Public Finnce

7/29/2019 Public Finnce

1/57

SABER Research Project Conference onSABER Research Project Conference on

,,Key South Asian EconomiesKey South Asian Economies

India International Centre, New DelhiIndia International Centre, New Delhi

June 29June 29--30, 200930, 2009

Re orms in IndiaRe orms in India

Dr J V M Sarma

n vers y o y era a


2/57

Review of the fiscal developments in India

focusing on the policy changes


3/57

Land mark Reforms of 90s, paradigm change

Trends in the Fiscal Components

The Unfinished Agenda and likely Institutional

hurdles.


4/57

PublicPublic Finance ManagementFinance Managementeve opment trategyeve opment trategy


5/57

Develo ment strate o tions or India at the time

IndependenceMarket orientation vs government intervention

Choice towards the Mixed economic framework

With bias towards heavy industry and dominant role for

Pronounced bias against foreign trade

Federal Fiscal Sharing

.


6/57

GDP

WorldMacro Fiscal InteractionsMacro Fiscal Interactions

Population

which inturn, resultsis a function of the accumulated capital stock which can be inverted and used to

determine the demand for capital for given level of income.Yt= f {Kt-1}

ontaxTaxTrans ers Saar es Su s esin higher revenueexpenditure.

Capital

= - -TotalRevenue

Exp

Revenue

entails the O&M exp

Saving

The private sector Capital

Rt=f{Y t}

Transfers from the rest of the country also contribute to the

growth of current expenditure other than interest paymentsbasically depends on the population, the national income,apart from other variables.

aance

Fiscal

payments

O&M

Pvt sectorCapital exp

government sector capitalexpenditurevia the crowding-

-.Ct=f{t,Y t }

The demand for the govt capital

The revenue balance,along with the demandfor capital, determines

balanceto be financed by new borrowings.

Debtoutstanding

.

Capital exp

emanates from total capital

requirement in the economy

the Fiscal DeficitNew

Borrowings


7/57

Key Requirements for mixedKey Requirements for mixed developmentdevelopment

strategy to workstrategy to work

-

Determining the respective areas of activities to

achieve crowding in,

Efficient government sector management

Regulating the Private sector


8/57

--

intervention of the state

even direct participation in economic activities.

Ine icient hi h cost and non-com etitive industrialstructure;

Significant constraints on the availability of financial.


9/57

The Landmark ReformsThe Landmark Reforms ofofss


10/57

--

from IMF

Trade and Industrial liberalization

Crisis catalytic for a paradigm shift in the tax

o cy


11/57

Industrial licensin relaxed

Market forces allowed to operate in many economicsectors

Independent regulators in electricity/ insurance/ telecom

FDI domestic rivate investment allowed inelectricity/ insurance/ telecom & many other economicsectors

Beginning made in disinvestment of Central/ StatePSUs


12/57

VisibleVisible shifts in the ecshifts in the economiconomic GrowthGrowth

atternattern

.

decades9.1110n

num

5.7 5.85.97

.

7.39

8.52

6

789

ercentper

Average for the decade

3.0

4.02 3.93

234

P

0

70s

80s

90s

00

-01

01

-02

02

-03

03

-04

04

-05

05

-06

06

-07

2 2 2 2 2 2 2


13/57

-

Growth in industrial investment touches > 50%

Export growth touches >20%

India the second fastest growing economy today .


14/57


15/57

Continued Fiscal Downtrends: A RoadContinued Fiscal Downtrends: A Road

Block to DevelopmentBlock to Development

Low, stagnant tax/GDP ratio

Impact of the Pay Commission

Growing revenue deficit

Growing fiscal deficit


16/57

2%

4%

Fiscal balance Revenue balance Primary balance

-2%

0%

-6%

-4%

-10%

-8%

1

960

-61

1

965

-66

1

970

-71

1

975

-76

1

980

-81

1

985

-86

1

990

-91

1

995

-96

2

000

-01

2

005

-06

2

006

-07


17/57

The Quality of Fiscal Deficit: A cause forThe Quality of Fiscal Deficit: A cause for

worryworry

, .4%

Fiscal balance

Revenue balance

-2%

0%

-6%

-4%

-10%

-8%

1

960

-61

1

965

-66

1

970

-71

1

975

-76

1

980

-81

1

985

-86

1

990

-91

1

995

-96

2

000

-01

2

005

-06

2

006

-07


18/57

The Quality of Fiscal Deficit: A cause forThe Quality of Fiscal Deficit: A cause for

worryworry

,

liability4% Fiscal balance

0%

2%

-

-4%

-

-10%

-8%

1

960

-61

1965

-66

1

970

-71

1975

-76

1

980

-81

1985

-86

1

990

-91

1995

-96

2

000

-01

2005

-06

2006

-07


19/57

10

12Other liabilities

External financing

Market borrowing

8

Bu getary surp us e c t

4

6

2

-2

0

1990

-91

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

006

-07r

007

-08b

-4

2


20/57


21/57

Tax structure uided b the economic and olitical

structures and choices 90s mark a bi chan e in the rowth strate . We

touch upon

Pre-90 tax policy stance Tax Reforms of 90s

Post Millennium tax reform experience

Future reform priorities Likely institutional bindings.


