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

Indira RajaramanSubscribe to Indira Rajaraman

Equity and Consistency Properties of TFC Recommendations

This paper examines three aspects of the Twelfth Finance Commission recommendations. First, it looks at the most urgent issue for states, the FRBM legislation which they must enact if they are to qualify for the interest rate reduction on debt owed to the centre. The required revenue deficit target of zero by 2008-09 is unambiguously clear but the fiscal deficit requirement is not. The parameter values underlying the fiscal deficit correction path could be valued by states very differently from those assigned in the TFC report. The second issue addressed in the paper is the complex and ambiguous set of conditionalities relating the debt write-offs in year t to the reduction in the revenue deficit in year (t-1) relative to (t-2). These conditionalities also carry a fiscal deficit cap which could be sharply inconsistent with a fiscal deficit correction path fully in conformity with that prescribed by the TFC. These issues are illustrated with simulations for a sample state. Finally, the paper examines the equity attributes of the tax devolution and non-tax grants prescribed by the TFC. The formula adopted for determining tax shares of states assigns a greater weightage to distribution-neutral factors, and so reverses the trend since the Sixth Finance Commission towards increasing weightage for redistributional factors. The non-tax grants do not show an inverse relationship with per capita GSDP. Together, these suggest that the TFC has chosen to move away from equity as a guiding principle for its statutory flows, but the report does not make plain why it has chosen to do so.

Fiscal Restructuring in Context of Trade Reform

The Twelfth Finance Commission is explicitly charged in its terms of reference with raising tax/GDP from present levels. The theoretical literature suggests that revenue compensation for lost trade revenues be sourced from domestic indirect taxes, and recommends a price-neutral destination-based VAT as the optimal instrument. In a federal setting, this will reduce relative tax collections at national level, where trade tariffs are levied, in favour of the subnational level, with which rights to levy domestic indirect taxes are typically shared. Possible resistance to such a restructuring, and the level from which it could originate will be a function of the history of collection shares in the federation; of the relative shares of discretionary and formulaic transfers from national to subnational level; and of the relative importance of redistributive criteria in formulaic transfers.

Univariate Forecasting of State-Level Agricultural Production

The drought of 2002 has brought home the critical need for a short-term forecasting model for the agriculture sector at sub-national level, since good and bad agricultural years are not synchronous across states. This paper attempts forecasting through the fitting of univariate ARIMA models to past agricultural outcomes for five states: Punjab, Rajasthan, Karnataka, Andhra Pradesh, and Uttar Pradesh.

Revenue Estimates for a Crop-Specific Agricultural Tax

This paper calculates per hectare rates of levy for a land-based crop-specific agricultural tax on eight major field crops, based on published Cost of Cultivation data, now available at state-level for the nineties but with uneven coverage across states. The eight crops are paddy, wheat, groundnut, rape/mustardseed, sugarcane, cotton, potato and onion. Clearly, any reconfiguration of input subsidies presently available to agriculture will alter the taxable surplus parameters and levy rates estimated, but the method used is of perfectly general applicability. The state-level rates of levy calculated for the year 1996-97 yield an estimated tax revenue of Rs 500 crore, around 80 per cent of aggregate land revenue collected that year from agricultural land. The levy is envisaged for panchayat rather than state-level, with jurisdictional retention for infrastructure improvements within agriculture. District-level rates of levy, with taxable surplus parameters adjusted for crop yield variations across districts, are calculated for four selected states: Andhra, Punjab, Rajasthan and West Bengal. Revenue additionality at panchayat level as a per cent of own revenue collections, aggregating across all panchayat tiers, ranges between 30 per cent in Andhra, and 201 per cent for West Bengal.

Non-Performing Loans of PSU Banks

The paper performs a panel regression on the definitionally uniform data now available for a five-year period ending in 1999-2000, on non-performing loans of commercial banks. The exercise is confined to 27 public sector banks, so as to investigate variations within a class that is homogeneous on the ownership dimension. The exercise groups banks with higher than average NPAs into those explained by poor operating efficiency, and those where the operating indicator does not suffice to explain the high level of NPAs, and leaves an unexplained intercept shift. Two of the three weak banks identified by the Varma Committee, Indian Bank and United Bank of India, fall in this category. Recapitalisation of these banks with operational restructuring may therefore not be the solution, since there is clearly a residual problem even after controlling for operating efficiency.

