Telangana Public Finance and fiscal Policy
During 2017-20, the Telangana’s own revenue (sum of state’s own tax and non-tax revenue) accounted for 73.8% of its revenue receipts on average, higher than that of the average of General States (57.7%). Telangana has also recorded the highest CAGR in the ‘own tax revenue’ (18.2%) post its formation amongst all General States (GS) between 2014 and 2020.
Telangana’s share of development expenditure in the total expenditure in the 2017-20 period was 77.4%, the highest among all General States; the average of all General States was 68.2%.
The average debt to Gross State Domestic Product (GSDP) of Telangana from 2014-15 to 2018-19 was 16.1 per cent, which is the lowest among the States in the country. GSDP ratio for 2021 stood at 22.33%, which is 5.4 percentage points less than the average of General States (27.73%).
Telangana Government also decided to supplement the budgetary resources with extra budgetary resources to fasten development. From 2014-15 to 2021-22 (till 31.1.2022), apart from the expenditure incurred from the budget (Rs. 1.67 lakh crores), Rs. 1.14 lakh crores was spent for capital expenditure, leading to a total capital expenditure of nearly Rs. 2.82 lakh crores, which is more than 5 times the capital expenditure incurred in the 10 years before the bifurcation of the state.
The state government budgeted revenue receipts of Rs. 1,76,127 crore and capital receipts of Rs. 45,560 crores in 2021-22 BE (Budget Estimates). During 2017-20, within revenue receipts, the state’s own revenue (sum of state’s own tax and non-tax revenue, Fig. 3.1), accounted for 73.8%, much higher than the average of India GS at 57.7%
Highlights of State Fiscal- Updated 2022:-
- Telagana State’s Own Tax Revenue (SOTR) constitutes 65.18% of revenue receipts, which is significantly higher than the India GS average of 48.9%, reflecting its tax collection efficiency in comparison with other states. Its average per capita revenue (Rs. 26,393) for 2017-20 is the second highest among India.
- Economic Intelligence Unit was established to curb tax evasion. Data analytics tools are also being used extensively to identify tax defaulters and generate individual reports for prompt departmental action. Under VAT, Telangana’s tax base was about 2.18 lakhs. Through above efforts in terms of administrative, technical, and government actions, this tax base has more than doubled. As of December 2021, the number of taxpayers in the State under GST is around 4.89 lakhs.
- The Budgeted Expenditure for Financial Year 2021- 22 is Rs. 2,30,826 crores, which comprises Revenue Expenditure and Capital Expenditure. Revenue Expenditure includes expenditure which does not result in creation of assets and is largely recurring in nature. This includes expenditure incurred on salaries, wages, pensions, grants and operational expenditure and includes expenditure on Rythu Bandhu, Aasara Pensions and other key schemes.
- The targeted capital outlay for Telangana for 2021-22 is Rs. 20,903 crores and therefore, by December 2021, the expenditure incurred should be Rs. 14,632 crores (70%). However, by December 2021, Telangana incurred expenditure of Rs. 22,073 crores, which is substantially higher than the target expenditure and became eligible for additional open market borrowing.
- The Telangana Fiscal Responsibility and Budget Management Act, 2005 has set the target for the Government to eliminate revenue deficit (revenue expenditure exceeding revenue receipts) and bring down fiscal deficit (overall expenditure exceeding overall receipts, excluding debt repayment and receipts) to not more than 3% of the GSDP.
- Fiscal deficit as a percentage of GSDP for FY 2021-22 is estimated to be 3.94%, within the 4% limit set for the year by the Government of India.
- Telangana issued the longest tenor security of 30 years maturity, which indicates good performance in the management of maturity profile of debt. About 49% of the outstanding state government securities are going to mature only after 2036 as per the latest RBI State Finances report.
- Revised Pay Scale recommendations include 7.5% fitment for all employee categories and a minimum pay of Rs. 19,000, higher than the basic pay (Rs. 18,000) for Union Government employees.
Basic Understanding of Public Finance
Public finance as a concept may be understood on two levels –
- as a practical activity of all components of public administration and
- As a theoretical area.
- The term “public finance“ may be defined as the identification of specific financial relationships and functions running between public administration bodies and institutions (i.e. public sector entities – the state) as one party and in mutual interaction with other entities of the economic system as the other party (i.e. private entities – households and companies).
- These relationships and functions may be considered special as they include:
- Procuring public goods (production and provision);
- arranging and funding various transfers (particularly in the social area);
- Directing entities existing in the economy towards socially desirable behaviours; for instance through taxes, penalties, subsidies and other stimuli and charges.
- In order to arrange the funding of the above-mentioned areas, there is a fiscal system (public budgeting system) whose aim is to collect the required amount of public revenue. Public revenue serves, at various levels of public budgets (governmental, regional and local), to fund public expenditures.
- Public expenditures, public revenue and particularly taxes may be considered to be the fundamental elements of public finance. Important terms derived from these three elements include deficit, public debt, budgetary policy and fiscal policy.
- The development of public finance is connected with economic mechanisms that should ideally lead to the effective and fair allocation of limited resources.
Public Finance – Causes of Development
- The reason for developing public funding is the state intention to soften the drawbacks resulting from economic decisions made by individual entities (households and companies). It uses fiscal tools (public revenue and expenditure) to accomplish this.
