on tax and non-tax sides and the revenue expendihlre: Revenue expenditure is synonymous with consumption and non-development, in general. But in the case of India, the social sector expenditure - flag ship schemes like NREGA is in the revenue expenditure. though a part of the Plan expenditure! see budget as a glance 2009 - 10). It is targeted at 4.8% of GDP for 2009-10 which is rendered necessary because of the global recession and slowdown in Indian economy. FRBM says that RD should be zero by the end of 2008-09. The objective is to fund for consumption from government's own resources and not borrowing. In fact, if the FRBM was implemented well, there would have been revenue surplus from 2009- 10 onwards that could be used for capital expenditure.
Fiscal deficit is the difference between what the government earns and its total expenditme. That is, the difference hetvveen what is received by the government on revenue account and all the non-debt creating capital receipts lIke recovered loans and disinvestment proceeds; and the total expenditure. It amounts to all borrowings of the government. It is targeted at 6.8% of GDP in 2009 - 10· about 4 lakh crores of rupees to be borrowed during the current fiscal year.
FD = Total expenditure of the Government in a budget minus (Revenue receipts + non-debt creating capital receipts).
There are Gross FD and Net FD, Net Central Fiscal Deficit is calculated by eductine. from the GFD the financial assistance (loans) that the States are given.
Budget deficit considers only the difference between the total budgeted receipts and the expenditure, It was abolished in 1997.
Fiscal Deficit mirrors the health of government finances most accurately unlike the budget deficit concept. BD does not cover all borrowings but only that portion of the borrowings for which government relies on printing money by the RBI
Monetised deficit is the borrowings made from the RBI through printing fresh currency. It is resorted to when the government can not borrow from the market banks and financial institutions like LIC etc) any longer due to pressure on interest rates. It means infusion of fresh currency into the market. It corresponds to the budget deficit that is discarded.
Primary deficit ps the difference between the fiscal deficit and the interest payments. The concept helps in assessing the progress of the government in its fiscal control efforts.
Deficit Financing
Deficit Financing is the phrase used, to describe the financin of gap between public revenue and public expen Iture or a budgetary deficit, the method of mancing resorted to being borrowing from the RBI through rintin of money. The gap can be deliberate as the Government wants to spend on welfare and infrastructure for which it has no money and so borrows from the RBI; or due to bad finances of the government
When the Government has to spend more than what it can raise through non-tax and other sources, It borrows from the market. It can not borrow above a certain amount from the market as it may push up interest rates and crowd out private investment. Then it borrows from the Reserve Bank of India. In other words, when the resources form taxes. user charges. public sector enterprises. public borrowings. Small scale borrowings and others are not enough.RBI prints and gives credit to the Government. It is called deficit financing. Apart from such borrowings form RBI. drawing down from its cash balances is also a part of deficit financing.
The money printed by the RBI is called high powered money or reserve money.
The concept of budget deficit was dropped from 1997 budget and as a result deficit financing also was stopped. That is, as a concept both were discontinued as the two were two sides of the same coin- budget deficit is monetized through deficit financing. ln fact, FRBM disallows RBI printing money to finance government deficit in normal conditions. But the economic conditions having become adverse since 2008-09. Government is forced to abandon the FRBM mandate to borrow and spend. Keynesian stimuli that the government has
resorted to since 2008 October includes massive borrowing by the Governmentfrom the markets and RBI - to arrest slowdown and stimulate growth.
The beneficial contribution of de'ficit financing in the early stages of independent lndia's economic planning and development is manifold. First. in the early 1950s our domestic savings ratio was less th.an 9 per cent of GDP , and that constrained the investment activity of the public and private sectors.
Second, the capacity to raise non-inflationary sources of financing (taxes. small savings, genuine public borrowings, etc.) was inadequate.
Third, external aid could supplement domestic funding only to a limited extent. To catalyse such foreign capital, the support of domestic rupee resources was crucial.
Fourthly, foreign direct investment was discouraged as a source of investment.
