Fiscal Federalism

Definition of Fiscal Federalism
It is concerned with the division of economic responsibilities between the Central and State and local govt.

Meaning of Fiscal Federalism
The govt can classified as :
a) Unitary system - All the governing power resides in a centralized govt. eg: UK
b) Federal system - The power to govern is shared between central, state and local govt.( Fiscal decentralization) eg: India

Key Issues in Fiscal Federalism
1 Division of responsibilities and resources-
Who makes the decisions about the programmes? Who pays for the programme?
involves financing, regulation and administration
Central govt. provide public goods like defence

2 Regulation-
Constitution restricts state and local govt
state and local govt subject to pollution and env regulations which apply to private firms

3 Incentives for resource transfer-
Central govt. grants and loans to state- leads to disparity in allocation
Types of transfer- Conditional & unconditional

4 Tax expenditure-
Sharing of central tax revenues with the states

5 Tax competition-
Local govt. use tax incentives to attract business- gains in one locality at the expense of losses in other

6 National and local Public goods-
eg: national defence benefits to all
eg: traffic lights benefits to particular locality
Not pure public goods.

7 Tax subsidies-
leads to increased expdt on publicly provided goods and increased capital invst
inefficient due to: wealthy investors, business, discriminate strong preference

8 Fiscal imbalance-
lack of harmony between functions and financial resources
mechanism to even out shortages and surpluses

FISCAL FEDERALISM IN INDIA
A] Division of functions
countrywide tasks to centre and state whereas local imp. to municipalities and panchayats
CG:development functions and non development
SG:development functions and non development
Jurisdiction:
defence uniformly
benefits economies of scale
foreign trade require national agenda
agriculture region to region
Problems:
overlapping -education and health
centrally sponsored schemes dont benefit targeted groups


B] Division of resource raising powers 
Receipts of CG: Revenue receipts( taxes on income, property, commodities) non tax and capital receipts( IMF)

Receipts of SG: Revenue receipts ( tax on agri, profession, capital) non tax and capital receipts ( loans)

Criterion for division of tax powers: depends on
tax base- personal income
production- union excise duty, sale/ purchase
entry of goods- octroi duty
weakness-- agri and nonagri income, sales tax

Financial imbalance: in favour of Centre

Trf of resources from Centre to State: tax proceeds, grants n loans, plan assistance

Non Performing Assets

Non-Performing Assets (NPA) - Meaning

Non-Performing Assets are popularly known as NPA. Commercial Banks assets are of various types.

All those assets which generate periodical income are called as Performing Assets (PA).

While all those assets which do not generate periodical income are called as Non-Performing Assets (NPA).

If the customers do not repay principal amount and interest for a certain period of time then such loans become non-performing assets (NPA). Thus non-performing assets are basically non-performing loans.

In India, the time frame given for classifying the asset as NPA is 180 days as compared to 45 days to 90 days of international norms.

In India, NPA were very high in the beginning of 90's. Now around 4.2-4%

Types of NPA

1. Standard Assets : A standard asset is a performing asset. Standard assets generate continuous income and repayments as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no special provisions are required for Standard Assets.
2. Sub-Standard Assets : All those assets (loans and advances) which are considered as non-performing for a period of 12 months are called as Sub-Standard assets.
3. Doubtful Assets : All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets.
4. Loss Assets : All those assets which cannot be recovered are called as Loss Assets

Causes of NPA

1. Speculation : Investing in high risk assets to earn high income.
2. Default : Willful default by the borrowers.
3. Fraudulent practices : Fraudulent Practices like advancing loans to ineligible persons, advances without security or references, etc.
4. Diversion of funds : Most of the funds are diverted for unnecessary expansion and diversion of business.
5. Internal reasons : Many internal reasons like inefficient management, inappropriate technology, labour problems, marketing failure, etc. resulting in poor performance of the companies.
6. External reasons : External reasons like a recession in the economy, infrastructural problems, price rise, delay in release of sanctioned limits by banks, delays in settlements of payments by government, natural calamities, etc.

Measures to Solve Problems of NPA 

1 Debt Recovery Tribunals (DRTs)

Narasimham Committee Report I (1991) recommended the setting up of Special Tribunals to reduce the time required for settling cases. Accepting the recommendations, Debt Recovery Tribunals (DRTs) were established. There are 22 DRTs and 5 Debt Recovery Appellate Tribunals. This is insufficient to solve the problem all over the country (India).

