Current Developments in the Indian Economy with s.r. to selected

Report
Current Developments in the Indian
Economy with special reference to
selected issues in Public Finance
Prof. CHARAN WADHVA
E-mail: [email protected]
ICAI, New Delhi: May 14, 2013
1
Indian Economy: Selected issues in
Public Finance
• Organization of this presentation:
• Module 1: Current developments in the Indian
economy and Public Finance (Fiscal Health):
Pivotal Role of Fiscal Policy (in conjunction
with other instruments of Economic Policy) in
achieving Major Objectives of National
Economic Policy: Fiscal Marksmanship Quality
• Module 2: Selected Focus on Public Finance
issues and Accountability of the Govt. of India
2
Indian Economy: Selected issues in
Public Finance
• MODULE 1 : Current Developments in the
Indian Economy and its fiscal health with
special reference to the role of Fiscal Policy ( in
conjunction with other instruments of
Government’s Economic Policies/Public Policy)
• Three major areas of Economic Policy:
• Fiscal Policy;
• Monetary Policy; and
• Exchange Rate Policy
3
Indian Economy: Selected Issues in
Public Finance
• Comparative Advantage of Effectiveness of the three areas
of National Economic Policy:
• Fiscal Policy relating to the health of the public finances
scores over Monetary Policy and Exchange Rate Policy in
more effectively achieving the following policy objectives :
(i) Accelerating Growth rate; Removing supply side
constraints/bottlenecks; Counter-cyclical macro-economic
stabilization; (ii) Employment generation; (iii) Social
justice/reduction of inequalities in income; consumption;
wealth; and regional disparities; and (iv)promoting
“Inclusive growth” benefiting the poorer and deprived
people and their “social empowerment” through Human
Resource Development (improving quality of life reflected
in the Human Development Index).
4
Indian Economy: Selected Issues in
Public Finance
• Monetary Policy is more effective in controlling
inflation through interest rate policy, especially
under demand pull inflation caused by excess
liquidity (money supply).
• Exchange rate Policy is more effective in achieving
the Balance of Payments objectives relating to
the external sector transactions of the economy
like exports; imports; remittances; foreign
investments (capital flows inwards and outwards)
5
Indian Economy: Selected Issues in
Public Finance
•
•
•
•
•
Three major components of Fiscal Policy:
1. Taxation and Subsidies Policies;
2. Public Expenditure Policies; and
3. Public Debt: Internal ; External Debt (serious)
Through each of these three areas, Fiscal policies
have impact on crucial economic indicators of the
current and future economic health and
international sovereign credit ratings of the
concerned country’s economy.
6
Indian Economy: Selected Issues in
Public Finance
• Illustrative use of instruments of Fiscal Policy
for achieving selected economic objectives by
influencing both macro-economic and
business environment for decision makers in:
(i) Household sector; (ii) Business sector and
Not for Profit organizations; (iii) All levels of
Government ; and (iv) Foreign entities doing
business with the concerned country.
7
Indian Economy: Selected issues in
Public Finance
• Examples of Use of Fiscal Policy for achieving selected
objectives:
• For promoting economic growth:
• (i) Tax incentives for increasing “Savings”;
• (ii) Tax saving policies for promoting investment by
business entities/entrepreneurs
• (iii) Public Investment (Public expenditure) in
infrastructure for removing supply side constraints to
growth and inflation; Public enterprises; social services
like health; education.
• (iv) Avoiding excessive government borrowing which
can “crowd out” private investment from the market
8
Indian Economy: Selected issues in
Public Finance
• Examples of use of Fiscal Policy for achieving
macro-economic counter-cyclical stabilization:
• Provision of Fiscal stimulus Packages through
Public Expenditure and Tax holidays/reduction of
tax liability for higher investment by businesses
(generating fiscal deficits) in recessionary phase.
• Raising taxes in times of boom to generate fiscal
surplus for creating reserves for financing
stimulus packages in times of recession
9
Indian economy: Selected issues in
Public Finance
• Examples of use of Fiscal Policy for promoting
“Inclusive Growth”:
• (i) Public Investment in Employment generation
schemes (like MNREGA) through provisioning of
training/skill development and capital/assets at
affordable lower cost with fair opportunities for
repayment of loans for productive purposes.
