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Public Finance in India in the Context of India's Development

Author

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  • Rao, M. Govinda

    (National Institute of Public Finance and Policy)

Abstract

The paper analyses important issues in Indian public finance in the context of the In-dia's economic development. Given the predominance of working population and with chil-dren in the age group 0-14 constituting over 40 per cent of the population, government fi-nance has a critical role not only in protecting life and property but also in creating physical infrastructure to expand economic activities to generate employment opportunities and in providing social infrastructure to empower them to get productively employed. The analysis public spending, however, shows that spending on education and healthcare is woefully in-adequate and expenditures on interest payments, subsidies and transfers have crowded out spending on physical and social infrastructures. The reasons for the above phenomenon have to be found in the low levels of taxation apart from lopsided priorities. Based on the 98 country average behaviour, the paper shows that the tax-GDP ratio in the country is lower by 2-3 percentage points for its level of per capita GDP. The reasons for the low tax ratio have to be found in the exemption to agricultural incomes, widespread tax preferences due to multiple objectives loaded into tax policy, tax abuse by multinationals and poor tax administration. The low tax collections are also the reasons for the persistence of large deficits and debt. Despite passing the FRBM Act to follow the rule based fiscal policy, containing the gov-ernment deficits and debt has continued to be a major challenge and the targets are diluted, new concepts created and repeatedly postponed. The paper argues that there is a strong case for creating a fiscal council by amending the FRBM Act and it is should be appointed by the Parliament and should be reporting to it as recommended by the Fourteenth Finance Com-mission. This is in contrast to the Fiscal Review Committee's recommendation according to which the Fiscal council should be appointed by the Finance Ministry and should report to it.

Suggested Citation

  • Rao, M. Govinda, 2017. "Public Finance in India in the Context of India's Development," Working Papers 17/219, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:17/219
    Note: Working Paper 219, 2017
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    References listed on IDEAS

    as
    1. M. Govinda Rao & Sudhanshu Kumar, 2018. "Envisioning tax policy for accelerated development in India," Asia-Pacific Sustainable Development Journal, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), vol. 25(1), pages 85-107, June.
    2. M. Govinda Rao & R. Kavita Rao, 2005. "Trends and Issues in Tax Policy and Reform in India," India Policy Forum, Global Economy and Development Program, The Brookings Institution, vol. 2(1), pages 55-122.
    3. Banerjee, Shesadri & Bhattacharya, Rudrani, 2017. "Micro-level Price Setting Behaviour in India: Evidence from Group and Sub-Group Level CPI-IW Data," Working Papers 17/217, National Institute of Public Finance and Policy.
    4. Buiter, Willem & Patel, Urjit R., 2006. "India's Public Finances: Excessive Budget Deficits, a Government-Abused Financial System and Fiscal Rules," CEPR Discussion Papers 5502, C.E.P.R. Discussion Papers.
    5. Panagariya, Arvind & Chakraborty, Pinaki & Rao, M. Govinda, 2014. "State Level Reforms, Growth, and Development in Indian States," OUP Catalogue, Oxford University Press, number 9780199367863, Decembrie.
    6. Buiter Willem H. & Urjit R. Patel, 2006. "Excessive Budget Deficits, a Government-Abused Financial System, and Fiscal Rules," India Policy Forum, National Council of Applied Economic Research, vol. 2(1), pages 1-54.
    7. Rao, M. Govinda, 2017. "The Effect of Intergovernmental Transfers on Public Services in India," Working Papers 17/218, National Institute of Public Finance and Policy.
    8. Rao, M. Govinda & Kumar, Sudhanshu, 2017. "Envisioning Tax Policy for Accelerated Development in India," Working Papers 17/190, National Institute of Public Finance and Policy.
    9. Richard M Bird & Eric M Zolt, 2008. "Tax Policy in Emerging Countries," Environment and Planning C, , vol. 26(1), pages 73-86, February.
    10. Hazarika, Bhabesh, 2017. "Decomposition of Gender Income Gap in Rural Informal Micro-enterprises: An Unconditional Quantile Approach in the Handloom Industry," Working Papers 17/216, National Institute of Public Finance and Policy.
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    More about this item

    Keywords

    Taxation and subsidies general;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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