There are two views on the rriatter.There are some people who regard deficit financing as essential for the purposes of development and welfare;as a healthy. means of stimulating economy. There are those who regard any deficit financing as inflationary and a serious threat to the stabi Iity of the economy.
On balance it may be said that, if deficit financing is done prudently and the borrowed money is used well, it is healthy. However, if the borrowed money is wasted for sonsumption is it against good economics as it can negatively affect money supply and inflation; and also dampen growth.
The desirability of deficit financing, in short, depends on
Extent of borrowing
End use of the money borrowed.
Adhoc treasury bills and WMA
Union Government entered into an agreement with RBI in 1997 re,garding discontinuing the practife of issuing ad hoc treasury bills to replenish the cash balance with effect from Aprl 1997.RBI is to ml-lke ways and means advances to Union Government, if so required. WMAs do not require any collateral. Its amount is limited and arrived at the beginning of the fiscal year through consultation between Government and the RBI. There are penal interest rates if the pre-agreed amount is violated.
Replacement of the adhoc bills with WMA represents an advance in fiscal discipline and hannumzartion of the fiscal and monetary policies as the RBI is consulted in Governmental short term borrowing and the 'automaticity' is dropped in the creation of currency by the RBI to fund go.vernmental expenditure.
WMAs
Prior to 1997 the RBI lent to central government against ad hoc Treasury bills. (since mid-50's) This provision for extending short-term financing was created to bridge temporary mismatches in receipts and payments. However.. the central government slipped into the practice of rolling over this facility, resulting in automatic monetisation of th government's cash balances with the RBI went below a threshold fixed. It had no choice but to create currency and lend to the Government of India. The process of creating 91-day bills and subsequently funding them into non-marketable pecial securities at a very low interest rate (4.6%) emerged as a principal source of borrowing. It meant money creation-monetary expansion.
In the case of state governments, the RBI provides two types of WMAs. normal WMAs are clean or unsecured advances extended at the bank rate, while special WMSs are extended against the government securities. The latter is exhausted first and then the former may be sought to a limited extent. If the state government borrows over and above the WMA allowed for it by the RBI, it is called overdraft and there is a limit to that too set by the RBI.
How much of Fiscal Deficit is right?
Fiscal deficit is bridged by market borrowings and central bank printing fresh currency (monetization). To a limited extent, FD is important as the Government's ability to help erowth and welfare increases. Government can alwavs return the loans when its revenues improve due to tax buoyancy. However. FD becomes problematic and even destabilizing when it overshoots a threshold.
Therefore, moderation of fiscal deficit is important Large and persistent fiscal deficits are a cause of concern, as they pose several risks.
Fiscal deficits may cause macroeconomic instability by inflating the economy as money supply rises.
Corporate sector is crowded out - they are left with inadequate funds in the markets as the government borrowing requirements increase. Added to that interest rates will be highe as there is pressure on the available money in the market.
It the funding route is through RBI monetization, it means inflation and instability.
Inflation may mean less savings, less investment and eventually it hurts the sustainability of high growth.
Large deficits, even if they do not spill over into macroeconomic instability in the short run, will require higher taxes in the long term to cover the heavy burden of internal debt. High tax rates will place ·India at a significant disadvantage to other fast-growing countries. It means, as the FRBM Act says, inter generational parity is hurt if debt mounts as future generations will have to pay higher taxes to help the government repay the debt.
Government liabilities- interest payments- increase and there is far less for development.
BOP pressures may mount if inflows drop due to the country being downgraded by rating agencies like Standard and Poor, Moody etc.
Therefore, FDs must be moderated- they are desirable within limits but hurtful beyond the limits.
The above analysis applies to FD in normal times. But in abnormal times like since 2008-09 when the world slipped into recession impacting Indian economy negatively, FD must be allowed to be increased for the fiscal stimuli which are necessary to arrest downturn in the economy and kickstart growth. ERBM allows such counter-cyclica! expenditure. Even then, deficit should be incurred not to waste but to stimulate the economy.
Reducing FD
FD has to be reduced and the FRBM targets are to be conformed with under normal conditions. But uuto3% of GDP for FD as laid down by FRBM Act is desirable as the Government can borrow and spend for \velfare and growth.
