ECONOMIC POLICY AND TAX REFORM IN INDIA (1994)

ECONOMIC POLICY AND TAX REFORM IN INDIA (1994)
Foreword by M. S. Swaminathan           K. Puttaswamaiah,Editor

The six papers contained in this book address to the task of new economic policies and tax reforms being attempted in India. The chapter on Towards a New Adjustment and Reform Rationale, emphasises the need for recasting our entire development and planning profile on a self-reliant, domestic savings-based, austere, wage-goods productivity-based foundations.
The second chapter provides a detailed analysis of the development and structure of tax reforms in India since Independence. India's fiscal problems are identified and a policy framework for the future is provided. After reviewing a number of valuable reports of the government commissions on taxation, the most important one relating to the Chelliah Committee is also examined. Chapters three and four deal with the development expenditure and public debt in India and debt-tax revenue ratio and government spending with the latest empirical analyses.
In the context of agricultural development, the chapter on Consumption Behaviour and Demand Projections of Fertilizers in India is important. The chapter also provides the guidelines for deciding the future demand, using the model of Tobin. The last chapter on Regional Economic Change and Development Policy in India is an important one as the disparities in development  in the various regions in India still persist, in spite of the planned era of over four decades. The picture of regional differentiation in terms of economic policy has been given very well and suggestions for bridging the gaps in development between different regions are pointed out. Prof. M.S. Swaminathan in his 'Foreword' has said that "the book addresses issues of great contemporary relevance. It provides valuable insights into areas requiring urgent attention from planners and public policy makers."
It is hoped that this book will be useful to planners, policy makers, as well as academicians, researchers and all those concerned with the subject of planning and economic policy.

The book on Economic Policy and Tax Reform in India edited by Dr. K. Puttaswamaiah is a timely contribution. There is now much debate in the country on the short-term and long-term impact of the new economic policies introduced during the last three years. There has also been much debate on the tax structure in the country and on the need for increasing the proportion of tax-paying population. The greatest worry, however, relates to the growing external and internal debt burden. There are some innovative ideas in these fields presented in the different chapters of this book.
The article on the fertiliser situation is also a valuable contribution. He analysis has shown that the official projections on fertiliser demand may be exaggerated. Fertiliser policies need to be structured on scientific and rational principles so that soil health remains suitable for sustainable advances in crop productivity. The paper on the regional aspects of economic change and development is an extremely important one. Regional disparities and intra-state
differences in economic prosperity are fuelling ethnic conflicts. It is important that no further time is lost in promoting a job-led economic growth strategy in all parts of the country rooted in the principles of ecology, economics and equity, particularly in gender terms.
In general, the book addresses issues of great contemporary relevance. It provides valuable insights into areas requiring urgent attention from planners and public policy makers. We are deeply indebted to Dr. Puttaswamaiah for the trouble he has taken in getting this excellent book prepared.

Madras June 8, 1994                                                       M.S.SWAMINATHAN 

On the onward journey of planning and economic development, we have already passed through seven Five Year Plans and we are almost on the verge of the Eighth Five Year Plan. The Nineth Plan has to be a more qualitative one aiming at poverty eradication. The macro-level planning has to be replaced by microlevel planning and the bottom-up approach has to be adopted. The country is implementing the New Economic Policies and the structural adjustments are being attempted at the macro level. As the next step, the structural adjustment process has to be at the district and the lower levels.
In me above context, the six papers contained in this book address to certain tasks required in the above process. While Prof. P.R. Brahmananda's paper "Towards a New Adjustment and Reform Rationale" stresses the need for 'recasting our entire development and planning profile on a self-reliant, domestic savings-based, austere, wage-goods productivity-based foundations', the papers by Professors Robin Burgess & Nicholas Stern, N.S. Bhat, K. Sham Bhat & V. Nirmala deal with tax reform and public debt in India in Uieir historical, empirical analyses as at present. Professors D. Varadiarajan & K.K. Saxena have analysed some issues in the Indian fertiliser market. Prof. Ashok Madiur's paper on "Regional Economic Change and Development Policy in India" is very important in that it explains the present status of the regional economic disparities in the country and provides suggestions for aiming at a better
regional economic development.

