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Themes from a Life in Public Finance

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.

Themes from a Life in Public Finance

D K Srivastava

seignorage can be justified under specified conditions and up to certain limits. Adjusting fiscal deficit under cyclical conditions may be welfare-improving. Rakshit’s ideas are getting more appreciation than before, and there is a good chance that some may now be implemented. The

A
maresh Bagchi was a crusader for fiscal reform in India. This volume is a tribute to his contributions as an academician, a policymaker, and an administrator to the reshaping of India’s government finances. The volume on Public Economics: Theory and Policy edited by Govinda Rao and Mihir Rakshit contains 10 authoritative contributions by eminent national and international scholars. Two well-written reminiscences by Tapas Majumdar and Shankar Acharya bring out some of the more intimate and laudable aspects of Bagchi’s perseverance and dedication.

Apart from the introductory article by Sudipto Mundle on Bagchi’s life and work, the volume covers nine key articles on frontier areas of public economics. These essays, for example on budgetary rules and plan financing by Mihir Rakshit or on the goods and services tax (GST) by Satya Poddar and Ehtisham Ahmad, are of c onsiderable contemporary relevance. By c overing areas like global public goods, carbon taxes and the environmental a spects of public policy, these essays go beyond the conventional domain of public finance. Arindam Dasgupta has written an interesting piece on neglected topics in public finance. Overall, the volume is r efreshing, contemporary, and reformoriented, providing a befitting tribute to a life spent understanding and influencing a nation’s public finances.

The opening chapter on the life and work of Bagchi by Mundle is a tribute by a long-term associate. Mundle divides Bagchi’s work into two phases – before and after 2000. In the first phase, Bagchi focused on tax policy. Most of his latter works related to fiscal federalism. Writing in the same room in the National Institute of Public Finance and Policy (NIPFP) that Bagchi occupied for long years, Mundle appropriately recognises the distinguishing

Economic & Political Weekly

EPW
october 8, 2011

book review

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.

feature of his contributions: straddling the

twin worlds of ideas and action, grasping

the challenges of public finance both from

the sweep of theory to the intricacies of

experience, and from the riches of aca

demics to the complexity of policymaking.

In his essay on budgetary rules and the

fiscal responsibility act, Rakshit r ecalls his

long discussions on the subject with

Bagchi (some of which I was witness to)

around the work of the Eleventh Finance

Commission. He discusses budgetary rules

and plan financing in the context of the

fiscal responsibility legislations of the

central and state governments. He raises

four main questions:

  • (1) How far are the revenue deficit, fiscal deficit and primary deficit suitable as control/target variables?
  • (2) On what basis should the quantitative dimensions of the targets be fixed?
  • (3) Is there any optimal debt-GDP ratio and if so, what is its relation to targets for deficits?
  • (4) Should the target be adjusted for cyclical and other shocks?
  • Rakshit’s main contribution comes in suggesting two adjusted measures of r evenue deficit. In the first case, he adjusts the conventional revenue deficit by deducting government revenue expenditure for creation of tangible assets. In the second case, he adjusts this revised measure of revenue deficit by further deducting government expenditure for human resources development. Rakshit makes the point that targeting zero revenue deficit, as implied by the golden rule, is by no means optimal; financing public expenditure by

    vol xlvi no 41

    recent 2011 Report of the High level Committee on Efficient Management of Public Expenditure constituted by the Planning Commission and headed by C Rangarajan does endorse some of Rakshit’s ideas on revenue deficit in the context of the fiscal responsibility acts.

    On the subject of tax reforms, there are two essays. Richard Bird writes about what he calls the broad-based low rate (BBLR) approach to tax reforms (p 37). Low tax rates are clearly consistent with lower deadweight costs of taxation. But broadening of tax bases may conflict with progressivity of taxes. Bird assures us, based on the experience of many, particularly developing countries, that progressive income taxes are not necessarily very redistributive. Nor is value-added tax (VAT) in such countries necessarily regressive. He argues that the BBLR approach would reduce the three types of costs associated with taxes, namely, administrative costs, compliance costs and efficiency costs. He also emphasises the fundamental importance of improving administration, a theme that Bagchi also considered key to the success of tax r eforms in India.