The extent of reduction and the manner of reduction matter. More resources should be raised from taxes. user charges, disinvestment etc. Lxpenditure control should not invol.ve cuts on social sector expenditure as it hurts poor and demographic dividend can not be reaped.
The level of FD should be determined keeping in consideration the following
whether the debt can be put to' productive deployment
The rate of return on the borrowed funds' use is adequate
the impact on private sector investment by way of crowding out effect etc
Even more important is not to cut social spending in a move to reduce deficit. In other words, while FD reduction is needed for macro economic stability and inter generational parity. Introduction of GST, selective disinvestment. broadening of tax base, tax buoyancy etc will yield enough to moderate borrowings.
Global crisis and the FD in India
Global recession impacted India and our growth rate slipped. Tax revenues were hit. There was a massive fall in demand.Corporate sectors postponed investment. Threat to employment was real. Therefore, Government took it upon itself to spend more by borrowing. The result is that fiscal deficit is at an abnormally high level- 6.8% in the year 2009-10- the target. It is because tax revenues went down and expenditure demands were higher. The gap inevitably widened. The fiscal measures taken by tne government to counter the negative fall -out of the global slow down on the Indian economy paid off.
Firstly, the Government responded by providing three focused fiscal stimulus packages in the form of tax relief to boost demand and increased expenditure on public projects to create employment 'and public assets.
Secondly, the RBI took a number of monetary easing and liquidity enhancing measures to facilitate flow of funds from the-financial system to meet the needs of productive sectors.
This fiscal accommodation led to an increase-in fiscal deficit from 2.7 per cent in 2007-08 to 6.2% of GDP in 2008-09. This fiscal stimulus at 3.5% of GDP at current market prices for 2008-09 amounts to Rs. 1.86.000 crore.
These measures were effective in arresting the fall in growth rate of GDP in 2008-09 and we achieved a growth of 6.7%.
The fiscal deficit for 2009-10 is projected at 6.8% of GDP.
The fiscal stimulus packages
To counter the adverse effects of global recession, government announced the first package in October 2008. It costs about 20.000 by way of tax cuts and additional spending by the government. the package will benefit all the sectors especially textile, housing and real estate sectors. Most significant of the package is the CENVAT rate cut of 4%. This is cut across the board except for petroleum products. This cut alone will bring a loss of 8700 crore to the government.
The second stimulus package
The government in January 2009 announced the second round of fiscal stimulus package with a view to revive economy. the package includes measures such as higher public spending, easing liquidity for further lending at lower interest rates, relaxing the external commercial borrowings (ECB) norms.
Under this new package, the FII limit in rupee denomination would be increased from USD 6 billion to USD 15 billion. The India Infrastructure Finance Company finance projects worth Rs 750 billion in the coming 18 months.
The third stimulus package
The third stimulus package for the economy was announced in February 2009 cutting excise duty and service tax two percentage points each and extending pervious excise cuts beyond March 31, 2009.
Service tax has been cut across the board from 12 % to 10% and the excise has been reduced by the same margin for items that currently attract the 10% rate.
Consumers are expected to benefit significantly from this latest cut in indirect tax. since over 90% of excise duty collections come from the 10% slab rate, which is levied on white goods, !TIetals, commercial vehicles. iron and sleel and cement.
The stimulus package cost the Central exchequer revenue of Rs 29,100 crore Service tax will account for Rs 14,000 crore, excise duty Rs 8,500 crore and customs duty (because of reduction in conutervailing duty) Rs 6,600 crore.
The packages increased the fiscal deficit.
The tax sops. first to fight inflation and then to boost demand. cost the government Rs 52,000 crore in 2008-09.
In terms of a decicit-financed stimulus, cutting indirect taxes is more effective than government spending. By cutting taxes, the government has put more money in people's hands rather than spending on its own.
Indirect tax cuts are more effective in stimulating demand than direct tax cuts-cutting income tax rates, for instance. often leads to higher savings instead of increased spending, as precautionary savings increase when people are faced with uncertainty.
