Recently, the Kelkar Committee published a roadmap for fiscal consolidation. The report stresses the need and urgency to address India’s fiscal deficit. A high fiscal deficit – the excess of government expenditure over receipts – can be problematic for many reasons. The fiscal deficit is financed by government borrowing; increased borrowing can crowd out funds available for private investment. High government spending can also lead to a rise in price levels. A full PRS summary of the report can be found here. Recent fiscal trends Last year (2011-12), the central government posted a fiscal deficit of 5.8% (of GDP), significantly higher than the targeted 4.6%. This is in stark contrast to five years ago in 2007-08, when after embarking on a path of fiscal consolidation the government’s fiscal deficit had shrunk to a 30 year low of 2.5%. In 2008-09, a combination of the Sixth Pay Commission, farmers’ debt waiver and a crisis-driven stimulus led to the deficit rising to 6% and it has not returned to those levels since. As of August this year, government accounts reveal a fiscal deficit of Rs 3,37,538 crore which is 65.7% of the targeted deficit with seven months to go in the fiscal year. With growth slowing this year, the committee expects tax receipts to fall short of expectations significantly and expenditure to overshoot budget estimates, leaving the economy on the edge of a “fiscal precipice”.
Figure 1 (source: RBI)
Committee recommendations - expenditure To tackle the deficit on the expenditure side, the committee wants to ease the subsidy burden. Subsidy expenditure, as a percentage of GDP, has crept up in the last two years (see Figure 2) and the committee expects it to reach 2.6% of GDP in 2012-13. In response, the committee calls for an immediate increase in the price of diesel, kerosene and LPG. The committee also recommends phasing out the subsidy on diesel and LPG by 2014-15. Initial reports suggest that the government may not support this phasing out of subsidies.
Figure 2 (source: RBI, Union Budget documents, PRS)
For the fertiliser subsidy, the committee recommends implementing the Department of Fertilisers proposal of a 10% price increase on urea. Last week , the government raised the price of urea by Rs 50 per tonne (a 0.9% increase). Finally, the committee explains the rising food subsidy expenditure as a mismatch between the issue price and the minimum support price and wants this to be addressed. Committee recommendations - receipts Rising subsidies have not been matched by a significant increase in receipts through taxation: gross tax revenue as a percentage of GDP has remained around 10% of GDP (see Figure 3). The committee seeks to improve collections in both direct and indirect taxes via better tax administration. Over the last decade, income from direct taxes – the tax on income – has emerged as the biggest contributor to the Indian exchequer. The committee feels that the pending Direct Tax Code Bill would result in significant losses and should be reviewed. To boost income from indirect taxes – the tax on goods and services – the committee wants the proposed Goods and Service Tax regime to be implemented as soon as possible.
Figure 3 (source: RBI)
Increasing disinvestment, the process of selling government stake in public enterprises, is another proposal to boost receipts. India has failed to meet the disinvestment estimate set out in the Budget in the last two years (Figure 4). The committee believes introducing new channels [1. The committee suggests introducing a ‘call option model’. This is a mechanism allowing the government to offer for sale multiple securities over a period of time till disinvestment targets are achieved. Investors would have the option to purchase securities at the cost of a premium. They also propose introducing ‘exchange traded funds’ which would comprise all listed securities of Central Public Sector Enterprises and would provide investors with the benefits of diversification, low cost access and flexibility.] for disinvestment would ensure that disinvestment receipts would meet this year’s target of Rs 30,000 crore.
Figure 4 (source: Union Budget documents, PRS)
Taken together, these policy changes, the committee believe would significantly improve India’s fiscal health and boost growth. Their final projections for 2012-13, in both a reform and no reform scenario, and the medium term (2013-14 and 2014-15) are presented in the table below: [table id=2 /]
There have been articles in the media on the future passage of the Women's Reservation Bill stating that the Bill will have to be ratified by state legislatures before it is signed into law by the President. Our analysis indicates that ratification by state legislatures is not required. We state the reasons below: This Bill amends the Constitution. It (a) amends Article 239AA, Article 331, and Article 333, and (b) inserts Article 330A, Article 332A, and Article 334A. In doing so the Bill:
Article 368 regulates the procedure for amending the Constitution. It states that the ratification of the state legislatures to a constitutional amendment is required in the following cases: a. If there is a change in the provisions regarding elections to the post of the President of India. b. If there is a change in the extent of the executive power of the centre or the state governments. c. If there is any change in the provisions regarding the Union judiciary or the High Courts. d. If the distribution of legislative powers between the centre and the states is affected. e. If any of the Lists in the Seventh Schedule is affected. f. If the representation of the states in the Rajya Sabha is changed. g. Lastly, if Article 368 itself is amended. None of these provisions are attracted in the case of the Women's Reservation Bill. The Parliament recently extended the reservation of seats for SCs, STs and Anglo-Indians in Lok Sabha and Legislative Assemblies by another ten years. Article 334 was amended to state that such reservation "will cease to have effect on the expiration of a period of seventy years from the commencement of the Constitution." The 109th Amendment Bill was passed by both Houses of Parliament and did not require the ratification of the states before being signed into law by the President. It follows that if Bills amending provisions for reserving seats for SCs and STs don't need ratification by state legislatures, a bill reserving seats for women does not need ratification either. Thus Article 368 very clearly lays down situations in which state legislatures have to ratify a piece of legislation before it can receive the assent of the President.
