According to normal practice, the Economic Survey preceded the presentation of
the Interim-Budget and accounts data for 1994-95 and revised estimates for 1995-96 are
available only now for a reassessment of fiscal stabilisation. Over the past five regular
budgets the fiscal deficit has declined as a proportion of GDP from 8.3 per cent in 1990-
91 to a revised 5.9 per cent in 1995-96 (Table 5). Much of this decline occurred,
however, in the first year. Since then the fiscal deficit has hovered around six per cent of
GDP, except for 1993-94 when the fiscal deficit was 7.5 per cent. This borrowing
represents the Central Government's draft on the savings available to the economy for
productive investment. The 2.4 per cent reduction in the fiscal deficit has been brought
about by a sharper 3.2 per cent reduction in the primary deficit (equal to fiscal deficit
minus interest payments). The primary deficit represents the effort made by the
Government to control the deficit, as interest payments are largely predetermined by past
borrowing. Unfortunately, this reduction in the primary deficit has been partly offset by a
0.8 percentage point increase in interest payments as a proportion of GDP. This, in turn,
is largely a legacy of preceding primary deficits accumulated as debt. The revenue
deficit, on the other hand, has fallen only by 0.4 per cent of GDP over these five budgets,
from 3.5 per cent of GDP to 3.1 per cent of GDP and remains too high for comfort.
The revised estimates for 1995-96 confirm the success of the strategy of tax reform
pursued in the last few years. Elements of the strategy include simple and more
economically rational tax structures, lower rates, wider bases and more effective tax
administration. Initially, as Table 5 shows, the ratio of gross tax revenues to GDP fell
from 10.8 per cent in 1990-91 to 9.5 per cent in 1993-94, after which it recovered to 10.1
per cent in 1995-96 (RE). The recovery in tax revenue collections has been spearheaded
by the outstanding performance of direct taxes which increased from 2.1 per cent of GDP
in 1990-91 to 3 per cent in 1995-96 (RE), with their share in gross tax collections rising
from 19 per cent in 1990-91 to 29 per cent in 1995-96. The average buoyancy of
personal income taxes, as measured by the ratio of change in the tax revenue to change in
GDP at current prices, has risen from an average of 1.1 in 1986/87 - 1990/91 to 1.5
during 1991/92 - 1995/96 (RE). Similarly, the buoyancy of corporate income tax
revenues has risen from an average of 0.8 during 1986/87 - 1990/91 to 1.7 in 1991/92 -
1995/96 (RE). The increasing role of direct taxes and the reduction in dependence on
customs duties (Table 5) has enhanced both the equity and efficiency of the tax system as
direct taxes are generally favoured as more progressive and customs duties are viewed as
trade-distorting.
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Economic
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