Government Finances

The Indian Economy is a centrally planned Economy.  The government, budgets its expenditures & revenues and whatever is the shortfall, it borrows either from the RBI or from the market.  Its revenue sources are direct and indirect tax collections, foreign aids and other sources like PSU divestment proceeds etc.  Its expenditure consists of planned and non - planned expenditure.  Planned expenditure is the expenditure which it uses to finance economic development and the non - planned expenditure consists of other expenditures like subsidies etc.

The borrowings for the year 2000 - 01 were estimated to be more than Rs. 100000 crores in the budget, which will add another Rs. 10000 crores to the ever increasing interest bill.  Add to it, thre existing level of almost $100 bln. of external debt.   This year's budget has estimated planned expenditure to be Rs. 88100 crores and non - planned expenditure at Rs. 250387 crores.  So most of the expenditure incurred is non - planned without contributing anything to the economic development.  How tight will be moneytary conditions due to this huge borrowing requirement of the government is yet to be seen, but it will definitely effect the economy.

Sources of finances

Pre liberalization

Till early 90s, the RBI used to finance the government borrowings by issue of G - secs and it also used to determine the yields to be payable on them, which used to be very nominal and so there was no control on government borrowing.  Also, these issues, since they never gave market yields, used to be under - subscribed and get devolved on the RBI.  The RBI didn't have any say in the government borrowing program at that point of time.

Apart from the usual T - bills and dated securities, there was a concept of ad - hoc T - bills, which used to be subscribed by the RBI.  In these, the government used to borrow money for short - term, and if it was not able to discharge those bills, they used to get  automatically converted into dated securities.  So what was happening at that time, the government used to borrow short - term and convert it into long term dated securities.  This is one of the main reason for such a high growth in money supply at that time.

Post Liberalization

All this has changed now.  When the RBI was given autonomy to decide its level of finances to the government, it decided to put a brake on this unlimited financing.   First of all, the issue of ad - hoc T - bills was stopped.  The issue of T - bills & dated securities is now done on a competitive bidding system.  The yields on these G - secs is now determined by the market, according to the conditions prevailing in the market at that particular point of time.

The RBI also started a new facility called the Ways and Means Advances (WMA), under which the government can borrow a fixed amount of money for a fixed period of time from the RBI.  It has to discharge this WMA within that fixed time period.

All these measures were taken by the RBI to put the fiscal house of the government in order.  The government needs to control its expenditure & to finance it through its revenues.  The fiscal deficit is approximately 6% of the Indian GDP, which is very high a percentage.  So necessary steps have to be taken to control the fiscal deficit and the government finances.