22/57

--

and government current expenditure requirements

Adoption of socialistic pattern means need to

maintain hi h ro ressivitAnti- foreign trade regime high foreign trade


23/57

Anti- orei n trade re ime hi h customs and ex ort

duties Hi h ro ressivit ersonal income tax

High tax rate differentiation corporate tax, union

excise, customs Plethora of exemptions, concessions, deductions, rebates

and preferences

Fe era fisca s aring furt er comp icates Resulting tax complexity, difficult to manage


24/57

PrePre--9090ss Tax Reform under systemicTax Reform under systemic

constraintsconstraintsConstrained due to the nature o the develo ment aradi m onl

mild Reforms

The TEC (1954) first comprehensive attempt after

Kaldor Committee (1956) Expenditure tax and move towards

integrated taxation DTEC (1971) Reduction in income tax rates, and slabs

ITEC (1977) Moves in the direction of VAT introduction at

The LTFP (1985) advocated reduction of customs, rationalizeexcise partially implented.


25/57

The Landmark TaxThe Landmark Taxe ormse orms oo ss


26/57

Broad principles for taxes on income andBroad principles for taxes on income and,,

consumption in the Interim Reportconsumption in the Interim Report

--Part I of the Final report ,Part I of the Final report ,

aa -- a aa aReportReport


27/57

Basic principles underlying theBasic principles underlying the

recommendationsrecommendations

Lowering of marginal tax rates,Lowering of marginal tax rates,,,

Simplifying the tax structure andSimplifying the tax structure andMeasures for more effectiveMeasures for more effective taxtax administrationadministration

Revenue neutralit in the short termRevenue neutralit in the short term

Revenue productivity in the medium and longRevenue productivity in the medium and longterm.term.


28/57

Sim le three-tier ersonal income tax structure

with an entry rate of 20 per cent and a top rate of 40 percent.

Phased reduction of the corporate tax rate to 40 per

cent,A o ition o t e istinction etween wi e y- e an

closely-held companies,

o on o wea ax on a asse s except certain unproductive assets.


29/57

above 200 per cent in 1991) to a range of 15 to

certain agricultural items by 1997-98.

es ruc ur ng o cen ra exc se o cover amanufactures,

Reduction of multiple excist tax rates to three inthe range of 10 to 20 per cent


30/57

Extension o MODVAT credit to all in uts includin

machinery. Selective excises at higher rates on luxury consumption

tems.

Elimination of the numerous prevailing exemptions and

Far-reaching reforms of tax administration, including thede lo ment o modern in ormation technolo and online

linkage of new tax identification numbers to a nationalnetwork.


31/57

In di erent hases b di erent overnments Broad

Thrust kept in tact PIT rates lowered

Import duties cut

Cor orate distinction widel held closel heldabolished.

Single CENVAT rate

Service tax introduced Reduction in the exemptions and incentives


32/57

Further lowering of CENVAT and customs

VAT at the States level

Advisory Group on Tax Policy 2001

The Kelkar Task Force Committee on Direct and


33/57

The Crises and their impact

Rise in Petroleum price and other commodities

The Financial Crisis

Series of monetary and fiscal measures


34/57

Combined Receipts and Disbursements of theCombined Receipts and Disbursements of the

Central and State governments (% of GDP)Central and State governments (% of GDP)1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

1960-61

1970-71

1980-81

1990-91

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07r

2007-08b

I Total Disbursements 15.4 17.7 24.9 26.8 26.1 26.5 26.7 27.1 26.1 25.9 27.0 27.3

A Revenenu expenditure 9.9 12.5 16.5 21.6 23.0 23.5 23.8 23.6 22.1 21.9 22.6 21.9

Interest payments 1.3 1.6 2.1 4.4 5.8 6.1 6.2 6.3 6.0 5.6 5.4 5.2

Defence 1.4 2.3 2.5 1.9 1.8 1.7 1.7 1.6 1.4 1.3 1.2 1.1Subsidies 0.0 0.0 0.6 1.2 1.0 1.1 1.3 1.3 1.1 1.0 1.0 0.9

B Capital expenditure 5.7 4.7 7.7 5.3 5.3 5.5 4.5 5.8 5.7 6.4 7.0 8.0

. . . . . . . . . . . .