- Certain behaviour is classified as the “quasi-fiscal funding principle”, where publiclaw goods are funded from off-budgetary resources (e.g. the public-law television in the Czech Republic is funded from television licence fees).
- Another important term that relates to public finance, and that is also a strong argument for its development, is market failure.
- The market system follows supply and demand through the price mechanism. It is a system that has developed itself, and that has strong ties with the interactions between people and companies.
- All these entities strive to maximize their benefit (welfare). The greatest benefit is strongly interconnected with reaching the economic optimum condition.
- A system that reaches the optimum is considered, in the neoclassical economics concept, to be efficient, fair and stable.
- The ideal condition is called the Pareto optimum. This exists in an economy when none of the involved entities can improve its position without worsening another entity’s position. If any of the entities intends to improve its position, it is possible for it to do so only to the detriment of another entity. The existence of perfect competition is a necessary requirement for reaching the optimum.
- The three above-mentioned elements (efficiency, stability and fairness) are connected with microeconomics from the viewpoint of efficiency, connected with macroeconomics from the viewpoint of stability, and connected with sciences outside economics from the viewpoint of fairness. The perception of fairness is investigated by other social sciences, and is closely linked to ethics, etc.
- If no conditions exist for reaching a market-efficient solution, or the conditions are simply violated for any reason, market failure will ensue.
- It consists of the following:
- The allocation of resources is not efficient,
- The economy in the area of macroeconomics indicators oscillates around the desired values and
- The distribution of wealth and income may diverge from the consensus on fairness.
- It is then up to the state to perform its fiscal function (the public finance function) in those three areas in order to preferably eliminate or at least reduce market failure. Specifically, those are microeconomic failures from the allocation function perspective, macroeconomic failures from the stabilization function perspective, and the redistribution function then falls into the area of market failure caused by outside economies.
- If the conditions for perfect competition are not met, a malfunction in the price mechanism will arise, which disturbs the allocation mechanism. Some failures can be eliminated without public finance intervention through auto-regulation (the internalization of externalities). However, others are part of the government’s allocation function and its fiscal tools (taxes and governmental purchases or transfers).
- Macroeconomic failure is indicated by instability in the economic system that usually suffers from cyclical inflation, a high rate of unemployment, low or even negative growth of production or problems in the foreign trade balance, etc.
- The above-mentioned macroeconomic cases of instability are why governments perform the state stabilization functions (stabilization fiscal functions).
- The state uses several tools to perform the stabilization function. The basic classification is a division into monetary and fiscal tools. The monetary tools include open market operations, the setting of basic interest rates, determining the level of mandatory minimum reserves, etc. Fiscal tools may include public expenditure, public revenue and ways of funding deficits.
- The causes of market failure outside the economy relate to reaching fairness in society through the distribution of wealth and income. With the distribution of wealth, the market does not practically perceive fairness. In this case, the state performs a redistributive role with 5h3 principles of solidarity, social conscience, charity, etc. based on the social consensus.
- The state performs the redistribution function through two basic categories of tools. The first includes revenue (tax) and the other expenditures (transfers, grants and subsidies).
- First, a tax transfer mechanism may be implemented through a combination of progressive taxation of high incomes and transfers (subsidies) in favour of low income households.
- Secondly, this can occur through the taxation of luxury goods combined with subsidies on goods for the low-income population.
Fiscal Policy Meaning
- Arthur Smithies defines fiscal policy as “a policy under which the government uses its expenditure and revenue programmes to produce desirable effects and avoid undesirable effects on the national income, production and employment.”
- Though the ultimate aim of fiscal policy in the long-run stabilisation of the economy, yet it can be achieved by moderating short-run economic fluctuations.
- In this context, Otto Eckstein defines fiscal policy as “changes in taxes and expenditures which aim at short-run goals of full employment and price-level stability.
Objective of Fiscal Policy
- To maintain and achieve full employment.
- To stabilise the price level.
- To stabilise the growth rate of the economy
- To maintain equilibrium in the balance of payments.
- To promote the economic development of underdeveloped countries
- Tax Revenue Comprises taxes collected and retained by the State and State’s share of union taxes under Article 280(3) of the Constitution.
- Non-Tax Revenue Includes interest receipts, dividends, profits etc. Grants in Aid and Contributions
- Grants-in-aid represent central assistance to the State Government from the Union Government. Includes ‘External Grant Assistance’ and ‘Aid, Material & Equipment’ received from Foreign Governments and channelised through the Union Government. In turn, the State Government also gives Grants-in-aid to Panchayati Raj Institutions, Autonomous Bodies etc.
- Expenditure is classified as Revenue Expenditure (which is used to meet the day-to-day running of the Government), and Capital Expenditure (which is used to create permanent assets, or to enhance the utility of such assets or to reduce permanent liabilities). Expenditure is further classified under Plan and Non-plan across different services viz., General services, Social services and Economic Services.
- General Services Includes Justice, Police, Jail, PWD, Pension etc.
- Social Services Includes Education, Health & Family Welfare, Water Supply , Welfare of SC-ST etc.
- Economic Services Includes Agriculture, Rural Development, Irrigation, Cooperation, Energy, Industries, Transport etc.
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