2. Securitisation Act 2002

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 is popularly known as Securitisation Act. This act enables the banks to issue notices to defaulters who have to pay the debts within 60 days. Once the notice is issued the borrower cannot sell or dispose the assets without the consent of the lender. The Securitisation Act further empowers the banks to take over the possession of the assets and management of the company. The lenders can recover the dues by selling the assets or changing the management of the firm. The Act also enables the establishment of Asset Reconstruction Companies for acquiring NPA. According to the provisions of the Act, Asset Reconstruction Company of India Ltd. with eight shareholders and an initial capital of Rs. 10 crores has been set up. The eight shareholders are HDFC, HDFC Bank, IDBI, IDBI Bank, SBI, ICICI, Federal Bank and South Indian Bank.

3. Lok Adalats

Lok Adalats have been found suitable for the recovery of small loans. According to RBI guidelines issued in 2001. They cover NPA up to Rs. 5 lakhs, both suit filed and non-suit filed are covered. Lok Adalats avoid the legal process. The Public Sector Banks had recovered Rs. 40 Crores by September 2001.

4. Compromise Settlement

Compromise Settlement Scheme provides a simple mechanism for recovery of NPA. Compromise Settlement Scheme is applied to advances below Rs. 10 Crores. It covers suit filed cases and cases pending with courts and DRTs (Debt Recovery Tribunals). Cases of Willful default and fraud were excluded.

5. Credit Information Bureau

A good information system is required to prevent loans from turning into a NPA. If a borrower is a defaulter to one bank, this information should be available to all banks so that they may avoid lending to him. A Credit Information Bureau can help by maintaining a data bank which can be assessed by all lending institutions.

Keynes General Theory of Income and Employment

(a) Total Employment depends on Total output, which is equal to total income. So National Income = Total Employment.

(b) Total Value of employment depends on Effective Demand.

(c) Effective Demand is composed of Aggregate Demand Function (ADF) and Aggregate Supply Function (ASF). The Effective demand at the equilibrium price where ADF = ASF.

(d) ASF is given in the Short period, and ADF is the significant factor on Keynes's theory.

(e) ADF depends on total expenditure, which is composed of Consumptionand Investment Function.

(f) Consumption Function depends on :- (i) Size of Income, (ii) Propensity to Consume. Keynes assumed consumption function to be stable in the short run.

(g) Investment Function depends on :- (i) Marginal Efficiency of Capital (MEC), (ii) Rate of Interest (Ri). Keynes considered Investment Function as a highly unstable factor.

(h) MEC is determined by :- (i) Prospective Yield, (ii) Supply price of Capital Assets. Keynes considered MEC as a highly fluctuating phenomenon because it depends on business psychology.

(i) Rate of Interest (Ri) is determined by Supply of Money and Demand for Money (Liquidity Preference). Supply of money is regulated by monetary authorities. Liquidity preference is determined by Transaction, Precautionary, Speculative motives, etc. Keynes considered rate of interest as a stable phenomenon.

(j) According to Keynes, Investment Expenditure is the main determinant of the level of employment. The greater the difference between MEC and Ri the higher the inducement to invest and vive-versa. Since Rate of Interest (Ri) is stable in the short run, MEC, which is unstable, is the main determinant of Investment Function.

(k) The theory concludes that to raise employment, effective demand should be raised. So, Investment Expenditure must be raised by filling the gap between an increase in investment and consumption. Lack of Effective Demand leads to unemployment.

Money

Definition of Money

"Anything that is generally acceptable as a means of exchange and which at the same time acts as a measure and store of value."

Money can be defined as an object, record or anything that is generally acceptable for payment and repayment of economics debt in the economic context .In barter exchange, it requires a double coincidence of wants.

Coins were the earliest forms of currency after barter trade and were later followed by notes. Bank money can be described as the non physical form of money in supply in an economy. The major examples of bank money are direct deposits, cheques, money orders, debit cards and the other methods of money transfers.

