public finnce
TRANSCRIPT
-
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
-
7/29/2019 Public Finnce
2/57
Review of the fiscal developments in India
focusing on the policy changes
-
7/29/2019 Public Finnce
3/57
Land mark Reforms of 90s, paradigm change
Trends in the Fiscal Components
The Unfinished Agenda and likely Institutional
hurdles.
-
7/29/2019 Public Finnce
4/57
PublicPublic Finance ManagementFinance Managementeve opment trategyeve opment trategy
-
7/29/2019 Public Finnce
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
.
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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.
-
7/29/2019 Public Finnce
9/57
The Landmark ReformsThe Landmark Reforms ofofss
-
7/29/2019 Public Finnce
10/57
--
from IMF
Trade and Industrial liberalization
Crisis catalytic for a paradigm shift in the tax
o cy
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
13/57
-
Growth in industrial investment touches > 50%
Export growth touches >20%
India the second fastest growing economy today .
-
7/29/2019 Public Finnce
14/57
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
20/57
-
7/29/2019 Public Finnce
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.
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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.
-
7/29/2019 Public Finnce
25/57
The Landmark TaxThe Landmark Taxe ormse orms oo ss
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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.
-
7/29/2019 Public Finnce
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.
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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.
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
33/57
The Crises and their impact
Rise in Petroleum price and other commodities
The Financial Crisis
Series of monetary and fiscal measures
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
36/57
The drop affecting the flow of tax devolution to thetates
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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-
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
43/57
Variations In FiscalVariations In Fiscaler ormance cross tateser ormance cross tates
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
46/57
Trends in the Fiscal Deficit/Trends in the Fiscal Deficit/GSDPGSDP ratio inratio in
1414 Major StatesMajor StatesAndhra Pradesh
5%
6%Bihar
GujaratUttar Pradesh
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
GujaratUttar Pradesh
es enga
55%
60%
HaryanaTamil Nadu
KarnatakaRajasthan
Late 80s
KeralaPunjab
Early 90sLate 90s
a ya ra es
Maharashtra
r ssa
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
52/57
-
7/29/2019 Public Finnce
53/57
state level VAT
earliest.
-
7/29/2019 Public Finnce
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.
-
7/29/2019 Public Finnce
55/57
-
7/29/2019 Public Finnce
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
-
7/29/2019 Public Finnce
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.