Understanding the nuances of India’s Fiscal policy- By Dilshad Billimoria

July 2015
What is Fiscal Policy

Fiscal Policy of our Government simply means, maintaining income and expenditure of the country to meet the stated objectives of Infrastructure Development and Growth, Improved Capital formation and Improvement of economic activity in our country.

The various heads of income received by the government comprise of Taxes(Direct and Indirect), Dividends, Interest Receipts, Disinvestment, spectrum sales.

The various heads of expenditure which are further divided as planned and unplanned expenditure include subsidy, capital expenditure on infrastructure, interest on debt borrowed.

When a country’s expenditure exceeds income, it is said to have a Fiscal Deficit.

Fiscal Policy is also said to affect trade balance and our Balance of Payments Position.

Presently  receipts from direct and indirect tax collections contribute the major source of receipts for the Government.

As on 2015, Under Revenue receipts, our direct tax collections- Individual and Corporate is at approximately 8 lakh crore and comprises of 55% of Receipts and approximately 6.50 lakh crore comes from indirect tax collections which comprise of around 45% of our receipts.

As on 2015, the total tax collections is approximately 14.5 lakh crore.

The GDP of our country as on date stands at 130 lakh crore.

Our Tax/ GDP collection is only 10%, even though we have many income earners in the 30% tax bracket. Such is the sorry state of tax payers money paid to the Income Tax authorities in our country.

The Indirect Tax collections comprise of excise duty, custom duty and service tax. Service tax is the largest contributor of indirect tax collections.

Our Government’s capital receipts predominantly comes from disinvestments and contributes only 6.50% of total Government Receipts.

Nearly 93% of Government Receipts comes from revenue receipts of which tax collections contribute 80% of Revenue Receipts.

Government Expenditure comprises of Planned and Non Planned Expenditure.

Planned Expenditure is only 26% and Non Planned Expenditure is a whopping 74%! Wonder why it does not fall in the Planned Category of Expenditure.

Planned and Non Planned Expenditure is divided into Revenue and Capital Expenditure.

Unfortunately, Capital Expenditure, which fuels growth, development, infrastructure, helps in creating assets in our country, stands at only  12% of the overall expense account.

The highest expenditure is non planned revenue expenditure which comprises of interest, subsidies, defence, pension grants.

As per Budget 2014-15 Estimates, The Total Expenditure- Planned and Non Planned in value terms is Rs 17,77,477 crore.

Total Receipts are at 14,49,490 crore.

Hence India is in a fiscal deficit of Rs 3,27,987 crore or 4.1% of GDP.

Interest on borrowing comprises of the highest component of expenditure, at approximately 4.5 lakh crore followed by subsidies at 2.5 lakh crore.

Our Subsidies are towards Oil, Food and Fertiliser.

Due to the Fiscal Deficit, Government borrows from the public, which is not good, because it could lead to inflationary pressure, which keeps interest rates on the higher side.

Ideally Government should spend on growth related projects to fuel economic activity.

However, being populist, and wanting to win votes, our budgetary reforms barely contribute to the growth of our economy.

Tax payers like us, always want tax cuts, tax reductions, which adversely effect the income and expenditure account and therefore leads to greater fiscal deficit.

By increasing revenue receipts by 1-2%, we can help drastically reduce or wipe out our fiscal deficit!

82% of our Fiscal Deficit is funded through Internal Borrowing of Debt market Securities or Government Securities called G Secs.

18% of our Fiscal Deficit is funded through External Debt, T Bills, Small Savings etc.

Some measures that our Government should take to reduce our fiscal deficit are-

  1. Reduce Subsidies.
  2. Increase tax collection net.
  3. Increase tax base- Service tax was introduced in 2005 and was increased from 12.5% to 14.5% in 2015-16. It is likely to increase further.
  4. Increase capital expenditure which will help in overall economic growth.
  5. Increase tax compliance.
  6. Increase in Nominal GDP
  7. Print Currency- Not a recommended option- since it leads to inflation.



Dilshad Billimoria

Director and Certified Financial Planner.


Dilzer Consultants Pvt Ltd.

SEBI Registered Investment Advisor.