The history of money can be dated back to as early as the start of civilization around 2000 BC in Mesopotamia and Egypt. The first and the earliest primitive form of money was the commodity money. Commodities such as hides, skins and some grins were universally accepted as medium of exchange. Then Metallic economy.

Functions of Money

Money performs five important functions :-

1. Medium of exchange : Money acts as a medium of exchange as it's generally accepted. On the payment of money, purchase of goods and services can be made i.e. goods and services are exchanged for money. Money bifurcates buying and selling activities separately so it facilitates the exchange transactions.
2. Measure of value : Money is a common measure of value so it is possible to determine the rate of exchange between various goods and services purchased by the people. Exchange value of commodity can be expressed in terms of money. For e.g. we can say that 10 metres of Cotton Cloth cost $220 dollars or Rs.10,000 rupees only.
3. Store of value : Money acts as a store of value. Money being generally acceptable and its value being more or less stable, it is ideal for use as a store of value. Being non-perishable and also comparatively stable in value, the value of other assets can be stored in the form of money. Property can be sold and its value can be held in money and converted into other assets as and when necessary.
4. Standard or Deferred payment : Money is also inevitably used as the unit in terms of which all future or deferred payments are stated. Future transactions can be carried on in terms of money. The loans, which are taken at present, can be repaid in money in the future. The value of the future payments is regulated by money.
5. Transfer of value : Value of any asset can be transferred from one person to another or to any institution or to any place by transferring money. The transfer of money can take place irrespective of places, time and circumstances. Transfer of purchasing power, which is necessary in commerce and other transactions, has become available because of money.

Highlights of Union Budget 2014-15

The following are the Union Budget 2014-15 highlights

For individuals

* Tax slab on personal income remains unchanged

* Income tax exemption limit raised by Rs 50,000 to Rs 2.5 lakh and for senior citizens to Rs 3 lakh

* Exemption limit for investment in financial instruments under 80C raised to Rs 1.5 lakh from Rs 1 lakh.

* Investment limit in PPF raised to Rs 1.5 lakh from Rs 1 lakh

* Deduction limit on interest on loan for self-occupied house raised to Rs 2 lakh from Rs 1.5 lakh.

* Kisan Vikas Patra to be reintroduced, National Savings Certificate with insurance cover to be launched

* Long term capial gain tax for mutual funds doubled to 20 pc; lock-in period increased to 3 years

* Mandatory wage ceiling of subscription to EPS (Employee Pension Scheme) raised from Rs 6,500 to Rs 15,000

* Minimum pension increased to Rs 1,000 per month

* LCD, LED TV become cheaper

* Cigarettes, pan masala, tobacco, aerated drinks become costlier

 Deduction limit on interest on loan for self-occupied house raised to Rs 2 lakh from Rs 1.5 lakh

New projects

* 5 IIMs to be opened in HP, Punjab, Bihar, Odisha and Rajasthan

* 5 more IITs in Jammu, Chattisgarh, Goa, Andhra Pradesh and Kerala.

* 4 more AIIMS like institutions to come up in Andhra Pradesh, West Bengal, Vidarbha in Maharashtra and Poorvanchal in Uttar Pradesh

* Govt proposes to launch 'Digital India’ programme to ensure broad band connectivity at village level

* Kisan TV for farmers, Arun Prabha TV for northeast.

* National Rural Internet and Technology Mission for services in villages and schools, training in IT skills proposed

* Govt proposes Ultra Modern Super Critical Coal Based Thermal Power Technology

* A project on the river Ganga called ‘Jal Marg Vikas’ for inland waterways between Allahabad and Haldia; Rs 4,200 crore set aside for the purpose.

* EPFO to launch the “Uniform Account Number” Service for contributing members.

* New programme “Neeranchal” to give impetus to watershed development in the country with an initial outlay of Rs. 2142 crores.

* Beti Bachao, Beti Padhao Yojana to generate awareness and help in improving the efficiency of delivery of welfare services meant for women.

* Free Drug Service and Free Diagnosis Service to achieve “ Health For All”

* Two National Institutes of Ageing to be set up at AIIMS, New Delhi and Madras Medical College, Chennai.

