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

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Fiscal Transfers in Pandemic Times

The Fifteenth Finance Commission has trodden carefully in dealing with the controversial terms of reference issued to it in the presidential order. The commission had the challenging task of dividing fiscal resources between the union and the states due to the serious uncertainty posed by the pandemic. In many ways, the recommendations of the commission marks continuity. Devolution of 41% in the divisible pool of taxes to the states, despite the nudging of the centre in the terms of reference to review it and the continuation of revenue deficit grants, are some examples. The phasing out of the revenue deficit grants to the states in the next five years is likely to pose challenges to the fiscally weak states. The conditionalities mandated for availing local body grants may deny the much-needed money for them as the states may not have the incentive to undertake the reforms unless the public pressure builds up. On the whole, the report of the commission is on expected lines; it does not disappoint but all the same, like the previous commissions, it is a work in progress.

A Budget for Pandemic Times

The budget for 2021–22 is important for three reasons. First, it provides a reality check on the government’s attempt to keep up public spending in the wake of severe contraction in revenues and expansion in expenditures needed to save lives and livelihoods. Second, it shows the large increases in deficits and debt in the already prevailing stressed fiscal environment. Third, as the economy was already slowing down even before the pandemic due to structural factors, it attempts to provide reform signals to reclaim the earlier growth trajectory. While it has tried to prioritise growth, there is considerable risk from burgeoning deficits and the possible impact in price stability from large liquidity infusion to facilitate government borrowing at low cost that is likely to occur. The reform proposals are important, but the test lies in how effectively they are implemented.

Tax System Changes in the Budget

There were high expectations from the budget on the changes in the tax system to provide stimulus to the beleaguered economy. However, fiscal conservatism has prevailed. The attempt to broaden the base by eliminating tax exemptions and preferences could have been done without complicating the tax structure. On the macro side, there are questions about the unrealism of the revenue estimates. Unduly optimistic estimates result in “tax terrorism,” lead to inefficient budget management and have adverse impacts on state finances.

Road Map for Structural Reforms in Budget 2019

There were great expectations of fast-tracking reforms in the budget. However, it disappoints in setting a road map for creating a virtuous cycle of investment and growth. On the fiscal front, the overambitious revenue projections raise questions of credibility and feasibility of containing the deficits at the budgeted level. The wait for banking and financial sector reforms continues. The selective increases in import duties are retrograde, and increase in the taxes on the super-rich complicates the tax system without much gain in revenues. The centralisation through the levy of surcharges does not match the lip service given to cooperative federalism .

Redesigning the Fiscal Transfer System in India

An overwhelming proportion of the poor live in low-income states in India. These states are home to over two-thirds of the children in the 0–14 age group. Therefore, provision of comparable levels of basic social services and physical infrastructure is important to ensure balance and stability in the Indian federation. This underlines the importance of intergovernmental transfers. Conceptually, general purpose transfers are given to enable the states to provide comparable levels of public services at comparable tax effort, and specific purpose transfers are given to ensure a minimum standard of public services. The shortcomings in both the design and implementation of the transfer system in India hinder its ability to achieve the objectives.

Business as Usual

The global situation is tense, marked with protectionism. The domestic environment is constrained by the twin balance sheet crisis. The dull investment climate was further jeopardised by the note ban. The budget has failed to create a policy environment to kick-start a virtuous investment cycle. It has failed to address critical issue of accelerating employment.

Fiscal Federalism

What lessons can economic and political theories and contemporary experiences offer to Nepal in designing a federal system? While political aspects are very important, the focus in this article is on fiscal federalism or efficient organisation of the multilevel system.

Role and Functions of NITI Aayog

The architecture, engineering and management aspects of the new institution, NITI Aayog, will have to be crafted carefully, if it is to serve as an institution to impart dynamism to the developmental process in a harmonious manner. Its effectiveness will depend on how it charts out a course for itself. An important question is whether the Aayog will have influence when it does not have the power to give grants and does not have the powers to make plan allocations to different ministries and departments.

Taxes and Death Are Inevitable, but GAAR Is Avoidable

The report of the committee to review the introduction to the General Anti-Avoidance Rules gives the impression that it fi rst decided on a postponement and then looked for a rationale for the recommended delay. While the report makes a strong case for protecting the interests of foreign investors, it does not clarify how their interests align with those of India. For some reason, the report does not seem to refl ect on the interests of India or even if it does, it assumes that a tax policy which has been drafted in India goes against the interests of India and Indians!

Stimulus, Recovery and Exit Policy: G20 Experience and Indian Strategy

There are large variations among the g20 countries in their deceleration experiences, transmission mechanisms and their current macroeconomic outlook. In an integrated global economy, it is essential that the major economies coordinate their policies. But coordination does not imply simultaneous stimulus withdrawal from all g20 countries. Indeed, a phased withdrawal is probably the best guarantee against the risk of a negative global shock leading to another recession in the event of a simultaneous stimulus withdrawal from all g20 countries. Hence, this paper argues that each country needs to set the timing, scale and composition of its stimulus withdrawal keeping in mind its own macroeconomic outlook.

Debating the Thirteenth Finance Commission

Two comments and two responses on two of the papers published in the special issue of the recommendations of the Thirteenth Finance Commission (27 November 2010). (This discussion could be read alongside that published on 26 March 2011.)

Goods and Services Tax: A Gorilla, Chimpanzee or a Genus Like 'Primates'?

Introduction of goods and services tax in India will be a win-win strategy for both the centre and the states and there is every reason to embrace it. However, reform of this nature involving both the centre and the states is an experiment in cooperative federalism and requires stewardship by statesmen. Resumption of GST reform requires greater recognition of and sensitivity to the views of the states. The IMF-type "one size fi ts all" reform, as has been recommended by the Thirteenth Finance Commission, could simply stall the process. At the same time, while it is legitimate for the states to bargain to retain their fi scal autonomy, they should not use this autonomy to indulge in predatory competition and export the tax burden to non-residents.

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