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

Articles by M Govinda RaoSubscribe to M Govinda Rao

Linking Central Transfers to Fiscal Performance of States

Based on the recommendations of the Eleventh Finance Commission, the central government has instituted the Medium Term Fiscal Restructuring Programme (MTFRP). This paper evaluates the design and implementation of these schemes. The important conclusions of the paper are that (i) the size of incentive-linked transfers is too small to influence the fiscal performances of the states; (ii) the multiple schemes of incentives tend to create a system of segmented incentivisation; (iii) the design of the incentive-linked system has serious shortcomings, and (iv) the scheme fails to address the basic reasons for the deterioration in fiscal performances of the states.

Trade Policy, Agricultural Growth and Rural Poor

This paper attempts to examine (i) how changes in trade policy introduced during the nineties have influenced the domestic inter-sectoral terms of trade, being the mechanism through which the impact of macro policies such as monetary, exchange rate and trade are transmitted to the agricultural sector; (ii) the impact of terms of trade and trade policy among others on aggregate crop output and private investment in agriculture over the period; (iii) whether trade policy and devaluation of rupee among others have helped in raising agricultural exports; and (iv) how the aggregate crop output and terms of trade have influenced rural poverty and real agricultural wages of unskilled workers over the period.

Reform in Central Sales Tax in the Context of VAT

This paper is concerned with the treatment of inter-state transactions in the levy of state VAT. It addresses the conceptual issues of central sales tax (CST) and the need to phase out the tax to ensure a common market, advances interim measure to reduce the CST to operational level and the final reform to zero-rate the CST, examines the revenue implications of CST reduction in the short term and zero-rating in the long term. It also examines the issue of compensating the states for the loss of revenues and finally deals briefly with the management information system needed to monitor inter-state transactions in the absence of CST.

State Finances in India: Issues and Challenges

Sharp deterioration in state finances during the last decade - as evidenced by sharp increases in revenue, fiscal and primary deficits, increases in their indebtedness and contingent liabilities, and decline in capital and maintenance expenditures - has been a matter of serious concern to policy-makers. Low buoyancy of central transfers and spillover of central pay revisions have had the most adverse impact on state finances. However, the states' own fiscal performance has also seen sharp deterioration. On the transfer system, the scheme proposed by the ministry of finance attempts to link a portion of transfers to fiscal reforms. There are serious design issues in the scheme. It is not certain whether the scheme will be effective either. The paper details the areas of reform the states should focus on to impart efficiency and improve revenue productivity and prioritisation and compression of unproductive expenditures.

Taxing Services: Issues and Strategy

This paper attempts to analyse the issues involved in extending consumption taxes to the services sector. Although the share of services in GDP is over 50 per cent, its contribution to tax revenue is not commensurate. Further, the prevailing taxes on services are overlapping and haphazard and are not conducive to the evolution of a coordinated value added tax at central and state levels. Besides, it is important to extend the tax also for reasons of revenue. The paper argues that for evolving a rational consumption tax system it is important to levy a general tax on services rather than continuing with the selective taxation prevailing at present. However, there should be a small but well defined exemption list and a negative list to avoid taxing services arising from the sovereign functions of the state and services of a meritorious nature. There should also be a threshold to exclude small service providers. At the central level it is also suggested that by 2004-05 service tax should be merged with the MODVAT to evolve a manufacturing stage value added tax. In the case of states, it is argued that to evolve a destination based retail stage value added tax, it is necessary to give concurrent powers to tax all services subject to certain safeguards to ensure orderly development of the consumption tax system.

Fiscal Correction: Illusion and Reality

The story of fiscal adjustment in India is one of missed opportunities. The crisis did initiate reforms in right earnest, but once the immediate problems were overcome, rather than achieving fiscal consolidation, the attempt in successive budgets has been to create the illusion of achieving fiscal correction rather than really achieving it. The government has been concealing deterioration in the fiscal balance by placing emphasis on the fiscal deficit rather than more meaningful summary measures, and frequently changing its definition and method of measurement. Analysis shows that on a comparable basis fiscal deficit reduction has been marginal. On the contrary, other fiscal indicators have shown significant deterioration. Thus the claims about fiscal adjustment are illusory. Fiscal consolidation in India perhaps requires another crisis.