• (ii) Public Investment in providing insurance
policies to the poorer sections at affordable cost.
10
Indian Economy: Selected issues in
Public Finance
• Fiscal “Marksmanship”: This term is used by the
Government in the Economic Survey(s) to denote the
quality of the management of the budgetary process in
the limited sense of ensuring minimum divergence
between Budgeted estimates and the Actual outcomes
(Revised estimates) of the resource allocations
• Government of India’s welcome initiative to shift focus
from financial “Outlays” to physically measurable
“Outcomes” announced in the 2005-06 Budget speech
by then Finance Minister Mr. P. Chidambaram.
• Fiscal Marksmanship needs to incorporate “Outcomes”
approach outlined in the Budget speech of 28-02-2005
11
Indian Economy: Selected Issues in
Public Finance
• Classical “Cannons” of Public Finance Policy:
• Selected Principles of ideal “Taxation Policy”:
• (i) Progressive Taxation according to
“Capacity/Ability” to pay; (ii) Chanakya Neeti:
The King (Government) ought to tax its
subjects in the manner in which the bee
collects “honey” from flowers without
adversely affecting their quality/inner strength
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Indian Economy: Selected issues in
Public Finance
• Principles of ideal Public Expenditure for developing
countries like India:
• Efficiency in Public Expenditure to fully reach
beneficiaries without any undesirable “leakages”;
favors/ corruption etc. with time bound delivery.
• Tailoring Public Expenditure (including social sector
schemes) to Public Revenues/Resources in a prudent
manner so as to avoid “Revenue Deficits” and to avoid
at all costs unsustainable “Fiscal Deficits” as a
proportion of Gross Domestic Product with several
adverse effects on the current and the future health of
the economy (explained below):
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Indian Economy: Selected Issues in
Public Finance
• The notable major adverse effects of “Unsustainably high
Fiscal Deficit as a proportion of GDP”:
• 1. Lowering prospects for sustainable high growth
• 2. Adding to inflationary pressures which beyond a socially
acceptable level act as the most regressive tax on the fixed
income and poor and vulnerable sections of the society.
• 3. Spilling over to unsustainable Current Account
Deficit/BOP problems forcing depreciation of the currency
and taking last recourse to IMF borrowings with austerity
conditionalities lowering growth/worsening unemployment
• 4. Reducing inflows of foreign investment and remittances
• 5. Lowering international credit rating for the country
making external borrowings costlier.
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Indian Economy: Selected issues in
Public Finance
• Touchstone of Prudent Fiscal Marksmanship:
• Transparency and Accountability in Fiscal Policy and
public delivery systems to achieve “maximum good of
the maximum people” ( for “Inclusive Growth” and
Human Development) and ensuring:
• (i) Higher growth with low inflation;
• (ii) Sustainable Balance of Payments;
• (iii) Sustainable developmt.(Ecological balance)
• (iv) Inter-generational and gender equity.
• The art of striking socially acceptable BALANCE for
delivering good governance in a true democracy.
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Indian Economy: Selected issues in
Public Finance
• INDIA GROWTH STORY: Rise and Fall:
• India attracted world wide attention as a fast rising emerging economy,
next only to China among the BRICS (Brazil, Russia, India, China and South
Africa) and as an attractive destination for Foreign Direct Investment (FDI)
for achieving avg. 9.0 % per annum growth rate during the years 2003-08
but growth rate has substantially decelerated since 2011-12 (lowest
growth estmtd. by C.S.O. for 2012-13 at 5.0 % during last decade.
• Uncomfortably high inflation in last 3 years: Highest CPI inflation among
BRICS countries Dec. 2012 over Dec 2011: China: 5.84%; India: 11.17%;
Russia: 6.54%; S. Africa: 5.47%.
• Uncontrolled high inflation creating macro-economic and social
distortions: Main causes: (i) Unsustainable high Fiscal deficit due to
excessive public expenditure on social welfare schemes; (ii) Food; fuel; and
wage push inflation and (ii) Supply side bottlenecks/constraints.