A Revenue receipts 10.0 12.8 16.4 17.6 17.0 16.5 17.3 17.9 18.4 19.2 20.3 20.5

(i) Tax 7.9 10.4 13.8 15.4 14.6 13.8 14.5 15.0 15.7 16.4 17.7 18.1

Direc 2.3 2.2 2.3 2.2 3.4 3.2 3.5 4.0 4.4 4.7 5.6 5.7

Indirect 5.5 8.2 11.5 13.6 11.2 10.6 11.1 11.3 11.6 12.2 12.5 11.4

(ii)Nontax 2.2 2.4 2.6 2.2 2.4 2.7 2.8 2.8 2.7 2.8 2.6 2.4

Interest receipts 0.0 0.0 1.2 1.1 0.8 0.7 0.7 0.7 0.6 0.6 0.4 0.4

v en s ec . . . - . . . . . . . . .

Others 1.8 2.2 1.3 1.2 1.0 1.3 1.3 1.3 1.7 1.5 1.4 1.3

BNondebt capitalreceipts

III Gross fiscal defici -5.3 -4.9 -8.4 -9.2 -9.1 -10.0 -9.4 -9.2 -7.6 -6.8 -6.7 -6.8


35/57

20

Other indirect taxes

Service tax

1.21.8

2.1 2.22.4

2.4

2.4

16

18

Sales tax

Union excise

Customs

2.8

2.8

3.23.5

3.4

3.4 3.63.7 3.8

4.0 4.10.0

0.30.2

0.20.3

0.50.7

.

1.5

1.82.0

2.12.2

10

12

t er rect taxes

Corporate tax

Income tax

0.2 0.20.2

0.2 0.1

3.62.3

1.8 1.81.8 1.8

1.82.0 2.1

2.43.8

4.54.3

3.33.2

3.4 3.33.1 3.1

1.0

1.7

0.0

.

1.2

4

6

8

1.0 1.0 1.0 0.9 1.5 1.4 1.5 1.5 1.6 1.71.9 2.00.6

0.8 0.9 0.91.7 1.6 1.9 2.3 2.6

2.8.

0.7 0.4 0.3 0.3

. 0.2 .

1.0 1.1

.

0

2

61

71

81

91

01 2 3 4 5 6

7r b

1960

-

1970

-

1980

-

1990

-

2000

-

2001

-

2002

-

2003

-

2004

-

2005

-

2006

-0

2007

-0


36/57

The drop affecting the flow of tax devolution to thetates


37/57

present recession.

1.140.96 0.93

1.15

0.94 0.88

1.121.04

0.96

- - - - - -

Centre and States combined Central taxes States own taxes


38/57

-- Non-tax revenues of the Centre increased during the 90s,

Non-tax revenues of the States declined. - - -

2.6 2.8 2.7 2.5 2.5 2.5 2.7 2.7

3.0 3.0

2.8 2.5

Centre States Total Nontax Revenue

. . . 2.21.9 1.7

1.0

1.51.3 1.4

1.71.5

1.2 1.1 1.0 1.1

0.6 0.7 0.7%

ofGDP

-0.3 -0.2 -0.2

0.0.

1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8

1990-

1991-

1992-

1993-

1994-

1995-

1996-

1997-

1998-

1999-

2000-

2001-

2002-

2003-

2004-

2005-

2006-

2007-


39/57

--b_1 (Net Contribution of Public Undertakings) b_2 (Interest Receipts)

***

2.5%

3.0%

_ _ ,

b_5 (Social & Community Services) b_6 (Economic Services) !

b_7 (External Grants)

1.5%

2.0%

0.5%

1.0%

-0.5%

0.0%

-75

-76

-81

-86

-91

-96

1re b

e

1974

1975

1980

1985

1990

1995

2000-0

2001-0


40/57

--b_1 (Net Contribution of Public Undertakings) b_2 (Interest Receipts)

2.5%

3.0%

_ _

b_5 (Economic Services) #

1.5%

2.0%

0.5%

1.0%

-0.5%

0.0%

-75

-76

-81

-86

-91

-96

1re b

e

1974

1975

1980

1985

1990

1995

2000-0

2001-0


41/57

Factors Contributing to rising CentralFactors Contributing to rising Central

Government ExpenditureGovernment Expenditure

Increases in defense expenditure

Impact of 5th Pay Commission

s ng er zer oo su s es


42/57

Pattern of Financing the Fiscal Deficit in thePattern of Financing the Fiscal Deficit in the

latelate 9090ss

of GDP in 2000-0110More important is its unsustainabilit (growth of

debt > GDP rowth67

8

fG

DP

2

3

4

5

Pecent

0

1

1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

Market Borrowings (net) Small Savings (net) State Provident Funds (net)

Budget Deficit Others External Financing


43/57

Variations In FiscalVariations In Fiscaler ormance cross tateser ormance cross tates


44/57

Uncertaint and Variabilit in the ederal resource

transfers.

