Uttar Pradesh Public Finance and fiscal Policy | Course for UPPSC Preparation - UPPSC (UP) PDF Download

Public Finance

Public finance, a division of economics, scrutinizes the government's involvement in the economy, with a specific emphasis on managing revenue and expenditures. It evaluates how governments acquire funds, distribute resources, and influence the economy to attain desired outcomes while avoiding unfavorable repercussions. 
In contemporary times, the field of 'Public Finance' includes five primary sub-divisions: 

• Public Revenue: This category concentrates on the methods of generating public income, encompassing both tax and non-tax sources. It delves into the principles guiding taxation, tax rates, the impact of taxes on individuals and businesses, and how taxes can shift, along with their broader effects.
• Public Expenditure: This segment explores the fundamental principles governing government spending. It delves into the consequences of public expenditure and strategies for its control and management.
• Public Debt: Within this aspect, the analysis focuses on the methods of obtaining loans from both domestic and international sources. It includes assessing the burden, repercussions, and strategies for redeeming public debt.
• Financial Administration: Financial administration involves a comprehensive study of various aspects related to the government budget, which serves as the annual master financial plan. This sub-category covers setting objectives, steps in budget preparation, approval processes, allocation of funds, performance evaluation, and financial auditing.
• Fiscal Policy: Fiscal policy employs tools such as taxes, subsidies, public debt management, and public expenditure to achieve economic goals and regulate the overall economy.

Fiscal Policy

Fiscal policy, a key economic strategy employed by governments alongside monetary policy, involves the deliberate manipulation of government spending and taxation to influence the economy. Its essential role lies in achieving broad macroeconomic goals such as full employment, price stability, and economic growth.
There exist two fundamental categories of fiscal policy :

• Expansionary Fiscal Policy : This tactic aims to stimulate the economy by either increasing government spending or decreasing taxes. Examples include investing in public infrastructure or providing tax incentives. It is typically implemented during economic downturns, marked by recession and high unemployment.
• Contractionary Fiscal Policy : This approach seeks to moderate economic growth by either reducing government spending or raising taxes. Measures may include cutting public programs or increasing taxes on businesses and individuals. It is usually deployed during periods of high inflation when the economy is growing too rapidly, leading to escalating prices.

The implementation of fiscal policy involves both the legislative and executive branches of government. The legislature enacts laws authorizing government spending and taxation, while the executive branch executes these laws.

Examples of fiscal policy include :
Expansionary Fiscal Policy :

• Providing increased unemployment benefits and stimulus checks during the COVID-19 pandemic to support individuals and businesses.
• Augmenting government spending on infrastructure, such as roads and bridges, to stimulate economic activity.
• Offering tax cuts to businesses to encourage investment and hiring.

Contractionary Fiscal Policy :

• Raising taxes on individuals to decrease disposable income and restrain consumer spending.
• Cutting spending on social welfare programs to reduce available funds for individuals.
• Implementing tax increases and reducing government spending in the early 1980s in the United States to combat inflation, despite resulting in a recession.

Public Finance and Fiscal policy : Relation

• Public finance and fiscal policy are interrelated yet distinct concepts within the realm of government economics. Public finance involves the examination of the government's economic functions, encompassing aspects such as revenue, expenditure, and policy implications. Fiscal policy, as a subset of public finance, concentrates on how the government utilizes spending and taxation to shape economic conditions.
• While public finance establishes the theoretical foundation, fiscal policy represents its practical implementation. The scope of public finance extends to diverse facets of government financial management, spanning taxation, expenditure, and borrowing. Fiscal policy, on the other hand, narrows its focus to the strategic utilization of government budgets for short-term objectives, such as addressing recessions or controlling inflation.
• Public finance delves into long-term economic considerations like sustainable growth and income distribution. Examples of public finance and fiscal policy illustrate their respective applications:

Examples of public finance and fiscal policy :
Public finance :

• Analyzing the impact of tax policies on economic efficiency and equity.
• Assessing the influence of government spending on growth and social welfare.
• Evaluating the sustainability of government debt.

Fiscal policy :

• Implementing tax cuts to stimulate the economy during a recession.
• Increasing infrastructure spending to promote economic growth.
• Raising taxes as a measure to counteract inflation.

In essence, public finance establishes the conceptual framework for comprehending government budgeting and its economic repercussions, while fiscal policy serves as the instrument through which governments strive to attain specific economic objectives within this framework. Both concepts are indispensable for a comprehensive understanding of the government's role in the economy.