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Indian Economy: Selected Issues in
Public Finance
•
•
•
•
•
•
•
India Recent Growth Story: Adding dynamism and attracting global attention: but
losing shine in recent years:
Years GDP growth rate real (%)
S/Y(%) I/Y %)
Forgn Inv/Y %
2005-06
9.5
2006-07
9.6
34.6 35.7
1.1
2007-08
9.3
36.8 38.1
1.3
2008-09
6. 7
32.0
34.3
2.3
2009-10
8.6
33.8 36.5
2.8
2010-11
9.3
34.0
36.8
2.8
2011-12
6.2
30.8
35.0
2012-13 (<7.6 est.)
5.0
N.A.
N.A.
FY12-13 % change (prev. yr.): Agl: 1.8%(3.6);Ind.0.7%(2.9); Srvces: 6.6%(8.2)
FY11/12/13: % change: Inv: 14/4.1/5.1; Consumption: 8.1/8.1/4.1
•
•
•
Source: Govt. Of India, Economic Survey 2009-10 , 2011-12 and 2012-13
Note: Consequence: Rising Incremental Capital-Output Ratio (ICOR) in lower growth years.
Tainted higher growth under permissive corrput regime? : Increasing role of black money??
•
•
•
•
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Indian Economy: Selected issues in
Public Finance
•
Major Driving Forces of India’s Recent Higher Growth:
•
Economic Reforms since 1991 (uneven contents and pace for political economy reasons)
•
•
•
•
Big Rise in Savings & Investment Rates; contribution of Foreign Investment.
Changing Composition of GDP: Shift to faster growing tertiary & secondary sectors;
Likely DEMOGRAPHIC DIVIDEND for raising future growth rate
Education and Skill development through planned development and Public Sector institutions of
higher learning with foundations in Science & Technology and R&D like: IISc; CSIR; IITs/ IIMs:
Building blocks for Capital Goods industries and Knowledge Economy: IT and IT-es; Pharm;
Biotech etc.. utilizing the dynamism of the private sector and leadership of selected PSUs like the
HMT; BHEL; & NTPC in building k-goods industries and others in building infrastructure.
Dynamism of Private Enterprise supported by Liberalization; Globalization; and reforms; and
expanding richer middle class and rural consumption exp
Participation and increasing Integration of Indian economy with global market economy: Look
East; FTAs; Rise of Indian Multinational Enterprises and acquisitons overseas (like Tatas acquiring
Corus and JLR and PIOs like Lakhsmi Mittal aquiring Arcer(Arcer-Mittal).
•
•
• MAJOR THREATS TO GOWTH: List Major (A) “Domestic Risks”; (B)“External Risks”
(A): Contd. Inv. Slowdown; Contd. High volatile inflation; Populist Fiscal expansion; NPAs of PSU banks
Note: Role of Complacency/Ignoring weakening eeconomy Signals; Policy Paralysis of the
Government and lack of further necessary economic reforms under coalition Government form.
(B): US slow growth/Fiscal cliff; No early Euro-zone revival; World Oil price movemts; Currency wars?
Continuing unfavorable external environment.
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Indian Economy: Selected issues in
Public Finance
World Output and trade: Projections: P. (% change)
Group/Country
2011 2012 2013 P. 2014 P.
Advanced economies 3.9 3.2 3.5
4.1
1. U.S.A.
1.6 1.3 1.4
2.2
2. Euro Area
1.4 -0.4 -0.2
1.0
Emerging & Devg. Econ. 6.3 5.1 5.5
5.9
1. China
9.3 7.8 8.2
8.5
2. India
7.9 4.5 5.9
6.4
World Trade(g&s) volume 5.9 2.8 3.8
5.5
Source: IMF: World Economic Outlook, January 2013
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Indian Economy: Selected issues in
Public Finance
• To tackle their economic and financial crises, USA and the Euro
Zone concerned countries (along with other affected developing
countries including India) have resorted to Keynsian formula of
fiscal stimulus packages with very high public expenditure and
monetary easing and inducing exchange rate depreciation. These
measures have led to sovereign debt crisis in USA and several Euro
Zone countries and to potential inflation due to excess liquidity and
impending threats of creating asset bubbles (property/other assets)
• USA and the EU in particular have been exerting pressure on China
to revalue its significantly “undervalued” currency Yuan (Renminbi)
as a step towards rebalancing global growth with stability. China is
unwilling to drastically revalue its currency or to quickly give up its
link to US$ in favor of floating exchange rate of Yuan.