Linking Central Grants to Revenue Deficit Reduction by States

If the central government thinks that simply by giving a directive to the Eleventh Finance Commission to design a transfer system linking transfers to revenue deficits it can solve the problem of the growing revenue deficits of the states, it is grossly mistaken. There are systemic problems affecting the states' finances and these need to be addressed. The transfer system alone cannot bear the burden of adjustment.

Educational Expenditure of Large States

Utilising the pooled data for 15 large Indian states over the period 1992-93 to 1997-98, this study employs panel data models to estimate the normative (average) levels of expenditure on primary, secondary and higher education. The findings of the study reveal that the actual spending on educational services in low income states is lower than their 'needs'. This finding implies that the existing fiscal equalisation mechanism has not been effective in offsetting the revenue and cost disabilities of the poorer states in India.

Con Conver er ergence ence of Incomes acr across oss Indian Sta States tes

This article examines the trends in interstate inequalities in the levels of income in India over the last three and a half decades. Contrary to the predictions of neoclassical growth theory that interstate differences in income levels tend to reduce as they approach the steady state equilibrium, our analysis shows widening interstate disparities. To understand the causes of this divergence, the article examines the determinants of interstate differences in growth rates and analyses the role of interstate transfers - explicit and invisible - in determining the geographical spread of investment and incomes. It finds that divergence in income levels has been mainly caused by the allocation of private investments which in turn, has been influenced by the inequitable spread of infrastructure. The inequitable nature of public expenditure spread across states is attributed to the inability of the intergovernmental transfer mechanism to adequately offset the fiscal disabilities of the poorer states as well as regressive nature of the invisible interstate transfers.

Reforms in Tax Devolution and Evolving a Co-ordinated Tax System

The finance minister in his budget speech has stated that a Constitution amendment hilt will soon be brought forward in the parliament to give effect to the tenth Finance Commission's recommendations on an alternative tax devolution scheme. In this paper it is argued that although the initiative is in the right direction, it does not go far enough, A well thought out reform should address reforms in tax devolution along with the issue of reassignment to evolve a co-ordinated system of domestic trade taxes. In particular, to design and implement a destination based consumption type value added tax (VAT), the states should be enabled to extend their sales taxes to services in addition to goods. Further, an efficient and equitable tax system should prevent the levy of sates taxes on inter-state sale. Reforms in tax devolution should be addressed in conjunction with evolving rational, co-ordinated domestic trade taxes to bring about a structured reform of the fiscal system in Indian federalism.

Investment Gaps in Primary Education

Investment Gaps in Primary Education M Govinda Rao RAMACHANDRAN, Raval and Swaminathan (RRS) (1997) emphasise the need to provide universal primary education and estimates the resources needed to achieve the task. The paper is important as well as opportune. It is important because intcrnational experience, particularly the east Asian experience, has underlined the importance of human resource development, particularly that of universal primary education in bringing about radical economic, social and demographic transition and in creating a shared basis of economic growth. It is opportune because the market-oriented reforms in India are likely to accentuate inter-regional imbalances and investment in education can provide the needed corrective by both taking capital to labour and improving labour mobility. However, in the annexure to the paper, the authors bring out the shortcoming of the estimates of expenditures on primary education forecast by the Ninth Finance Commission. As I feel that I was in some ways responsible for making those estimates, I feel obliged to respond to their observations.

Value Added Taxation in the States-Challenges Ahead

Challenges Ahead M Govinda Rao J V M Sarma The need for co-ordinated development of domestic trade taxes in the Indian federal polity has shifted the focus to reforms in the states' sales tax systems. Detailed deliberation has led to a consensus on the need to transform the prevailing sales taxes into a destination based consumption type value added tax. Attempts to reform sales taxes, however, have not been always in the right direction and, in addition, have met with resistance from traders. Based on the experience gained so far, this paper attempts to set out the strategy and stages of reform towards evolving the value added tax which is less distortionary and more acceptable to traders.

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