Public Finance and Fiscal Policy of UP

The financial system of Uttar Pradesh, concerning the manner in which the state government raises and utilizes funds, encompasses various sources such as taxes, fees, and grants from the central government. The revenue, derived from these sources, supports a range of services including education, healthcare, infrastructure, and social welfare. However, recent years have witnessed challenges, attributed to factors such as the COVID-19 pandemic, global economic slowdown, and increased living costs.
In the fiscal year 2020-21, Uttar Pradesh reported its first revenue deficit in 14 years, amounting to Rs 2,367 crore. The state government has implemented measures to ameliorate this situation, including tax hikes, expenditure reductions, and enhancements to tax administration. Yet, further actions are imperative to confront the financial hurdles.
Here is a summary of the key trends in the public finance of Uttar Pradesh in recent years:

• Revenue Receipts: Although the state's revenue receipts have exhibited consistent growth, the pace has decelerated. Taxes, fees, and grants from the central government remain the primary sources.
• Revenue Expenditure: While revenue expenditure has steadily increased, it outpaces the growth of revenue receipts, resulting in a widening revenue deficit. Main components include salaries, pensions, and subsidies.
• Capital Expenditure: Capital expenditure has remained stagnant, leading to a deterioration in the state's infrastructure.
• Fiscal Deficit: The fiscal deficit has expanded due to both a widening revenue deficit and relatively unchanging capital expenditure.
• Debt: Despite an increase in debt, the debt-to-GSDP ratio remains below the permissible limit of 35%.

The following are some of the challenges facing the public finance of Uttar Pradesh:

• Low Tax-GDP Ratio: Uttar Pradesh grapples with one of India's lowest tax-GDP ratios, indicating an inability to generate sufficient revenue for expenditure needs.
• High Dependence on Central Grants: The state heavily relies on central grants, rendering it susceptible to fluctuations in the central government's fiscal policy.
• High Revenue Deficit: A substantial revenue deficit implies that expenditure surpasses receipts, posing long-term sustainability challenges.
• Rising Debt: Escalating debt levels increase the burden on future generations.

The following are some of the measures that the state government can take to improve its public finance:

• Increase Tax-GDP Ratio: Enhance tax administration, broaden the tax base, and reduce exemptions to boost the tax-GDP ratio.
• Reduce Revenue Expenditure: Rationalize subsidies, enhance efficiency in public spending, and combat corruption to curtail revenue expenditure.
• Increase Capital Expenditure: Mobilize private investment and borrow from the market to augment capital expenditure.
• Improve Fiscal Discipline: Set realistic fiscal targets and adhere to them to enhance fiscal discipline.

Uttar Pradesh's public finance is pivotal for economic development and social welfare. To overcome challenges, the state government must undertake proactive measures to fortify its fiscal position.

Fiscal Responsibility & Budget Management Act, 2004

(Mid-term Fiscal Restructuring Policy, 2023)
Background
In adherence to the Uttar Pradesh Fiscal Responsibility and Budget Management Act (FRBM) of 2004 (updated version), the annual requirement mandates the Uttar Pradesh state government to present a Mid-term Fiscal Restructuring Policy. This policy, delineated by the Uttar Pradesh Fiscal Responsibility and Budget Management Rules of 2006, is an integral part of the annual budget presentation to both houses of the State Legislature. The policy encompasses financial goals for the upcoming five years, past accomplishments, expenditure details, and future plans.
Objectives
The Uttar Pradesh Mid-term Fiscal Restructuring Policy for 2023 aligns with the stipulations of the Act and Rules. It encompasses projections for the budgets of 2022-23, revised estimates, and budget estimates for 2023-24. Additionally, it provides forecasts for the subsequent three fiscal years: 2024-25, 2025-26, and 2026-27, as outlined in the accompanying table.

The objectives set for the fiscal years 2024-25, 2025-26, and 2026-27 are as follows:

• Gross State Domestic Product (GSDP): Based on the new series with a base year of 2011-12, advance estimates have been formulated.
• Base Year: Receipts and expenditures for various items are estimated using the fiscal year 2023-24 (budget estimates) as the base year.
• State’s Own Tax Revenue: Estimated annual growth rates of 13 percent for the fiscal year 2024-25 and 14 percent for subsequent years for GST and VAT.
• State’s Non-Tax Revenue: A projected annual growth rate of 6 percent for the fiscal year 2023-24 and beyond.
• Share of Central Taxes: Calculations are based on the state's share in central taxes, assuming a growth rate of 13 percent for the fiscal year 2024-25 and 14 percent for subsequent years, starting from the 2023-24 budget estimates.
• Central Government Grants: A general increase of 10 percent has been applied to this item.
• Expenditure on Revenue: Calculated based on the revised estimate for the fiscal year 2022-23 and an annual increase of 11 percent for the fiscal year 2024-25 and 11.5 percent thereafter.
• Salaries: An estimated annual increase of 10 percent in expenditure on salaries for state employees and employees of state-funded organizations.
• Pension: Assumed increase of 10 percent in pension expenditure.
• Interest: Estimated expenditure on interest based on the average interest rate on state loans, approximately 9 percent.
• Capital Expenditure: Estimated based on the budget estimate for the fiscal year 2023-24, with a general increase in subsequent years.
• Loans and Advances: Anticipated annual increase of 10 percent in loan recovery and loans approved by the state government.
• Loan Repayment: Estimated based on actual repayment obligations.
• Debt Burden: The total debt burden, including the financial year 2022-23 (revised estimate) and 2023-24 (budget estimate), is approximately INR 15,573.84 crores and INR 17,939.00 crores, respectively, under the ‘Special Assistance Scheme for Capital Investment by States’ by the central government. Projections for subsequent years under this scheme have also been factored in.

