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The deputy chairman of the Planning Commission, Montek Singh Ahluwalia, feels tax income needs to be increased by four to five percentage points from the existing level.
And, in the next five to six years, the objective should be to bring down the ratio of gross debt to gross domestic product (GDP). This means a squeezing of the fiscal deficit and subsidies.
In his Dr Raja J Chelliah Memorial Lecture, titled ‘Fiscal policy - challenges India faces today’, at the Madras School of Economics, organised on Thursday by the Southern Indian Chambers of Commerce, he said there were four broad objectives of such a policy.
It should be directed to achieving higher levels of economic efficiency and designed to promote growth. The third is the issue of distribution; fiscal policy is about making sure that different groups get a fair share of opportunities. Fourth, to stabilise the economy, to enable reaction to shocks, due to both internal or external factors.
To be competitive and to support growth, more government investment would be required to develop quality human capital (lacking now), on infrastructure and in social spending.
“It means government’s revenue at 19.4 per cent (of GDP) is not going to be enough. We need at least a four-five percentage points increase and for this, the fiscal deficit needs to be reduced,” he said.
In the 12th Plan, the proposal is for reducing subsidies by one percentage point of GDP; there has actually been a slight increase so far.
India's debt to GDP ratio is on the high-end among developing countries, except for Brazil. Yet, compared to industrialised countries, India’s debt doesn’t look that bad, he said. Quoting International Monetary Fund data for 2012, he said government revenue was 19.4 per cent of GDP and expenditure was 27.3 per cent. Gross debt was 66.7 per cent.
Tax reforms
In a globalisation era, he said, it was very important that our tax system and administration, and method of calculation, was aligned as much globally as possible. “We need to have a stable set-up and well understood rules. This is becoming doubly important in recent years because the nature of global trade has also changed. We have started to realise this.”
Globally, people are increasingly saying, if we are making an investment decision, we want certainty, like this is the tax rate and this is not going to be changed. You cannot have a system in-principle every year, said Ahluwalia.
He added that introducing a (national) goods and services tax would be the single most important tax reform and the best signal that India was open for business and we are serious about it.
Ahluwalia also felt we needed to bring down customs duty to levels prevailing in East Asian countries, by reducing it four to five percentage points. The cabinet recently approved a free trae agreement for both trade and services with the Association of Southeast Asian Nations, a major step towards integrating our economy with this dynamic part of the world. In five to seven years, duties on imports from Asean will drop to zero, he said.
Growth
Earlier, the fiscal policy and growth connection was simply seen as generating a surplus to do more private investment. In the past, growth was equated with investment. Today there is much realisation on the importance of human capital and its quality, as an ingredient into growth.
One of India’s weaknesses is that the quality of our human capital is not actually consistent with the ability to sustain growth at eight per cent annually for the next 20 years. We are very good in a small number of highly skilled occupations. Yet, the average number of years of education the Indian labour force has is less than five; in China, it is more than eight. We can’t expect high growth if a lot of people are not adequately educated.
This needs more investment, importantly by the government. Which is also why government revenue must go up. Globalisation also means public investment must go into high-quality infrastructure, if you want to be a part of a global supply chain.