Fiscal Transparency

What one expected from the Report of the Advisory Group set up by the Reserve Bank of India (RORB) to assess conformity to the guidelines specified in the IMF's Fiscal Code was an in-depth exploration of compliance, beneath the formal provisions in place. The peculiar genius of Indian misgovernance is that, while complying with transparency requirements in a superficial sense, there are enough exceptions and anomalies tucked away in the system for it to achieve obfuscation to an impressive degree. The Group was advantageously placed in terms of its membership to ferret out examples where there is de jure compliance, but none de facto. It does not do this. Further, the RORB is largely confined to compliance at the central government level. It does deal to some degree with inter-government issues between centre and states, but not with state-local issues.

Impact of Grants on Tax Effort of Local Government

This paper examines the impact of state-local grants on tax effort of rural local governments (panchayats) for Kerala state using data for 1993-94. After controlling for tax capacity we find a negative impact on own tax revenue of lump sum 'untied' grants that are predictable and unvarying. The reduction in own tax revenue is the result of a selective slackening of tax effort. The post-grant pattern of tax incidence will therefore be less transparent than the nominal pattern, less preserving of voter preferences, and possibly driven by corruption towards greater regressivity. The data contradicts the flypaper effect and also theories of fiscal effects of ethnic fragmentation.

NPA Variations Across Indian Commercial Banks

The Indian commercial banking sector is characterised by both a high average non-performing share in total bank advances and a high dispersion between banks. This paper presents the findings of a formal attempt to explain inter-bank variations in NPAs for the year 1996-97. The specification tests for the impact of region of operation on domestically-owned banks, as measured by percentage branches in each of a set of state clusters. One cluster of three eastern and seven north-eastern states carries a robust and statistically significant positive coefficient; another cluster of the southern and some of the northern states carries a significantly negative coefficient. These findings bear out those of Demirguc-Kunt and Huizinga on the significance of the operating environment for bank efficiency. No sustainable improvement in the performing efficiency of domestic banks is possible without prior improvement in the enforcement environment in difficult regions of the country. Another finding of some importance is that it is not foreign ownership in and of itself so much as the banking efficiency and technology correlates of the country of origin of the foreign bank which determine NPA performance in the Indian environment.

A Land-Based Agricultural Presumptive Tax Designed for Levy by Panchayats

Designed for Levy by Panchayats Indira Rajaraman M J Bhende With economic reform and the dismantling of the structure of implicit taxation of agriculture through imported- protected industrialisation, accompanied by partially-compensating input subsidies, the case for an explicit tax on agriculture resurfaces with, however, a new emphasis on retention within the sector of resources so raised for infrastructure development and productivity-enhancing land improvements. This paper designs a crop-specific presumptive levy to supplement the land revenue, and presents the results of a field survey in northern Karnataka covering three crops as a prototype of the kind of exercise necessary.

Improving the Capability to Govern

Improving the Capability to Govern Indira Rajaraman World Development Report 1997: The State in a Changing World; published for the World Bank by Oxford University Press, New York, 1997; pp 265, price not mentioned.

A Minimum Alternative Asset-Based Corporate Tax for India

Corporate Tax for India Indira Rajaraman T Koshy A minimum alternative asset-based tax (MAT), with offset against the conventional corporate income tax, does not eliminate corporate tax avoidance or evasion, but caps the advantage from such practices by placing a floor on tax payable. A direct assault on avoidance/evasion is difficult within the institutional constraints and information vacuum confronted by tax administration authorities in developing countries. The MAT floor also reduces the distortionary impact of the concessional provisions presently available, and thus partially restores fiscal neutrality with respect to the investment decision. Most of all a MAT introduces incentives for improved efficiency in the utilisation of existing capacities, which is urgently needed, given the evidence on the decline in this efficiency in recent years in India. On the basis of actual rates of return on corporate assets from a CMIE sample of companies, this paper prescribes a 1.6 per cent levy on total assets, obtained from application of a 40 per cent nominal tax rate (excluding surcharge) to a minimum presumed rate of return to total assets of 4 per cent. The paper also examines the historical transition probabilities of Indian companies around the chosen threshold rate of return.

Augmentation of Panchayat Resources

Augmentation of Panchayat Resources Indira Rajaraman O P Bohra V S Renganathan Even if the new tier of local governance mandated by the 73rd Amendment is visualised merely as a shift in the point of delivery of certain functions previously discharged by higher levels of government, so that the problem of fiscal devolution simplifies to one of ensuring a fiscal transfer to match the functional transfer, there has to be some revenue additionality to cover incremental establishment costs. This is particularly so for the rural sector, and is the justification for the limited focus in this paper to panchayats alone. Hut if the intention is improved delivery, the need for additional revenues is even greater.

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