The government has also allowed states to exceed the 3% fiscal deficit target in the next fiscal. That will allow them to borrow more from the market.
FRBM Act 2003
Fiscal Responsibility and Budget Management (FRBM) Act 2003 was notified in 2004 with the following salient features
annual targets of reduction in deficits, government borrowing and debt
Government to ann.pally reduce the revenue deficit by 0.5% and the fiscal deficit by 0.3% beginning fiscal 2004-05.
elimination of revenue deficit and reduction of fiscal deficit to 3% of GDP by March 31, 2009
a cap on the level of guarantees and total liabilities of the Government.
prohibits Government to borrow from the RBI( primary borrowingl after April 1, 2006. RBI can not print money to lend to government.
ona quarterly basis, that Government shall place before both the Houses of Parliament an assessment of trends in receipfs ana expenditure.
annually present the macro-economic framework statemen!, medium tem fiscal policy statement and fiscal policy stnltcgy statement. The three statements would rovide the macro-economic background and assessment relating to the· achievement of FRBM goals.
Under exceptional circumstances, Government may be compelled to breach targets. In case of deviations, the Government would not only be reauired to take corrective measures, but the Finance Minister shall also make a statement in both the Houses of Parliament.
Borrowing from the RBI is permitted in exceptional situations like natural calamities.
FRBM was brought in for fiscal discipline: increase plan expenditure: reduce the amount of borrowings: meet consumption from government's own fiscal resorces; leave the RBI with autonomy as far as money creating goes etc. Fiscal consolidation is necessary particularly in the era of globalization when the penalty for irresponsibility is high.
New Zealand was the first country to enact a Fiscal Responsibility Act in 1994. thereby setting legal standards for transparency of fiscal policy and reponing. and holding the Government formally responsible to the public for its fiscal performance. A similar legislation, the Charter of Budget Honesty, has been enacted in AustrMia. The UK. too, has enacted a Code for Fiscal Stability.
Kelkar Task Force in its report on implementing FRBMA ( 2004) said that plan expendIture should be enhanced and the way to cut deficit is by enhancing revenues( taxes) and rati.onalize non-asset creating expenditure like subsidies which should be targeted better.
The global recession from 2008 onwards has made the overnment b each the FRBM targets vastly- RD at 4.8% ot GDP; FD at 6.8% of GDP and monetization of the deficit to a great extent to complete the 4 lakh crores of borrowings of the Union government. However, it is a quintessential Keynesian stimulus( pump priming) of the economy as demand fell and along with it the private sector investment. The Union Budget 2009-10 says that over the next two years from 2010-2011, the FD will be rolled back to 4% ofGDP- 5.5% next year and 4% the year next.- 2011-12.
FD in general
The factors that impact on the fiscal.deficit in general are
tax base
user charges being rational or otherwise
PSE profitability
disinvestment as an option
On the expenditure side
non-plan expenditure
Subsidies
ongoing projects being completed before new ones can be taken up
populist expenditure like free power etc.
Above all, the efficiency of fiscal resources holds the key to fiscal health.
Fiscal consolidation
Fiscal consolidation means improvement government finances. Fiscal consolidation is critical as it provides macro economic stability: cuts wasteful expenditure: can enable government to spend more on infrastructure and social sectors. Tax reforms, disinvestment, better targeting of subsidies and so on are the hallmarks of fiscal consolidation.
Enactment of FRBM Act provides an institutional framework and binds the government to adopt prudent fiscal policies.There is a need to involve states to effect overall fiscal consolidation and strengthen the growth momentum.
The debt swap scheme( centre helps the states to repay the costly debt contracted earlier and re-contract debt at lower rates) with states helps th.elJ1 use the resources so gained better.
GST which will come into effect· in 200=10-11 is an important federal effort toward fiscal reforms and consolidation.
An important part of fiscal consolidation is to privatize loss-making state-run companies or they should be closed.
Fiscal consolidation is important for benign inflation and interest rates that will bring in more private investment.
Also, without fiscal consolidation, it is not possible to step up public investment; especially in areas such as agriculture, where gross capital formation has dropped from 1.9% to 1.3% of GDP since 1990-91.