 5 more IITs in Jammu, Chattisgarh, Goa, Andhra Pradesh and Kerala

Allocations

* Rs 100 crore to support about 600 new and existing Community Radio Stations

* Swachh Bharat Abhiyan to cover every household with sanitation facility by the year 2019

* Rs 100 crore for metro projects in Lucknow and Ahmedabad

* Rs 2,037 crore set aside for Integrated Ganga Conservation Mission called ‘Namami Gange’

* Rs 150 crore allocated for increasing safety of women in large cities

* Rs. 7,060 crore for the project of developing 100 Smart Cities.

* Set aside Rs 11,200 crore for PSU banks capitalisation

* Govt provides Rs 500 crore for rehabilitation of displaced Kashmiri migrants

* 1000 crore provided for “Pradhan Mantri Krishi Sinchayee Yojna” for assured irrigation.

* Rs. 50,548 crore under the SC Plan and Rs. 32,387 crore under TSP

 Rs. 7,060 crore for the project of developing 100 Smart Cities

Economic initiatives

* Composite cap of foreign investment to be raised to 49 per cent in Defence and Insurance sectors.

* Requirement of the built up area and capital conditions for FDI reduced to 20,000 square metres and USD 5 million respectively for development of smart cities.

* Manufacturing can sell its products through retail including Ecommerce platforms.

* Requirement to infuse Rs.2,40,000 crore as equity by 2018 in our banks to be in line with Basel-III norms PSUs will invest through capital investment a total sum of Rs. 2,47,941 crores.

* Rs 4,000 cr set aside to increase flow of cheaper credit for affordable housing to the urban poor/EWS/LIG segment.

* Govt in favour of consolidation of PSU banks

* Govt considering giving greater autonomy to PSU banks while making them accountable

The numbers

* Government expects Rs 9.77 lakh crore revenue crore from taxes

* Plan expenditure pegged at Rs 5.75 lakh crore and non-plan at Rs 12.19 lakh crore.

* Fiscal deficit target retained at 4.1 pc of GDP for current fiscal and 3.6 pc in FY 16

* Disinvestment target fixed at Rs 58,425 crore

* Gross borrowings pegged at Rs 6 lakh crore

* Contours of GST to be finalised this fiscal; Govt to look into DTC proposal.

 Plan expenditure pegged at Rs 5.75 lakh crore and non-plan at Rs 12.19 lakh crore

Administrative reforms

* Committee to look into all fresh tax demands for indirect transfer of assets in wake of retrospective tax amendments of 2012

* Expenditure management commission to be setup; will look into food and fertilizer subsides

* Legislative and administrative changes to sort out pending tax demands of more than Rs. 4 lakh crore under dispute and litigation.

* New Urea Policy would be formulated.

* More productive, asset creating and with linkages to agriculture and allied activities wage employment would to be provided under MGNREGA.

* A committee will to examine and recommend how unclaimed amounts with PPF, Post Office, saving schemes etc. can be used to protect and further financial interests of the senior citizens

* Slum development to be included in the list of Corporate Social Responsibility

* Committee to examine the financial architecture for MSME Sector, remove bottlenecks and create new rules and structures to be set up and give concrete suggestions in three months.

* An institution to provide support to mainstreaming PPPPs called 4PIndia to be set up with a corpus of Rs. 500 crores.

GDP growth seen at 5.4-5.9%

Government Budget

Definition of Budget
The budget is an estimate of the government's revenue and expenditure for a given financial year.

Meaning of Budget
The Finance Ministry prepares a budget for every financial year which is presented by the Finance Minister on the last working day of February in the Parliament. It is an annual financial statement describing in details the estimated receipts and proposed expenditures and disbursements of the govt. under various head for a given financial year. 

Balanced budget- when revenues and expenditure are equal during a given year. (Point E)
Budget surplus- when revenues exceeds govt. expenditure for a given year.
Budget deficit- when govt expenditure exceeds revenues for a given year.

Types of Budget
1 Balanced & Unbalanced budget-
Balanced budget takes place when the estimated receipts are equal to the estimated expenditure. Whereas in the Unbalanced budget, revenues are expenditure are not equal. When revenues are greater than expenditure, its called surplus budget and when expenditure exceeds revenues, there is a deficit budget.

