Against the backdrop of the new Monetary Policy Committee (MPC) decisions to maintain the status quo policy rates, we analyse the post-pandemic monetary policy stance in India. Using high-frequency data, the term structure of interest rate is analyzed incorporating monetary aggregates, fiscal deficit, inflation expectations and capital flows. The results revealed that the fiscal deficit does not significantly determine interest rates in the post-pandemic monetary policy stance in India. The long-term interest rates were strongly influenced by the short-term interest rates, which reinforces that term structure is operating in India. The results further revealed that long-term interest rates were also positively influenced by capital flows, and inflation expectations, while it was inversely impacted by the money supply. These inferences have policy implications on the fiscal and monetary policy coordination in India, where it is crucial to analyse the efficacy of high interest rate regime on public debt management.  Our results also refute the popular belief that deficits determine interest rates in the context of emerging economies. 

Against the backdrop of demographic transition in India, the study highlights the necessity of integrating the elderly population as a critical factor in formula-based intergovernmental fiscal transfers. The demographic transition, characterized by an increasing elderly population, imposes unique fiscal challenges on states, necessitating a revision of transfer formulas to ensure equitable and efficient resource distribution. The paper employs a historical analysis of fiscal devolution criteria, and analysing the impact of incorporating the elderly population into the devolution formula on the share of states in the total tax transfer to states. The findings indicate that integrating the elderly population into the tax devolution formula can significantly alter the distribution of resources among states, with states having higher shares of elderly populations benefiting more. The study recommends that there is a need to consider demographic changes by incorporating the share of elderly population to working age population ratio as a criterion by the Sixteenth Finance Commission to promote a more equitable and efficient allocation of resources.

The paper analyses the fiscal performance of the Central Government and the States of India. It addresses the question of whether the central and state governments have fully recovered from the mega fiscal shock of the Covid 19 pandemic of 2020-22 by examining their fiscal performance today (i.e., 2023-24, 2024-25) as compared to a baseline before the pandemic shock (2019-20). With state governments accounting for about two-thirds of public spending and a third of total revenue, the fiscal performance of states has always been an important component of India’s overall fiscal performance. It turns out that of late there are signs of lax fiscal discipline at the state level. The paper develops a particular developmental taxonomy of States as a lens through which to assess their fiscal performance. This lens is used to compare the intra-group and inter-group fiscal performance of States to assess whether their fiscal performance is related to their development orientation as also how the fiscal behavior of individual States in the different groups has evolved over time. 

Gender budgeting is a public financial management (PFM) tool to ensure accountability mechanisms. The analysis of "process" indicators of gender-responsive PFM (GRPFM) reveals that India has been successful in integrating a gender lens within the budget cycle, including in financial planning and allocation, and in effective implementation. However, a legally mandated GRPFM would be crucial for the sustained impact of gender budgeting on gender equality outcomes. The empirical analysis of the link between gender-responsive PFM and gender equality outcomes showed that the flexibility of finances is crucial for a government to implement GRPFM. Unconditional fiscal transfers have a relatively greater impact on gender equality outcomes than conditional transfers. The plausible mechanism through which unconditional tax transfers impact gender equality outcomes lies in the flexibility of use of tax transfers by subnational governments in prioritizing their gender-related commitments. This inference has policy implications for the 16th Finance Commission.

The paper analyses gender budgeting as a fiscal innovation to translate the public policies into 'beyond GDP’ commitments incorporating a gender lens. Earmarking a specific proportion of fiscal allocations for gender budgeting can be only a second best principle of gender budgeting. With the advent of fiscal decentralisation, a few countries in the Asia Pacific region have experimented with gender budgeting as a PFM tool of accountability and fiscal transparency. However the lack of gender disaggregated data and lack of flexibility of finance at local levels thwarted the process of deepening gender budgeting. The legally mandated gender budgeting process led by Finance Ministries has been found as the sustainable model of gender budgeting to translate resources into results. Fiscal marksmanship (deviation between budget estimates and actual spending) is an important prerequisite for establishing such result-based fiscal frameworks of gender budgeting.

