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Fiscal Developments

 

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Fiscal Developments

The process of fiscal consolidation received a setback during 1997-98 with the Central Government fiscal deficit (Revised Estimates) reaching 6.1 per cent of GDP as against the budget target of 4.5 per cent.
The deterioration in the fiscal deficit was due primarily to a tax revenue shortfall of Rs. 14236 crore (net to Centre), and a shortfall of Rs. 3894 crore in disinvestment receipts.
The 1997-98 budget introduced sharp cuts in income tax rates with a view to stimulate saving and investment and encourage higher tax compliance. Personal and corporate tax rates were reduced and rationalised to bring them to internationally comparable levels. The top marginal personal income tax rate was cut from 40 to 30 per cent. The corporate tax rate for domestic companies was reduced from 40 to 35 per cent and on (branches of) foreign firms from 55 to 48 per cent. The surcharge on corporate tax was abolished. The tax on dividends in the hand of receipients was replaced by a 10 per cent tax on distributed profits of domestic companies.
A significant initiative was taken to widen the tax base by stipulating that residents of large metropolitan cities who satisfy certain specified economic criteria must file their tax return. Another proposal with the same objective was the introduction of an estimated income scheme for retail traders. With a view to harness "black money" for productive purposes a new Voluntary Disclosure Income Scheme (VDIS) was introduced, which netted tax collections estimated to exceed Rs. 10,000 crore.
The peak customs duty was lowered from 50 per cent to 40 per cent.
The discontinuation of ad-hoc treasury bills for financing the budget deficit is a step towards strengthening fiscal discipline. Budget for 1997-98 also took some initiatives in the infrastructure and agriculture sectors.
There was progress in the decontrol of the banking system, with further deregulation of interest rates on deposits.
Competition in the banking sector has intensified with the formation of ten new private sector banks.
The Reserve Bank of India (Amendment) Act, 1997, conferred wide ranging powers on the RBI for registration, regulation, supervision, issue of guidelines and winding-up of the non-banking financial companies (NBFCs).
On January 2, 1998 the RBI issued detailed guidelines regarding norms of deposit acceptance, prudential norms, etc. for various categories of the NBFCs. These were later reconsidered and revised guidelines were issued on January 31, 1998. According to these guidelines, an NBFC will have to obtain the minimum prescribed investment rating before accepting public deposits.
During 1997-98, the financial assistance sanctioned by All India Financial Institutions grew by 48.8 per cent while disbursements increased by 28.5 per cent. This followed a sharp decline of 14.7 per cent in sanctions and a modest growth of 8.4 per cent in disbursements during 1996-97. This was one of the few quantitative indications of a potential recovery in industrial investment.
A number of measures were taken by RBI to enhance the depth and liquidity of the government treasury bill and government securities market.
A number of measures were taken by SEBI to strengthen investor protection and develop capital markets, with particular emphasis on efficiency and transparency of both the primary and secondary segments.
The capital market continued to remain dormant in 1997-98. Resource mobilisation from the primary market through public issues steadily declined to Rs. 14276 crore in 1996-97 and further down to Rs. 4570 crore in 1997-98.
 

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