State Finance

Fiscal Overview

• Revenue Expenditure : The revised projection for fiscal year 2022-23 anticipates a revenue expenditure of INR 4,24,909.27 crores, with an estimated increase to INR 5,02,354.01 crores in the budget estimate for 2023-24.
• Capital Expenditure : The revised estimate for capital expenditure in the fiscal year 2022-23 is INR 1,26,601.11 crores, projected to rise to INR 1,47,492.29 crores in the budget estimate for the fiscal year 2023-24.
• Revenue Deficit : The objective of eliminating the revenue deficit was accomplished by the financial year 2006-07. Although the state has consistently maintained a revenue surplus since then, the financial year 2020-21 witnessed a revenue deficit due to the economic challenges posed by the COVID-19 pandemic.

Fiscal Policy Details 
The primary departments responsible for revenue generation in Uttar Pradesh include the Revenue Department, Excise Department, Transport Department, Registration Department, and Geology and Mining Department. These departments have implemented various measures to enhance revenue growth.

Commerce Tax
The Special Rate Scheme for brick and tile manufacturers, effective since April 1, 2022, is expected to generate an additional revenue of ₹300 crore. E-invoicing has been implemented for taxpayers with an annual turnover exceeding ₹20 crore since the same date.
A centralized Command Center now monitors the Vehicle Tracking System for active fleet vehicles. Government departments under GST are registering and depositing TDS with authorized officers, and regular reviews are conducted for TDS deduction on payments exceeding ₹5 crore for projects.

Transport
Ongoing special checking campaigns against vehicles with outstanding dues have resulted in increased revenue collection. Owners of vehicles with pending dues receive regular demand letters, and recovery notices are issued as per land revenue regulations. Special checking campaigns are also targeting unauthorized operation of passenger vehicles and overloading of goods vehicles, with penalties collected through enforcement actions.

Stamps and Registration
The revaluation of the valuation list for the past 5 years in most districts was carried out in the year 2022-23. The system for online refund of unused stamps and online e-fees has been strengthened, leading to increased utilization by stakeholders.

Excise Department
The excise policy for the financial year 2022-23 has been established, featuring increased processing fees for country liquor, renewal fees for licensed shops, and MGQ. Model shops and licensed shops also face higher processing and renewal fees, including those for beer.

Geology and Mining
The Geology and Mining Department conducts mineral mapping of new mining areas based on satellite images. An Integrated Mineral Surveillance System (IMSS) on the Mine & Mitra portal enhances control over illegal mining/transportation.
The "M-check" mobile app facilitates verification of transportation documents, and online deposit of exchange fees for brick kilns has been implemented.
Regulatory fees on vehicles carrying minor minerals from other states have been increased, aiming to boost revenue by ₹50/- per cubic meter, according to a government order dated 10.08.2022.

Fiscal Situation Analysis
The assessment of the fiscal situation can be based on several indicators as a percentage of the total state domestic product, some of the key indicators are listed in the table below —

The projected proportion of own tax revenue as a percentage of the Gross State Domestic Product (GSDP) in the fiscal year 2022-23 budget is anticipated to be 10.8%, marking a 90% increase compared to the revised estimate of ₹0.30 lakh crore. This ratio is expected to persist at 10.8% in 2023-24, with an anticipation of continual growth in subsequent years.
In the revised estimates for the fiscal year 2022-23, the state's tax-to-GSDP ratio is 0.6%, projected to rise to 1.0% in 2023-24. The fiscal deficit as a percentage of GSDP in the 2022-23 budget was estimated at 3.96%, slightly adjusting to 3.97% in the revised estimates. For the fiscal year 2023-24, the projected fiscal deficit as a percentage of GSDP is 3.48%, expected to comply with the defined ratio set by the Fiscal Responsibility and Budget Management (FRBM) Act in 2024-25 and 2025-26, with the limit yet to be determined for 2026-27.
Sustainability of Fiscal Situation
For the assessment of fiscal sustainability, various other indicators are presented in Table.

Fiscal sustainability is assessed through various indicators presented in a table. In 2023-24, revenue receipts are expected to constitute 52.3% of revenue expenditure, with revenue expenditure accounting for 59.5% of the total GSDP. These ratios are projected to decrease to 48.4% and 56.9%, respectively, by 2026-27. Debt servicing expenditure is estimated to be 12.5% of revenue receipts in 2023-24, decreasing to 11.0% by 2026-27.
The Capital Outlay/Fiscal Deficit ratio, indicating the proportion of government net borrowing used for investment, is expected to be 173.8% in the 2023-24 budget, reflecting continuous growth in subsequent years. Overall, these indicators suggest the sustainability and enhancement of the fiscal situation, highlighting positive improvements in the quality of public spending.

Government Debt
In terms of government debt, the state's debt was ₹6,66,153.39 crores in the 2022-23 budget estimates, increasing to ₹7,00,445.52 crores in the revised estimates. It is projected to further rise to ₹7,84,113.65 crores in 2023-24, constituting 32.1% of the GSDP.