Public finance in India: some reflections

Abstract

The paper analyses important issues in Indian public finance in the context of India’s economic development. Given the predominance of working population and with children in the age group 0–14 constituting over 40% of the population, government finance 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 of public spending, however, shows that spending on education and healthcare is woefully inadequate and expenditures on interest payments, subsidies and transfers have crowded out spending on physical and social infrastructures. The main reason for the above phenomenon has to be found in the low levels of taxation apart from lopsided priorities. The low tax ratio is due to 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 collection is also the reason for the persistence of large deficits and debt. Despite the enactment of fiscal responsibility legislation, containing the government deficits and debt has been 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 which should be appointed by the Parliament and should be reporting to it as recommended by the Fourteenth Finance Commission. 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.