• Meanwhile fears of “currency wars” (competitive devaluations) are
on the rise since latest Japan government interventions to stop Yen
appreciation & ensure actual depreciation of yen/$ to spur growth.
20
Indian Economy: Selected issues in
Public Finance
•
•
An objective and Realistic Assessment of India’s worsening economic performance
since 2008:
We should not exaggerate the adverse impact of global slowdown since 2008.
Indian economy started slowing down even before eruption of Lehman bankruptcy
in USA in 2008. Examine the major role played by India’s domestic policy
paralysis (deferring new economic reforms; infra constraints; over-spending on
social welfare programs; and obstacles created in India’s growth due to lack of
clearances to industrial projects in mining; infrastructure projects (esp. roads);
delays in approved government project expenditures; high interest rate regime
due to compulsions to control inflation; corruption/scams increasingly noticed:2G;
C-W Games; mining/coal; unwise proposed retrospective GAAR (General Anti
Avoidance Rules introduced in the Budget for 2012-13 (now deferred for 3 years);
and obstacles created both by coalition partners ofUPA-2 ;and the opposition
parties: There is a return of License permit raj in required environmental
clearances; adverse effect on investment climate, both domestic and FDI. : Case
Study: POSCO’s $ 12 billion investment in steel project in Orissa awaiting all
clearances for more than 7 years: Other examples of stalled investment projects.
21
Indian Economy: Selected issues in
Public Finance
• The continuous eruption of corruption based
business and other scandals in the Indian
governance system involving certain Ministers;
influential and powerful politicians in power in
Centre and the States; and non-cordial CentreState economic relations have led bureaucrats
and the Ministers not making quick decisions in
the interests of reviving the Indian economic
growth quickly and believing that they are doing
their best under their constraints has not helped
solving the problems .
22
Indian Economy: Selected issues in
Public Finance
• New Policy Initiatives taken by new Finance Minister Mr. P.
Chidambaram to revive growth; improve investment sentiment: FDI
• Recognizing the gravity of the deteriorating economic conditions
affecting growth and investment climate esp. FDI, Chidambaram has
activated government in 2012 to take several new policy initiatives to
revive growth and to improve its electoral prospects.
• These include, among others: (i) Acceptance of reduction of Fiscal deficit
proposed by Kelkar committee (Diesel price hike ); (ii) Deferment of
GARR up to March 2015; (iii) Liberalization of FDI in multi-brand retail;
and (iv) Road shows in selected countries to attract FDI on liberal terms;
(iv) A pro-investment and pro-growth Budget formulated for 2013-14.
• Recognizing that a beginning has been made to improve economic
Performance, the big question is on the effective implementation of the
policy pronouncements and response of the investors and undertaking
further required economic/governance reforms or their wait and watch
attitude towards investment decisions pending results of 2014 elections?
23
Indian Economy: Selected issues in
Public Finance
• Suggested Readings:
• Govt. of India, Economic Survey 2012-13
• International Monetary Fund, World Economic
Outlook, January 2013.
• Jagdish BHAGWATI and Arvind PANAGARIYA:
India: Emerging Giant, Oxford University Press,
2005. (See also full Bibliography)
• Arvind PANAGARIYA (Co-author), India: Tryst with
Destiny, 5 volumes, Same Publishers (OUP?),
2012 (See also full Bibliography)
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Indian Economy: Selected issues in
Public Finance
• MODULE 2:
SELECTED FOCUS ON PUBLIC FINANCE ISSUES
AND ACCOUNTABILITY OF THE GOVERNMENT
OF INDIA:
1. Government’s Accountability for fiscal
prudence and improved fiscal marksmanship
2. Fiscal Responsibility and Budget
Management Act and Revised Roadmap for
fiscal consolidation
25
Indian Economy: Selected issues in
Public Finance
• 3. The Conceptual Shift from Fiscal “ Outlays”
to Fiscal “Outcomes” in fiscal management.