2 Zero Based Budget (ZBB) and Traditional Budget-
In traditional budget, there is an attempt to justify only the increase in expenditure over the previous year. Budgetary expenditure and what has already been spent is automatically sanctioned. No reference is made to the previous level of expenditure. Only the changes over the past years are to be justified. Here, incremental approach is used. Only the current budget are to be approved and not every item of the budget.
By contrast, in ZBB all expenditure must be justified for the budget year. Every item of the budget must be approved rather than only changes. It starts from a zero base and every item of expenditure is analysed in terms of costs and benefits. Budgets are then prepared for the coming year, regardless of whether the budget is higher or lower than the previous year. It means the past is cut off. It is futuristic and may or may not be equal or more from the last year's budget. It is more cost effective and time consuming when compared.

3 Performance & Programme Budget- 
Performance budget takes into account the end result or the performance of the budgeted programme. It links the funding of the programme to its outcome. It emphasizes management efficiency. It is result oriented. and more flexibility for innovation and performance.
Programme budget divides the major functions of the government into specific programmes or activities. The funds are allocated according to the achievements or benefits expected out of the programme. It emphasizes on the benefits that the society gains from govt. programmes.

4 Multiple & Unified Budget-
Under multiple budget, the functions of the govt are divided into separate units or parts, and separate budgets are prepared for each unit.  Eg: budget for education, budget for health, budget for agriculture
Unified budget includes receipts and expenditure for all programmes of the Govt. It is more comprehensive measure. For eg- In US, it was felt the need for a unified budget which would be useful for knowing the total effect on the economy.

5 Functional & Cash budget-
Functional budget indicates the income and expenditure of a particular department of the govt.  It is an accrual based budget. eg: In US, 20 categories are known as budget functions.
On the other hand, cash budget  is a detailed estimate that shows all expected sources and the uses of cash. It includes opening cash balance, closing cash balance, cash collections and cash disbursements.

6 Legislative & executive budget-
Legislative budget is prepared by legislature( elected representatives) or with the help of committees. It is a decision making org. that has the power to enact and amend laws.
Executive budget is prepared by the executive wing of the govt.  It is responsible for the implementation of budget proposals of the govt. Likely to be better as they have more correct estimate of revenue receipts and expdt.

7 Revenue & Capital Budget-
Revenue budget indicates the revenue receipts( tax and non tax) and revenue expenditure( interest payment, subsidies). They are recurring in nature.
Capital budget consists of capital receipts( disinvestment proceeds,market borrowings, recovery of loans) and capital expenditure( infrastructure) .

UNION BUDGET OF INDIA
Acc to constitution of India, there is a 3- tier system of govt, Central, state and local( municipal corp, parishad, zilla) govt.

Consists of:
Actual for the preceding yr        2012-13
Budget estimate for current yr   2013-14
Revised estimate for current yr  2013-14
Budget estimate for coming yr   2014-15

Format:
Revenue receipts
Capital receipts    ______
Total receipts
Revenue expdt
Capital expdt       ______
Total expdt       _________
Revenue deficit
Effective revenue deficit
Fiscal deficit
Primary deficit


TYPES OF DEFICITS IN THE BUDGET
The excess of expenditure over revenue of the govt. is termed as deficit. In a developing country like India, the budget should show a deficit. The govt. may borrow to fill the gap between revenue and expdt.

1 Revenue deficit(3.9% of GDP)
It is the excess of revenue expdt over revenue receipts.
met through capital receipts
In India, revenue deficit i.e financed by borrowings.

2 Budget deficit
It is the excess of total budgeted expenditure( revenue+ capital) over the total budgeted revenue(revenue + capital)
govt resort to deficit financing( govt borrows from RBI and gives own securities as collateral to RBI)
not used

3 Fiscal deficit(5.2% of GDP)
It is the difference between total receipts and total expdt of the govt. 
(Revenue expdt + capital expdt) - (revenue expdt + capital expt except borrowings)
It is equal to the total borrowings of the govt.
most common
indicator of country's financial performance 
Net- deduct amt of loan

4 Primary deficit(1.9% of GDP)
Gross = Gross Fiscal deficit - int payment
Net= Net Fiscal deficit - int payment
real position of govt

5 Monetised deficit
increase in net RBI credit to the govt.- increase in reserve money - increase in money supply

6 Effective revenue deficit
introduced in 2011-12
Revenue deficits - grants for creation of capital assets