    The discussion on VAT is taken forward in a paper by Satya Poddar and Ehtisham Ahmad on “GST Reforms and Intergovernmental Considerations in India”. GST reforms require a reconsideration of revenue-raising powers between the centre and the states. Noting that taxation powers in India so far have been by and large, characterised by separation of powers, Poddar and Ahmad argue that this approach may not serve India any more. They observe (p 77):

    This approach…is no longer optimal for modern economies where the traditional dividing lines between sectors are blurred, and new social, environmental, and economic issues emerge which require new forms of taxation instruments.

    BOOK REVIEW

    Govinda Rao in his essay on the “Normative Framework of Fiscal Federalism” argues that the normative approach to fiscal federalism developed in the context of advanced economies. It needs to be modified to take into account the special features of developing and transitional economies, particularly with regard to planned development strategies and country-specific institutional structures. He argues that the assumptions of the normative framework concerning the presence of a benevolent state, and competitive and functioning markets often do not apply in federal countries that are developing or in transition from plan to market. The legacy of centralised planning, price and output control, impediments to the mobility of factors as well as products, and the overhang of public enterprises imply that the normative framework requires modification before it can be used for policymaking in such federal countries.

    Chapter six on global public goods is by U Sankar. It reviews the meaning and scope of global public goods and considers the relevance of the concept with reference to the future shape of the world eco nomy, particularly in the context of climate change. Sankar argues that the three existing global institutions do not provide for any built-in measures for achieving dynamic efficiency. As a result, development concerns get low priority.

    Continuing with the concern with the environment in chapter seven, Ahmad and Nicholas Stern examine the scope of levy of carbon taxes in an economy like India. They argue that in a federal set-up, the ideal instrument for such a tax would be central excise. There is a need for uniformity in carbon taxes across the states. They complement the analysis of carbon tax with a cap-and-trade scheme.

    A third contribution on the interface of the public finance and environment d imensions is by Ramprasad Sengupta. In his chapter “On Sustainable Economic Growth and Modelling for Resource and Income Accounting”, Sengupta highlights the role of resources and human innovation in achieving sustainable development. He provides an approach for resources and income accounting using an input-output framework, in which the environmenteconomy interface along with material balances are analysed.

    New from SAGE!

    Another area which interested Bagchi was the economics of education. The contribution by Arnab Mukherji and Anjan Mukherji deals with the role of public funds in ensuring a minimum number of instructional days in primary schools. They show that receiving public funds is important for schools to be functional, but the marginal effect of public funding diminishes with larger amounts of funding.

    The last chapter by Arindam Dasgupta lists several neglected topics in public finance. He particularly develops three topics in detail, namely, economic principles of the government budget, non-tax revenues, and the global fiscal commons. He provides an instructive discussion on the principles of voluntary, requited nontax revenue instruments. Similarly, his brief discussion on the principles of efficient international taxation provides valuable insights.

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    2011 / 304 pages / C 595 (Hardback)

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    2011 / 248 pages / C 695 (Hardback)

    www.sagepub.inLos Angeles „ London „ New Delhi „ Singapore „Washington DC

    october 8, 2011 vol xlvi no 41

    EPW
    Economic Political Weekly

    BOOK REVIEW

    Overall, these essays are forward looking, policymakers will find substantial value
    characterised by theoretical rigour while in these essays, which in a way, constitute
    taking into account the complexities of an extension of Bagchi’s works. They re
    empirical application. There is much warmth flect his approach of marrying theory with
    in the way the authors have traced the policy, his areas of concern in carrying
    links with Bagchi’s own ideas on the forward the theme of fiscal reforms, and
    subjects. Students of public finance and his priorities for intervention in the fields
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    of education, subsidies, and the global fiscal commons. All in all, this volume is not only valuable in itself but a brilliant tribute to Bagchi’s life and contributions.

    D K Srivastava (srivastava@mse.ac.in) is at the Madras School of Economics.

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    Economic Political Weekly

    EPW
    october 8, 2011 vol xlvi no 41

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