• 4. The setting up of “Independent Evaluation
Office” (IEO).
• 5. The most significant reform move towards
launching all-India “Goods and Services Tax”
under our Federal structure sharing tax
revenues by the Union with the States.
26
Indian Economy: Selected issues in
Public Finance
• 6. Reforming Direct Taxes by the proposed
“Direct Taxes Code” (DTC).
• 7. Fiscal Implications of eliminating import
tariffs by extensions of India’s Free Trade
Areas (FTAs); Comprehensive Economic
Cooperation Agreements (CECAs); and
Comprehensive Economic Partnership
Agreements (CEPAs).
27
Indian Economy: Selected issues in
Public Finance
• 8. Fiscal Policy for controlling misuse of the socalled “Mauritius Route” (“Round Tripping” of
Indian Investment as FDI) and non-resident
foreign entities under Bilateral Tax Treaties).
• 9. Fiscal Policy for controlling “Black Money”.
• 10. Fiscal Policy for bringing back illegally
stashed Indian money in foreign “Tax Havens”.
• 11. Flagging Other issues in Fiscal Policy.
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Indian Economy: Selected issues in
Public Finance
• 1. Government’s Accountability for fiscal prudence and
improving fiscal marksmanship. Crucial Question: Who will
regulate government for “government failures” and with
what corrective mechanism and penalties for accountable
Ministers/officials operating the system of governance ?
• Transparency and Accountability are the prime
responsibilities of the fiscal authority in the Govt.. The
present system has serious weaknesses. Need for changing
the “mindset” of concerned decision makers in governance.
• Catalytic role of Public Action: Bhagidari in governance .
• The concept/quality of “Fiscal Marksmanship” as
articulated in the latest Economic Survey is “narrow” in its
coverage and needs broadening.
29
Indian Economy: Selected issues in
Public Finance
• 2. Fiscal Responsibility and Budget Management
(FRBM) Act and the Revised Roadmap for Fiscal
Consolidation (as per Vijay Kelkar chaired Committee).
• While there had been some notable progress towards
fiscal consolidation in the first few years of the
enactment of the FRBM Act, the slippages have been
generally widening in the proportion of Fiscal Deficit to
GDP in India since the global financial crisis that
originated from Lehman bankruptcy in USA in 2008.
The Reasons.
• Financial Engineering: New concept: Effective Rev. Dfct.
30
Indian Economy: Selected issues in
Public Finance: Deficits of “Central”
Govt. as % of GDP
Year
1.Rev. Dfct.
2. Fiscal Dfct.
Prmry . deficit
½ as %
2003-04
3.5
4.3
0.0
79.7
2004-05
2.4
3.9
0.0
62.3
2005-06
2.5
4.0
0.4
63.0
2006-07
1.9
3.3
-0.2
56.3
2007-08
1.1
2.5
-0.9
41.4
2008-09
4.5
6.0
2.6
75.2
31
Indian Economy: Selected issues in
Public Finance: Deficits of “Central”
Govt. as % of G.D.P.
2009-10
5.2
6.5
3.2
81.0
2010-11
3.2
4.8
1.8
67.5
2011-12 (B.E.)
3.4
4.6
1.6
74.4
2011-12 (P)
4.3
5.7
2.6
75.5
2012-13 (B.E.)
3.5
5.1
1.9
68.2
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Indian Economy: Selected Issues in
Public Finance
• Structural Problems/Current unsustainable High Twin
Deficits (High Fiscal Deficit and more seriously High Current
Account Deficit) in Public Finances of India: Threat:
downgrade crdt. Rating.
• Despite “Tax Buoyancy”, higher Expenditure Buoyancy.
• Revenue deficits (“undesirable”) growing and increasing as
proportion of Gross Fiscal Deficit in several years.
