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Introduction to Fiscal Framework – World is Changing should India change too?
The government has succeeded in reducing the burden of the fiscal deficit from 4.5 % of the GDP to the current level of 3.2% of the GDP. The Governments all around have changed the policy of their country in the face of the Global financial crisis and have taken measures like quantitative easing, negative interest rates, bond buyback programs etc. to boost the economy.

The Government has also maintained a good Debt to GDP ratio and although this has been high compared to other emerging economies, it has not reached unmanageable levels. India has also been very willing to meet its debt obligations and hasn’t defaulted on loans to external debtors even during near crisis like situations in 191 and 1993.

The Government’s both the States and the Center however have a vulnerability too – They haven’t been able to collect enough revenue to meet their running costs. Hence the primary deficit – Difference between the Government’s revenue and its non interest expenditure is higher compared to other countries. Although many countries face a Primary deficit as after the Global Financial crisis the spending schemes have been greater and revenues lower. However their growth rates too are low. By comparison the Indian growth rate and the consequent primary deficit are abnormally high.

Fiscal Lessons from the States

The States have shown the way in fiscal prudence by reducing the revenue deficit to 0 and the fiscal deficit to 3% of their GSDP. The reason for this is reduction in spending schemes, greater outlay from the center, more expenses from the centrally sponsored schemes, reluctance in borrowing, reducing wasteful expenses etc. The majority of the states have managed to reach the targets set in their respective Fiscal responsibility legislation’s. The Center however should lead from the front by paring its own deficit and becoming a model for the state.

The reason for the increasing need to maintain fiscal discipline in the state’s finances is that the 7th Pay commission, increase in bond payments from UDAY bonds, other expenses shall increase for the states. This time however they shall not be able to maintain the high growth rate that they did earlier.

The 14th Finance commission had rolled back the incentive provided by the 13th Finance commission of giving monetary incentives to states who had good fiscal performance. There should be a consideration to go back to this system.

Clothes and Shoes – Can India reclaim low skilled Manufacturing?
Sectors such as manufacturing of leather and textiles can boost Indian economy in two ways. It can provide jobs to semi and unskilled workers on a large scale and second it can boost employment of women and employment of rural youth. Manufacturing also has a second advantage that it can create jobs in the service sector too [three times more].

Certain factors that favor India in this are the appreciation of yuan and China’s labor problems. This means Indian manufacturing can become competitive if India agrees to have a stable taxation regime, sign free trade agreements with major buyer nations like EU and US. This shall make Indian made clothes competitive compared to Vietnam and Bangladesh the nearest competitors.

The reason for targeting leather and apparel sector is also because the relation between the investment needed and the subsequent output in terms of jobs and also the impact in terms of bringing social change. The East Asian countries too have relied on this sectors for their growth stories in the post war period. In some of these nations the growth of the apparel, footwear and the leather sectors was as high as 50% every year and this boosted their economies. The female literacy, fertility rates, participation in the labor force also moved in a positive direction after the boost to the apparel sector.


Chapter Review

Score more than 80% marks and move ahead else stay back and read again!

Q1:China has lost out its manufacturing competitiveness due to
environmental norms
weak yuan
high wages

Q2: GDP is released by the
Finance ministry
Dept of revenue
Office of economic advisor

Q3:Highest job to investment intensity is in
apparel and footwear

Q4: The challenges faced by the leather and apparel industry are
lack of FTA with markets
Cattle slaughter ban

Q5: Primary deficit is
revenue income and expenditure difference
government borrowing
government revenue and non interest expenditure difference
revenue and capital expenditure