Prof. P.R. Brahmananda explains in his paper the Indian economic crisis and its various facets. The ways out of the crisis are also given. The paper contains an examination of structural adjustment process and the future perspectives on the contours of economic policy. He further goes on to explain the implications of full currency convertibility. The paper also examines the base factors in the light of a number ofcommittees constituted by the Government of India, more importantly the Narasimham Committee.
Professors Robin Burgess and Nicholas Stern in their paper on "Tax Reform
inIndia"havetraced the genesis of the development and structure of tax revenues in India since Independence. An understanding of the background to India's severe fiscal problems is crucial to the design of policy to overcome them. At an aggregate level, the surges in deficits and debts took place
in the 1950s and 1980s. These were decades both of faster growth and of more ambitious economic policies, although the direction of the policies was radier different in the two decades. The structure of taxation appears to have been influenced both by Centre-State allocations and relations and development policy. India has seen a number of valuable reports by government commissions on taxation, and the major ones are reviewed in this paper. The most recent report, by the Chelliah Committee, has been of particular comprehensiveness and value. Prominent amongst all the reports has
been a recognition of the absence of progress in collecting the personal income tax. The paper concludes by specifying a specification of a number of topics for furmer research, emphasising political economy, income distribution, Centre-State relations and allocations, and the integration of tax policy with changing views of the role of the state and towards trade and industrial policy. All
such analyses should be seen in relation to the overwhelming importance of closing the deficits.
The papers by Professors N.S. Bhat, and K. Sham Bhat & V. Nirmala deal with "Development Expenditure and Public Debt in India" and "Debt-Tax Revenue Ratio and Government Spending" respectively. The paper by Prof. N.S. Bhat explains how the development expenditure has increased in India, such as cost, public debt and has contributed to budgetary deficits. The objective of this paper is to analyse the empirical relationship between development expenditure and public debt in India and to suggest possible means of lessening the burden of public debt in future. This, he feels, is possible, if the government de-emphasises its developmental role and reduces its development expenditure and gives wider scope for private entrepreneurship in the country to ensure rapid economic development and reduction in the burden of public debt.
The paper "Debt-Tax Revenue Ratio and Government Spending" by Prof. K. Sham Bhat & V. Nirmala examines one of the most controversial and yet unresolved issues in macroeconomic analysis relating to the impact of burden of national debt on the economic activity of the country. The objective of the study is to investigate the hypothesis that increase in public debt-tax revenue ratio causes growth in government spending in the context of India. Granger and Sims tests are used for the purpose. The analysis reveals a unidirectional relationship, indicating that the growth of government expenditure causes the ratio of debt-tax mix ratio. This contradicts the assumption of public choice theory of a majority voters' perceptions being a major influence on the actual spending of government. Rather, it is the politicians and few bureaucrats who decide the level of government expenditure with the vote bank in their mind.
Professors D. Varatharajan & K.K. Saxena in their paper on "Consumption Behaviour and Demand Projections" have analysed the consumption behaviour and demand projections of fertilisers in India.  Using a simple model, this paper analyses theconsumption behaviour for a period that includes the glut
years as well. The paper has also come out with ex-ante projections for the glut period using the same model but excluding the extreme glut years. The ex-ante projections are then compared with actual demand as well as the official projections. The model has performed fairly well to explain the demand
behaviour and our projections are reasonably close to the actual demand. Having done this, the paper has also attempted to see what sort of behaviour the planners exhibit while deciding the future demand, using a model of Tobin.
Prof. Ashok Mathur's paper on "Regional Economic Change and Development Policy in India" is considered important in the context of our planning. The paper mainly discusses three aspects of regional development in India. Firstly, it tries to put together evidence regarding trend of inter-state disparities in
terms of some key economic indicators.

The second aspect in this paper relates to the examination of the regional domination of growth of output, employment expansion, structural change and some demographic variables. The third area of investigation in this paper relates to the success of the regional policy in achieving greater spatial equity. In this context, the role of some key infrastructural variables and that of devolution of resources from Centre to the States has been examined. The picture of regional differentiation in terms of economic development has been given very well and suggestions for bridging the gaps in development between different regions are pointed out. The above six papers have been selected from among many articles  published already in the various issues of the Indian Journal of Applied Economics, as they are of topical interest in the context of India's policies relating to economic development and taxation.
I am thankful to the authors for their contributions. I wish to place on record my gratitude to Prof. M.S. Swaminathan, Member, Advisory Committee of the Indian Journal of Applied Economics for his support to the journal and for his Foreword to this book. I am also grateful to his kind words of appreciation in it.
It is hoped that this book will be useful to planners, policy makers, as well as academicians, researchers and all those concerned with the subject of planning and economic policy.
                                                                         K. PUTTASWAMAIAH

Foreword by M.S. Swaminathan                                                          5
Preface                                                                                                7
Contributors                                                                                      13 
1. Towards a New Adjustment and Reform Rationale                        15
—P.R. Brahmananda
2. Tax Reform in India                                                                        43
—Robin Burgess & Nicholas Stern
3. Development Expenditure and Public Debt in India:
An Empirical Analysis                                                                        124
—N.S. Bhal
4. Debt-Tax Revenue Ratio and Government Spending:
What Causes What?                                                                        134
—K. Sham Bhat & V. Nirmala
5. Consumption Behaviour and Demand Projections:
Some Issues in Indian Fertiliser Market                                           145
—D. Varatharajan & K.K. Saxena
6. Regional Economic Change and Development Policy
in India                                                                                            158
—Ashok Mathur