• Current levels of unsustainably Fiscal Deficit accentuating
Inflationary pressures under lower growth profile leaving
little elbow room for the RBI to lower key interest rates for
supporting higher growth possibilities.
• Foreign Inv. flows affecting Sensex/Exch. Rate movements
depicting volatility
33
Indian Economy: Selected issues in
Public Finance
• The current Finance Minister Mr. P. Chidambaram has
shown serious interest in controlling Fiscal Deficit as a
proportion of GDP in 2012-13 by bringing it to R.E. of 5.2%
against target of 5.3% by mostly curtailing or deferring plan
expenditure (“ anti-growth”?). He has also given signals to
foreign investors and international credit rating agencies of
his commitment to adhere to the revised roadmap of fiscal
consolidation up to 2015 recommended by the Kelkar
Committee.
• Efforts are being made to reduce CAD by policy
liberalization to attract inward inflows of FDI and FII as
prospects for raising export growth currently are low.
• Forthcoming 2014 General Elections may raise Fiscal Dfct.
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Indian Economy: Selected issues in
Public Finance
• 3. Shift from Fiscal “Outlays” to “Outcomes”
• Announced launching of this conceptual shift in fiscal
management and budget orientation in the Budget
speech of the then Finance Minister Mr. P.
Chidambaram on 28 Feb. 2005.
• “outcome Budgets” process launched with the help of
Planning Commission. Guidelines issued.
• The first “Outcome Budget” for 2005-06 was presented
on 25 August 2005 and are being presented thereafter.
• Purposeful initiative envisaging participation by the
civil society: Problems have come in implementation
by the concerned Ministries
35
Indian Economy: Selected issues in
Public Finance
• Anand P. Gupta after studying the “Outcome
Budgets” (OB) and conducting case studies
concludes that the “OB has failed”. He has
opined that the guidelines do not go far
enough in ensuring the achievement of the
envisaged objectives of such budgets. There is
both a capacity gap in the concerned
bureaucrats in several Ministries as also lack
of effective interest in improving the quality of
such outcome budgets. So, “OB has failed”.
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Indian Economy: Selected issues in
Public Finance
• The apparent failure of OB initiative has been
explained by Mr. Chidambaram as follows:
• “the Government of India has substantially
expanded outlays in sectors like irrigation,
education and health, but kept on following the
existing ‘tried and tested’ system, as a result of
which the outcome of these enhanced outlays is
not visible at the ground level” (As reported in
the Times of India dated December 3, 2007).
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Indian Economy: Selected issues in
Public Finance
• 4. The setting up of “Independent Evaluation Office” (IEO).
• Allied to the conceptual innovation of launching “Outcome
Budgets”, the then Finance Minister, Mr. Pranab Mukherjee
in his speech for the Budget 2010-11 announced the
setting up of an Independent Evaluation Office (IEO).
• The IEO was tasked to undertake “impartial and objective
assessments of the various public programmes and
improve the effectiveness of the public interventions. It has
been decided that it would be an independent entity under
a Governing Board chaired by the Deputy Chairman,
Planning Commission. The IEO would evaluate the impact
of the flagship programmes and place the findings in the
public domain. It would be funded by the Planning
Commission”.
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Indian Economy: Selected issues in
Public Finance
• As Anand Gupta has observed, the IEO, welcome and
needed intervention, is yet to be set up? However, Gupta is
skeptical on the likelihoood of the IEO to fulfill its
designated role. And for the same reasons too. The lack of
culture in our system of governance and the mindset of
those who wield power and are the decision makers is the
biggest obstacle to make the IEO effective. The concerned
decision makers in their heart do not wish to be evaluated.
They are unwilling to provide whole-hearted cooperation
to such unwelcome interventions in their entrenched way
of work. The political will and the effective leadership in
our governance system are absent. Who will bell the cat?
• Some critics also question the “independence” of the IEO
on ground reality.
39
Indian Economy: Selected issues in
Public Finance
• 5. Replacing existing system of indirect taxes on
the domestically produced goods and services by
the All India Goods and Services Tax (GST) as per
international norms modified to suit the Indian
federal structure under our Constitution.
