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

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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.

Report of the 13th Finance Commission: Introduction and Overview

This special issue on the Report of the Thirteenth Finance Commission has eight experts evaluating its recommendations from different perspectives. While acknowledging the many plus points of the report, the writers also draw attention to its numerous drawbacks, ranging from a lack of proper attention and omissions to faulty logic. There is little doubt that some of the recommendations, if implemented in the right spirit, will benefit the management of public finances in the country. However, an awareness of the report's limitations could serve as an antidote to not slipping up again.

Deficit Fundamentalism vs Fiscal Federalism: Implications of 13th Finance Commission's Recommendations

The Thirteenth Finance Commission's recommendation to increase the vertical share of tax devolution to states will help, but its horizontal distribution formula leaves much to be desired. One, its design is such that two of the four key indicators are in conflict with each other. Two, the commission's revised road map for fiscal consolidation at the centre and the states, which recommends state-specific, year-wise, fiscal adjustment paths, not only limits the fiscal manoeuvrability of states but also impinges on their fiscal autonomy. Three, its design of the grant for elementary education has the potential to reduce the expenditure of states rather than augment it. The need to look at intergovernmental transfers from the right perspective of federalism, where the states and the centre are seen as equal partners in development and not from a narrow technocratic viewpoint, cannot be stressed more.

Goods and Services Tax: The 13th Finance Commission and the Way Forward

The Thirteenth Finance Commission was required to look into the revenue impact of the introduction of the goods and services tax. Its report, based on the recommendations of a task force constituted to study the issue, recommends a highly uniform and centralised format that does not adequately recognise a tax reform exercise in a multi-level fiscal system that involves compromises and trade-offs. While several flaws can be pointed out in its design, developments that have taken place before and since the report was submitted have to a large extent rendered the commission's recommendations irrelevant. All this underlines the need for a model that goes beyond uniform rates of tax and allows states to vary beyond a floor, with a fixed classification of commodities and services, so that they can choose an appropriate rate to ensure that their revenue requirements are met.

Capital Management Techniques for Financial Stability and Growth

By refraining from imposing capital controls, India is today paying a high price in the form of a loss of autonomy in monetary policy, a reduction in the available fiscal space, and bouts of volatility in the foreign exchange and equity markets. These volatility episodes have often created a penumbra of uncertainty around investment decisions. Surprisingly, the pronounced swing of opinion globally against unfettered capital account liberalisation in the light of the recent financial upheavals seems to have completely bypassed Indian policy circles. This article discusses various options for "capital management" that would contribute to growth with stability. These techniques comprise two complementary (and sometimes overlapping) sets of policies, viz, capital controls on inflows/outflows and prudential financial regulation.

Managing Capital Flows, c.2010: Policy Options for India

With the emergence of a "two-speed" world in the aftermath of the 2008 crisis, financial flows are expected to flood emerging markets' shores, including those of India which has positive growth and interestrate differentials vis-à-vis the advanced countries. This article discusses existing policy options for India and concludes by emphasising the need to evolve a medium-term response strategy, one of whose elements include countercyclical fiscal responses.

Time for Global Capital Account Regulations

All the elements - reserves, exchange rates and capital flows - of the global monetary system need reforms. Capital flows, the third leg, call for capital account regulations in both developing and developed countries. In the former, regulations can be justified as a way to help authorities avoid exchange rate appreciation while reducing the need for costly and/or useless foreign exchange reserve accumulation. In the advanced economies, the effectiveness of monetary expansion may be enhanced if they reduce the leakages generated by short-term capital outflows. This would, in fact, imply a return to the basic principle under which the IMF was built: that it is in the best interests of all members to allow countries to pursue their own full employment macroeconomic policies, even if this required regulating capital flows.

On Remembering Lohia

During his life, Rammanohar Lohia paid the price for three "sins" that the opinion-making class could never forgive him for - he attacked Nehru repeatedly at a time when Nehru was god-like, he led a vigorous and voluble campaign against English and he publicly questioned upper caste dominance and advocated caste-based affirmative action. No wonder Lohia was persona non grata to the upper-caste, English-speaking elite, from Congress supporters to communists. The Nehru-left dominance of Indian academia and media ensured that a caricature of Lohia became his dominant image. On the occasion of his birth centenary this year, there has been fortunately a renewed political curiosity about Lohia and there is some reason to hope that serious, meticulous and critical scholarship on his politics and ideas may indeed take off. This special issue on the thought and politics of Rammanohar Lohia is offered in this hope.

Understanding Capitalism through Lohia

Extending Lohia to our times, we can infer an important truth about capitalism. Capitalist development cannot take place without colonial or neocolonial exploitation. In the absence of external colonies or neocolonies, capitalism tries to create internal colonies, but they are not enough for full-fledged modern industrial development, which requires both exploitation of labour and the plunder and destruction of natural resources on a global scale. If internal colonial exploitation is fundamental to capitalism and unequal exchange in various forms is one of its important mechanisms, the Third World can be liberated only when it breaks away from the present system of international trade, exchange and finance and looks at ways of building an alternative society in all senses.

Union Budget for 2010-11 and the UPA's Growth Strategy

The growth strategy underlying Budget 2010 intensifies a recent tendency wherein private consumption expenditure has increasingly substituted for public expenditure in order to induce growth. It also accepts a regressive bias in fiscal policy as part of the strategy. In the Union Budget, the government has restructured the tax system so as to curtail revenue expenditures, while maintaining past direct tax concessions and using a part of its revenues to provide new concessions that are expected to spur demand, sustain and increase corporate savings and encourage corporate investment, all with the intention of "facilitating" growth. The potentially "inequalising" fallout of such an approach is possibly seen as collateral damage in realising a high rate of market-driven (as opposed to state-driven) growth, which needs to be redressed separately - if at all it will be.

Assessing the Fiscal Capacity of Indian Governments

This article assesses the record of different post-reform governments in meeting their fiscal targets and improving both delivery and finances. A variety of indices are constructed, and consistency checks devised to measure relative performance. No government has achieved its targets, but the Congress Party has had the best record in keeping its promises, and reducing deficits. The effect of the growth dividend on lowering government debt and deficits is established. But the failure of the government finances to improve proportionately with this suggests the need for further improvement in expenditure management.

Analysing the Parikh Committee Report on Pricing of Petroleum Products

The Parikh Committee's recommendations on pricing of petroleum products are bad for the country and worse for the aam aadmi. The committee's recommendations do not address the problems of petroleum pricing in their entirety and appear to be driven by the desire to give private sector refiners, originally set up for export of products, an entry into the domestic market under the garb of liberalising price of petrol and diesel. The petroleum sector in India needs tax rationalisation and not tax increases. The high incidence of taxes on the petroleum sector, relative to the gross domestic product, has a negative impact on issues such as access to energy services and development.


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