Fiscal consolidation in India includes the following reforms:
revenue reforms include fax rdonns on both direct and indirect tax front: reduction elimination of tax exemptions and treating the revenue forgone as tax expenditure, improving efficiency of tax collection, including the arrears and stable medium term tax rates avoiding annual changes .
On the ·expenditure side, reform -areas include-cutting out.non-essential and unproductive activities, schemes and projects, allocation of resources to priority areas, reducing cost of services, rationalizing subsidies: reduction fo time and cost overruns on projects, getting proper 'outcome' from output
Fiscal recovery
The FRBM targets were more or less followed till the fiscal year 2007-08. But from 2008-09, as global economic conditions turned bad and Indian economy was also affected negatively - slow down in growth rate-. the Govemment ncccssarily had to pump prime the economy with an expansionary fiscal policy- tax reliefs and massive public investment- infrastructure spending, NREGA being stepped up ele. As a result, the FRBM targets were breached by a big margin. However, the recovery plan was laid oul in the Union Budget 2009-10 to take the FD to 4% of the GDP by 2012.
Plan and Non Plan Expenditure classification and its unsustainability
In the Budget, expenditure is shown both as revenue. and capital and also as plan and non-plan. 'Plan' expenditures. as the name implies, relate to expenditures on annual plan projects contributing to five-year plan; these include projects like dams, roads, povyei PJants etc. Non-Plan expendit.ure. relates to maintenance. consumption and welfare. Non-plan expenditure does not create assets. When a project is being built, it is a plan item of expenditure. When completed and being maintained, it is a non-plan item of expenditure.
'Non-plan' expenditure is a generic term, which is used to cover all expenditures of government not included in its annual plan programmes. But essentially covers consumption expenditure. Such rion-plan expenditure is also under both revenue and capital accounts. Non plan expenditures has the following-items
Interest payments
Subsidies
Defence
Public admn
It is important to mention that not only that maintenance expenditures subsequent to the completion of plan programmes are non-plan, but even "expenditures on research projects and operating expenses of power stations are classilied as non-plan. Thus, as more Plans are completed, in addition to the interest on borrowings to finance the Plan, a large amount of expenditure on operations and maintenance of facilities and services created gets added to non-plan expenditure.
The Distinction between plan and non-plan expenditure items has become simplistic and is artificial and untenable. The building of a new school or a primary health centre is considered a Plan investment but its running and maintenance is considered non-Plan spending. Thus, very often it had led to Government allocation being reduced for maintenance as it is classified as non-plan item and will be criticized. Thus: assets are neglected. New projects are allotted money while the completed projects are neglected.
It is important to take a consolidated view of finances keeping in perspective the interdependence of Plan and non-Plan expenditures.
Kelkar Task Force to implement FRBMA 2003 recommend recxamination of the distinction between Plan and Non-plan expenditure. Various bodies. including the Finance Commission, have advocated the elimination of the plan and non-plan distinction in the budget. A Task Force, including representatives of Planning Commission, Finance Ministry, Comptroller and Auditor-General of India and State Governments was constituted to examine these issues in a comprehensive manner and to make recommendations for a functionally viable and more focused presentation of government expenditure in the budget.
Zero Base Budgeting
Tenth Plan Approach Paper says that ZBB will be followed for rationalization of expenditure. The ZBB methodology was taken IIp first in 1987 in the Union Budget and was recommended for the Government departments and PSUs. Many state governments also applied it, for example, Government of Raiasthan and Maharashtra. The Maharashtra Government renamed it' Deyelogment -based budget.
Under the ZBB, a close and critical examination is made of the existing government pro rammes, projects and other activities to ensure that funds are ma e available to hi h riority items by eliminatin outdated programmes and reducing funds to the low priority items. Governmental proerammes and projects are appraised every year as if they are new and funding for the existing items is not continued merely because a part of the project cost has already been incurred. Programmes are discarded if the cost-benefit ratio is below the prescribed norms.
The objective of the ZBB is to overhaul the functioning of the government departments and PSUs so that productivity can be increased and wastage can be minimised. Scarce govrnment resources can be deployed efficiently.
