The fis­cal com­pany we keep

The Pak Banker - - OPINION - Manas Chakravarty

ON the eve of the Union Bud­get, let's take a look at the coun­tries In­dia can com­pare it­self to in fis­cal mat­ters. Let's con­sider govern­ment rev­enues as a per­cent­age of gross do­mes­tic prod­uct (GDP) as a yard­stick. Ac­cord­ing to data from the In­ter­na­tional Mon­e­tary Fund (IMF), govern­ment rev­enues in In­dia (in­clud­ing those of the states) are around 20% of gross do­mes­tic prod­uct. That puts us in the same league as Ghana, Kenya, Mali, Myan­mar, Nepal and Rwanda. That is hardly com­fort­ing. All th­ese coun­tries' in­come per head is sub­stan­tially lower than In­dia's. In­deed, Mali, Nepal and Rwanda have per capita in­comes less than half of In­dia's. The ques­tion for the fi­nance min­is­ter is: Do we re­ally want to be­long to this group? IMF's es­ti­mates of gen­eral govern­ment rev­enues as a per­cent­age of GDP for the group. We can see that all the other coun­tries, with­out ex­cep­tion, have made a bet­ter rev­enue ef­fort than In­dia, de­spite be­ing much poorer. Nor is it enough for the fi­nance min­is­ter to take the easy way out and raise ex­cise or cus­toms du­ties. In­di­rect taxes, which are re­gres­sive and fall dis­pro­por­tion­ately on the poor, are al­most dou­ble di­rect taxes, if we in­clude state taxes. The need there­fore is to in­crease rev­enues from di­rect taxes.

Can we at least raise our rev­enue-to- GDP ra­tio to Rwanda's lev­els? In­dia's govern­ment ex­pen­di­ture-to-GDP ra­tio is high, with only Kenya be­ing an ex­cep­tion. Of course, the prob­lem with cut­ting ex­pen­di­ture is that most of the govern­ment's ex­penses are fixed, es­pe­cially pay­ing in­ter­est on govern­ment bor­row­ing. None­the­less, it's nec­es­sary for the In­dian govern­ment to cut its coat ac­cord­ing to the cloth. Govern­ment's over­all bal­ance as a per­cent­age of GDP. The over­all bal­ance is the dif­fer­ence be­tween govern­ment rev­enues and spend­ing. Arith­meti­cally, it's the dif­fer­ence be­tween the fig­ures in chart 1 and chart 2, with some round­ing er­rors. The chart shows In­dia's govern­ment deficit is very high. That is why it's sur­pris­ing to see a re­newed de­bate on post­pon­ing fis­cal con­sol­i­da­tion. If the govern­ment can­not stick to the path of fis­cal rec­ti­tude with oil at $30 a bar­rel, when will it ever be able to do it? Many years of liv­ing be­yond its means has led to the govern­ment pil­ing up a lot of debt. As the chart shows, In­dia has a high level of govern­ment debt to GDP.

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