Large electricity/irrigation/transport subsidies

Inadequate generation of own resources

Inefficiencies in expenditure Rising expenditures mainly due to rising wages and

salaries, pensions, subsidies and interest payments.

Constraint on investments ineducation, health, infrastructure, social security and welfare

I d G h Di i A SI d G h Di i A S


45/57

Increased Growth Dispersion Across StatesIncreased Growth Dispersion Across States

(average % per annum) during(average % per annum) during 8080s ands and 9090ssAndhra Pradesh

6

8

Bihar

GujaratUttar Pradesh

West Bengal

2

4

HaryanaTamil Nadu

0

KarnatakaRajasthan

KeralaPunjab

80s

90s

Madhya Pradesh

Maharashtra

Orissa

T d i h Fi l D fi i /T d i h Fi l D fi i /GSDPGSDP i ii i


46/57

Trends in the Fiscal Deficit/Trends in the Fiscal Deficit/GSDPGSDP ratio inratio in

1414 Major StatesMajor StatesAndhra Pradesh

5%

6%Bihar


West Bengal

1%

2%

3%

HaryanaTamil Nadu

0%

KarnatakaRajasthan

KeralaPunjab1995

2000

Madhya Pradesh

Maharashtra

Orissa

P iP i ii fi l d fi i /fi l d fi i /GSDPGSDP ii


47/57

PercapitaPercapita incomeincome vsvs fiscal deficit/fiscal deficit/GSDPGSDP ratioratio

inin 1414 major States of Indiamajor States of India12

10

BiharWest Bengal

8

it/G

SDP(%)

a ast an

Uttar Pradesh

Gujarat

4Fiscaldefic

Maharashtra

Andhra Pradesh

KarnatakaKerala

Madhya P radesh

Tamil Nadu

Haryana

2

0

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

Percapita income (INR)

O / T t l p dit & Fi lO / T t l p dit & Fi l


48/57

Own revenue/ Total expenditure & FiscalOwn revenue/ Total expenditure & Fiscal

deficitdeficit GSDPGSDP inin 1414 major States in Indiamajor States in India70

60

)

Haryana

MaharashtraKarnataka

Tamil Nadu Gujarat

Punjab

40

tal

expenditure(

Andhra PradeshRajasthan

Madhya Pradesh

20

30

wnresources/T

Bihar

Orissa

West Bengal

Uttar Pradesh

10

0

0 2 4 6 8 10 12

Fiscal deficit/ GSDP %

Sh f d l p t l p dit i t t lSh f d l p t l p dit i t t l


49/57

Share of developmental expenditure in total:Share of developmental expenditure in total:

The Shrinking Trend in the inThe Shrinking Trend in the in 1414 major Statesmajor StatesAndhra Pradesh

70%

75%

ar


es enga

55%

60%

HaryanaTamil Nadu

KarnatakaRajasthan

Late 80s

KeralaPunjab

Early 90sLate 90s

a ya ra es

Maharashtra

r ssa


50/57

States Efforts to overcomeStates Efforts to overcomesca constra ntssca constra nts

Fiscal restructuring at the States level to focusFiscal restructuring at the States level to focus


51/57

Fiscal restructuring at the States level to focusFiscal restructuring at the States level to focus

onon Revenue mobilization, through better tax collection and

Revising user charges specially for power, water and transport Better expenditure management

or example, downsizing the Government by abolition freezing ofposts

Enhance expenditure efficiency Compressing non-Plan revenue expenditures

PSU reforms: Closure/ disinvestment

Sector reforms: Competition/ Regulation


52/57


53/57

state level VAT

earliest.


54/57

- a a

wage bill,

finite duration, making them transparent and proper

tar etin . Review user charges in

agriculture, irrigation, industries, power and transport.

Use the proceeds of disinvestment in public enterprise toamortize public debt.


55/57


56/57

Strategy for the Next Decade Considerations foreterm n ng t e rect ons o

Reforms, EPW, September 4. 2) Bagchi, Amaresh et al (1994): Reform of

Options, National Institute of Public Finance and, .

3) Acharya, Shankar (2005) Thirty Years of


57/57

()Subsidies And Salaries: Issues In Theestructur ng overnment xpen ture n

India 8) Sarma E A S and Sarma J V M (2002)

development in India, Swedish Embassy, New.

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