ZBB as a resource planning and control technique and process vielded substantial benefits in the advanced countries like New Zealand, UK. Australia and Sweden in terms of efflcieng gains, better resource use, lower costs and finally suiplus budgets, particularly in New Zealand.
However, the use of ZBB to human development programmes and poverty alleviation and employment generation programmes is limited and the results are cumulative and can not be assessed annually,
Fringe benefit tax (FBT)
The benefits that are usually enjoyed collectively by the employees and cannot be attributed to individual employees shall be taxed in the hand of the employer transport services for workers and staff and canteen services in office or factory to be outside the tax net; the tax to be called Fringe Benefits Tax.
The rationale for levying a FBT on the employer lies in the inherent difficulty in isolating the 'personal element' where there is collective enjoyment or such Qenefits and attributing the same directly to the employee. This is so especially where the expenditure incurred by the employer is ostensibly for purposes of the business but includes. in partial measure. a benefit of a personal nature.
It is abolished .in the Union Budget 2009- 10.
Perquisites
Perquisites are benefits in addition to normal salary to which employee has a right by virtue of his employment. To put it simply or "perks' as they are called colloquially, are benefits generally in cash/kind. reveived by an employee by virtue of his employment.
Perks are taxable as a part of salary as per the India income tax laws. As per this Section "perquisite" includes:
the value of rent-free accommodation
the value of any concession in the matter of rent respecting any accommodation provided etc
car
elub membership
travel
Some words
Fiscal Dra
A situation where inflation pushes income into higher tax brackets-bracket creep. The result is increase in income taxes but no increase in real purchasing power. This is a problem during periods of high inflation. Government gains due to higher tax collections and the economy suffers as growth is dragged down due to less demand. In high-growth and high inflation economies (overheated), fiscal drag acts as an automatic stabiliser, as it acts naturallly to keep demand stable.
Fiscal neutrality
When the net effect of taxation and public spending is neutral, neither stimulating nor dampening demand-a balanced budget, It is neutral, as total tax revenue equals total public spending.
Crowding Out
Excessive government borrowing can lead to shrinkage of the liquidity in the market; forces the interest rates to go up; private investment is crowed out for two reasons: liquidity availability is less and the rates are high. Investment suffers and growth decelerates. The Government also may not spend the borrowed resources well to generate returns. If the government deploys the funds well, it may have a crowding in effect: the infrastructure built can have a multiplier effect on investment, tax collections and growth.
Pump-priming
Deficit financing and spending by a government on public works in an attempt to reyive economy rlllring recession - countercyclical measures. It can raise the purchasing power of the people and this stimulate and revive economic activity to the point that deficit spending will no longer be considered necessary to maintain the desired economic activity.
Small Savings
Small savings instrument~ are Post Office Monthly Income Schemes and Time Deposits; Nattional Savings Scheme; Indira Vikas Patra; Kisan Vikas Patra; Public Provident Fund and so on. They are aimed at promoting safe and long-term savings by individuals. They are called small savings because the amount saved is relatively small. They are initiated by the central Government but mobilized by the State Governments ; and are deposited with and managed by the central government As a reward State Governments receive all such savings as loan,
Small savings are a sizeable portion of the financial savings of the country. They contribute to the finances of the Government- federal and State- that is, they are an important source of borrowing for the government. These schemes have a built in tax concession that enhances their attraction for the small savers. They also eam a rate of interest that is higher in comparison to what the banks offer- approximately 8%. They are called small savings as savings are made in small amounts by low income and other groups.
Small savings instruments in India are retailed through 1.53 lakh post offices of which about 1.29 lakh are in rural areas.
The National Small Savings Fund (NSSF), in the Public Account of India has all the small savings. they are completely onlent to the state in which they are collected.
The attraction of small savings is declining of late and they are losing out to banks, mutural funds and insurance companies. The NSSF's net collections in 2007-08 were Rs 18,000 crore compared with Rs 57,500 crore in 2006-07. The estimate for 2008-09 is Rs 30,000 crore.