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This article provides information about the Different Ways to Stabilise the Government Revenue in India !
The government could however reduce its deficit by increasing revenues – by either increasing taxes or through higher profits of the public sector enterprises. As part of the reform package, in order to reduce its liabilities, the government decided to sell its non-profit making enterprises. Expectedly, there were no takers, because these were companies acquired by the government when the private sector was unable to run them.
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Since disinvestment was a stated policy of the government, it decided to sell the profit-making companies, thereby closing future sources of revenue. In 1999, the department of disinvestment was formed by the Indian government with a view to establishing a systematic policy approach to disinvestment and privatisation and to give fresh impetus to the govt.’s disinvestment programme.
Taxes from the major source of revenue for the government. In the initial phase of the structural adjustment programme, a series of reform measures were undertaken both on the direct and indirect tax front. The tax rates were reduced substantially with the hope that reduced tax rates would result in greater tax compliance. Further, attempts were made to increase the tax base by using non-income measures such as possession of mobile phones, luxury cars etc. to determine tax liability because it is widely acknowledged that there is gross underreporting of incomes.
However, despite all these measures, there was a decline and stagnation of tax revenues (when measured as a proportion of GDP). The tax-GDP ratio has not been able to climb back to the pre-reform period, which has severely affected the fiscal position of the government. A part of the decline can be attributed to the reduced customs collections since the process of liberalisation entailed a reduction of import duties and taxes.
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There is, however, one thing to cheer about here – the share of direct taxes has gone up from a lowly 19% at the beginning of the reform period to a respectable 41% in 2003-2004. It is important that the bulk of tax revenue be raised from direct taxes otherwise the tax system will be considered “regressive”- Indirect taxes impose the same burden irrespective of the income earned by individuals, which is undesirable under the principles of “Ability to Pay”.
According to this principle, the tax burden must increase with income. The borrowing is required to meet the expenditure. When the tax and non-tax revenues arc insufficient to meet the expenditure requirements of the government the deficit can then either be financed by increasing the currency in circulation (printing more money) or by borrowing increasing debt The first option can be fraught with one kind of danger – it could lead to inflation in the economy. Since one of the targets of reform was to keep inflation under check, monetisation of the deficit, at least not all of it, was not a valid option.
The next option was to increase market borrowing. Though there may not be a direct inflationary impact of this, the flip side is that there is an increase of debt liability, debt servicing obligations and also fiscal vulnerability of the government. Patnaik has, however, demonstrated that financing of deficit by directly selling in market as opposed to the process of borrowing from the central bank is not necessarily less (or more) inflationary when the credit market does not clear and there is an excess supply of credit that the banks are saddled with.
In India, the debt-GDP ratio has risen over the reform period but this has been mainly on the domestic front. The external debt (as a proportion of GDP) has actually declined to 1.7% in 2003-04 from 5.5% in 1990-91. While increase in debt is not desirable, the fact that most of it is domestic has one advantage – at least the debt servicing is in domestic currency. This means that foreign currency is not required for repayment of loans to international lenders and this reduces the external vulnerability of the Indian economy.
However, a secular rise in the debt even if domestic is not desirable as it could leave the economy vulnerable to a fiscal crisis. The other area of concern that had emerged during the crisis of 1990-91 was the management of the external account Trade deficit, which had grown steadily over the 1980s and was financed by short-term borrowing in the international market, created a payment crisis at the time of the Kuwait-Iraq war, forcing India to seek an IMF loan.
As part of the loan conditionalities, India was asked to liberalise its external sector (imports and exports) and make the current and capital account folly convertible. After the East Asian crisis, which many felt was exacerbated if not caused by an open capital account India slowed its move to a fully convertible capital account.