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> Policies> economic survey 2000-01
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Economic Survey 2000-2001
[Issues and priorities]
Key problems
1.98 The changes in the components of fiscal deficit over the last decade give an indication of the reasons as well as potential solutions to the fiscal problem. Gross tax revenues of the central Government have declined between the period 1980-81 to 1991-92 and 1992-93 to 1999-2000 by 0.9 percentage points of GDP. This decline is primarily due to a fall in the indirect tax revenues by 1.6 percentage points. In contrast, direct taxes have increased by 0.7 per centage points of GDP. This rise compensated partially for the decline in customs revenues but was unable to prevent the overall ratio from declining. Among indirect taxes, though the decline in customs revenue was expected that in excise revenue was not.
1.99 Another significant factor in the current fiscal problem is the administered interest rates on Government pension and provident funds. The nominal inflexibility of these rates means that they have not varied with the rate of inflation, resulting in very high real interest rates on Government debt when inflation declined. With decline of inflation (WPI) from an average of 11 per cent during 1990-95 to an average of 5.6 per cent during 1995-99, real interest rates on pension and provident funds jumped from an average of 1 per cent to 6.3 per cent. Implicit interest rate floors on short term markets and the underdeveloped nature of the market for Government securities and treasury bills, have also contributed to the increasing, high rates of interest on Government debt.
1.100 High fiscal deficit puts upward pressure on market interest rates and international risk premium and raises the cost of capital for all producers. Crowding out of private investment by public borrowing also remains a potential threat to any industrial recovery. The central and state Governments have little money to spend on public goods and basic non-commercial infrastructure, whose quality continues to deteriorate. Inefficient monopolies, such as in power, impose additional costs that undermine the competitiveness of Indian manufacturing and agriculture. Other gaps in the reform process, such as those relating to labour laws and procedures, bankruptcy, land ceiling and rent control and small scale industry reservation, inhibit industrial restructuring, raise costs and reduce international competitiveness. The high industrial and GDP growth rates seen during 1994-95 to 1996-97 can be replicated only if these critical gaps in the reform process are attended to.
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