• The GST is the single most important reform in
the Indian Public Finance that will transform the
presently fragmented Indian market to a truly
functioning “Single common market”. This
reform alone, when effected, has the potential to
generate an additional 2.0 to 3.0 per cent of GDP.
40
Indian Economy: Selected issues in
Public Finance
• The proposed GST has been under negotiation between the Union
Government and the State Governments for last several years.
Since it plans to change the entrenched existing complex system of
indirect taxation of domestically produced goods and services and
involves the consensus of the Union Government and all State
Governments (currently ruled by different political parties or
coalition governments), getting complete consensus on this
complex issue, requiring some Constitutional Amendments, is
proving to be a more difficult task than imagined earlier and taking
more time.
• Despite, the Union Government making some concessions to allay
the fears of the concerned State governments on the likely loss of
revenues to them from some proposals, efforts are continuing to so
re-design the structure of the GST that consensus will emerge fairly
soon that will make it acceptable to all parties involved.
41
Indian Economy: Selected issues in
Public Finance
• 6. Reforming the current Direct Taxes regime by the
proposed “Direct Taxes Code” (DTC).
• The proposed “Direct Taxes Code” (DTC) replacing the
provisions of the Income Tax Act of 1951 as modified from
time to time has been there with the nation for some years
now. The DTC aims to rationalize the system of direct taxes
to bring it to the prevailing international standards for
delivering a better system meeting international
benchmarks. It is also designed to remove certain
anomalies in the existing provisions of the Income Tax.
42
Indian Economy: Selected issues in
Public Finance
• The draft of the DTC has already gone through
several revisions. These have been agreed to by
the concerned stake holders. However, there are
still some unresolved issues under “Exempt,
Exempt, Exempt” at three stages of certain types
of incomes from assets (like the Public Provident
Fund) which need to be resolved for the final
adoption of the DTC.
• It is difficult to explain the further delay in striking
full agreement on a welcome reform under DTC.
43
Indian Economy: Selected issues in
Public Finance
• 7. Fiscal Implications of eliminating import tariffs by
extensions of India’s Bilateral and Regional “Free Trade
Areas” and related arrangements to reap advantages of
closer integration with the target country/countries.
India has emerged as a more confident economic power to
shed fears of further reduction in tariff rates on imports
and from the countries with whom it has signed or is in the
process of signing agreements involving free trade area in
goods and/or services (FTAs); comprehensive economic
cooperation agreements (CECAs); and comprehensive
economic partnership agreements (CEPAs).
44
Indian Economy: Selected issues in
Public Finance
• 8. Discussion on:
• Fiscal Policy for controlling misuse of the socalled “Mauritius Route” (e.g. for “Round
Tripping” of Indian Investors disguised as Foreign
Direct Investment) and misuse by the nonfunctional foreign entities claiming to be
residents in Mauritius for claiming tax exemption
benefits under bilateral treaty.
• Some of the contentious issues relating to FDI
using the Mauritius route have now been
resolved by mutual India-Mauritius agreement.
45
Indian Economy: Selected issues in
Public Finance
• Issues flagged for Discussion(time permitting):
• 9. Fiscal Policy for controlling “Black Money”
• 10. Fiscal Policy for bringing back to India
illegally stashed Indian money in foreign “tax
havens” (like Switzerland; the Bahamas; etc.).
• 11. Any Other related issues to be raised by
the viewers/listners.
46
Indian Economy: Selected issues in
Public Finance
• Selected References to Module-2:
• 1. Government of India, Economic Survey 2012-13.
• 2. Anand P. Gupta, “Evaluation of Governance: A Study
of the Govrnment of India’s Outcome Budget”, Journal
of Development Effectiveness December 2010, pp. 566573 (Routledge: Taylor & Francis Group Publication).
• Vinod Vyasulu, Reflections on Budgets and Governance
of India, New Delhi: Centre for Budget and Governance
Accountability, July 2012.
• Mahesh Purohit, Book on Goods and Servies Tax.
__________________________________________
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