ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

D K SrivastavaSubscribe to D K Srivastava

Underlying Drivers of India’s Potential Growth

Global growth is expected to be tepid in the medium term and India will have to depend on domestic growth drivers. In order to better understand the future, a new methodological framework is proposed to estimate potential growth in India with a focus on capacity output till 2029–30. The domestic savings rate was identified as the most potent growth-augmenting driver.

Themes from a Life in Public Finance

Public Economics: Theory and Policy: Essays in Honor of Amaresh Bagchi edited by M Govinda Rao and Mihir Rakshit (New Delhi: Sage Publications), 2011; pp 364, Rs 795.

Vertical Sharing and Horizontal Distribution of Resources: The Equity and Efficiency Trade-off

Examining the key recommendations of the Thirteenth Finance Commission that have a bearing on vertical and horizontal transfers aimed at correcting imbalances in the system, this paper takes a critical look at these two aspects as well as the grants given to states. It also reviews the overall design of transfers by decomposing these to identify their vertical and equalising content, pointing to problems that could arise in the long run. Yet it concedes that despite several drawbacks, the commission has arrived at a mechanism for transfers that includes some desirable features.

Reforming India's Fiscal Transfer System: Resolving Vertical and Horizontal Imbalances

Two central problems in a fiscal transfer system relate to resolving vertical and horizontal imbalances. This paper looks at the methodological background of fiscal transfers followed by recent finance commissions, particularly the Twelfth Finance Commission. It is noted that in India, there is long-term stability in the share of states after transfers in the combined centre and state revenues. This stability depends on linking the share of states in the transfers, particularly tax devolution, with the difference in the buoyancies of central and state taxes. In the context of horizontal imbalance, it is argued that some of the recent finance commissions have implicitly followed an axiomatic approach to tax devolution and brought in some normative elements in determining grants. In spite of large differences in fiscal capacities, a high degree of equalisation has been achieved. It is shown that for tfc recommended transfers, nearly 88 per cent of the needed equalisation was achieved while devoting 50 per cent of transfers to resolving vertical imbalance. A methodology is also developed to determine the weights of the vertical and equalising components of transfers through devolution.

Rural Poverty in Madhya Pradesh

This study examines the incidence of rural poverty in Madhya Pradesh based on a field survey of 2,208 rural households spread over 11 districts. The issues of poverty are examined in a multidimensional perspective with emphasis given to issues related to access to publically provided services like health and education. There is a need for greater and more effective fiscal intervention for poverty reduction and employment generation. The implementation of the National Rural Employment Guarantee Act may prove to be an effective intervention in reducing poverty in rural areas of the state.

FRBM Act and Eleventh Plan Approach Paper

This article argues that the time phasing problem highlighted in the approach paper to the Eleventh Plan is the outcome of specific assumptions used in the projections, which are not always justified. Following the fiscal correction path releases resources for the revenue plan through falling interest payments and increases capital expenditure by allowing the permissible fiscal deficit to be fully used for that purpose. It gives the required balance in resources available for the revenue plan and capital plan. The profiles of saving and investment make a growth rate of 8.5 to 9 per cent achievable within the plan period. These would be possible by adhering to the fiscal responsibility targets and not by compromising on them.

Fiscal Deficits and Government Debt

This paper examines the long-term profile of the fiscal deficit and debt relative to GDP in India, with a view to analysing debt-deficit sustainability issues, along with relevant considerations to determine a suitable medium- and short-term fiscal policy stance. It is argued that large structural primary deficits and interest payments relative to GDP have had an adverse effect on growth in recent years. There is a clear need to bring down the combined debt-GDP ratio from its current level, which is in excess of 80 per cent of GDP. The process of adjustment can be considered in two phases: adjustment and stabilisation. In the adjustment phase, the fiscal deficit should be reduced in each successive year until the revenue deficit, and correspondingly, government dissaving, is eliminated. In the second phase, the fiscal deficit could be stabilised at 6 per cent of GDP and the debt-GDP ratio would eventually stabilise at 56 per cent.

Fiscal Transfers in Australia

This paper examines the working of Australia's fiscal transfer system in the context of its long-term evolution, paying particular attention to salient changes that have occurred since the introduction of a comprehensive Goods and Services Tax (GST). The GST has served to increase the vertical imbalance in the system, which was high even prior to this change, by placing more revenue resources with the Commonwealth Government in Australia. In spite of a high degree of expenditure centralisation, considerable emphasis is placed in Australia on achieving horizontal fiscal equalisation through an elaborate mechanism of equalisation transfers, which looks into both revenue and expenditure sides of the state budgets and calculates revenue and expenditure 'disabilities' that account for departures from a pure equal per capita distribution of the shareable amounts. This paper looks at the equity and efficiency implications of the Australian equalisation transfers and considers its relevance for the Indian system, which has many comparable features. Apart from the need for making equalising features of the Indian transfer system more transparent, there is need for emphasising some cost disabilities, particularly those that are structural and exogenous in nature.

Fiscal Transfers in Canada

The Canadian system of fiscal transfers, developed over a long period of time, has two central features: equalisation grants, which are constitutionally guaranteed and the Canadian Health and Social Service Transfers (CHST). This paper examines the relevance and applicability of the Canadian system of inter-governmental transfers in the Indian case. Equalisation grants are meant to ensure that provinces have sufficient revenues to provide reasonably comparable levels of services at reasonably comparable levels of taxation. An elaborate 'representative tax system' approach using individual revenue bases is used in Canada for determining the equalisation grants, although there has recently been a debate to use a more macro approach. The source-by-source approach is less practical in the Indian case for want of comparable and reliable information required for applying the method. A more practical alternative is the macro approach, which is adopted in India, but better indicators of fiscal capacity than those based on GSDP need to be used. In addition, the concept of ensuring that resources are available for maintaining the per capita expenditure of select basic services at certain levels among states, as attempted in Canada through the CHST transfers, is worth exploring.

Dynamics of Debt Accumulation in India

Accumulation of debt can be seen as the resultant of the balance between cumulated primary deficits and the cumulated weighted excess of growth over interest rate. Decomposing the change in the central governmentâ??s liabilities relative to GDP since 1951-52, it is seen that but for three recent years, the accretion to debt relative to GDP was due to the cumulated primary deficits. A significant part of the effect of the cumulated primary deficits could be absorbed in the sixties, seventies, and the nineties due to the excess of growth over interest rate. However, there were large unabsorbed parts in the fifties and the eighties. The cushion provided by the excess of growth over interest rate may not continue to be available for long. For three years, viz, 2000-01 to 2002-03, the interest rate exceeded the growth rate. This, together with the continuing primary deficits though at a reduced level, led to acceleration in the increase in the debt-GDP ratio in recent years. For stabilisation of the debt-GDP ratio at current or reduced levels, focus on primary balance becomes necessary.
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