Against the backdrop of G20, we analyze the climate responsive budgeting as a tool of transparency and accountability towards climate change commitments. The detail Demand for Grants across sectors in India is analyzed for the climate intensive allocations under the identified eight components of adaptation matrices, incorporating crop improvement and research, drought proofing and flood control, forest conservation, poverty alleviation and livelihood preservation, rural education and infrastructure, health, risk financing and disaster management, for the period 2020-21 to 2023-24 for adaptation accountability in India. We found that more than forty sectoral ministries have adaptation related expenditure, accounting for around 5 per cent of GDP in India. The fiscal marksmanship and PEFA scores related to these eight core areas revealed that there are deviations between Budget Estimates and Actual spending across sectors. The template for climate responsive budgeting attempted in the paper has policy contributions to make the climate responsive budgeting matrices sustainable and comparative across G20 countries.

Using OECD evaluation criteria, we analysed the child protection schemes of Odisha to understand whether legal commitments on child protection are translated into fiscal commitments. The intergovernmental fiscal transfers and State specific specifically targeted programmes for the children in need of care and protection (CNCP) and children in conflict of law (CCL) are evaluated   using the OECD criteria of   relevance, coherence, effectiveness, efficiency and sustainability. Using the theory of change, various fiscal interventions for child protection are analysed with activities, outputs, intended outcomes and impacts. The analysis revealed that in the post pandemic fiscal strategy of Odisha, various programmes have been designed by the government to tackle the capability deprivation, hardships and vulnerabilities faced by the children within the budgetary frameworks and these programmes are made fiscally sustainable through public expenditure convergence within the classification of budgetary transactions. However, the low utilisation ratios of the funds and the institutional constraints are identified as the challenges in the effective implementation of child protection programmes in Odisha.   

This paper is a summary of the status and compilation issues in the National Accounts. In addition to a brief summary of the sources and methods of estimation, the paper covers the set of issues that have emerged with the 2011-12 series of national accounts after it was introduced in 2015. Some of the key measurement issues are in the manufacturing sector, particularly after the introduction of the MCA21 database. A summary of issues with the expenditure side estimates and regional accounts are also presented. While the focus is largely on the estimates of aggregate value added, a comprehensive analysis is also needed for other macro-aggregates, such as consumption expenditure, savings, capital formation, input-output transaction tables and transactions of the public sector. Given the present compilation of national accounts, major macro-indicators such as savings, expenditure side estimates, etc. are yet to be compiled at the state level. On the sources and method front, issues with the household sector and status of the data sources are highlighted. Lastly, new challenges for GDP estimation, Code of Practice, among others are some of the areas that need systematic research initiatives for overall improvement of official statistics.

Abstract

Against the backdrop of fiscal rules – legally mandated fiscal responsibility and budget management (FRBM) Act - our paper explores the budgetary forecast errors of climate change related public spending in India. The fiscal rules stipulate that fiscal deficit to GDP ratio should be maintained at 3 per cent. However, in the post-covid fiscal strategy, a medium term fiscal consolidation path of 4.5 percent fiscal deficit-GDP is envisioned by 2025-26. Within this fiscal consolidation framework, we analysed the budget credibility of fiscal commitments for climate change in India. We analysed the fiscal behavioural variables in terms of bias, variation and randomness, and captured the systemic variations in budgetary forecast related to climate change for a period 2017-18 to 2020-21 across sectors. We identified the sectors where systematic components of forecasting errors are relatively higher than random components, where minimising errors through altering the fiscal behavioural models are done by revising the assumptions and by applying better forecasting methods. A State level decomposition of the public spending revealed that disaggregated fiscal space available for developmental spending constitute around 60 per cent of total. However, identifying the specifically targeted public spending related to climate change across all States and analysing its fiscal markmanship can further the subnational inferences.

Keywords: Fiscal marksmanship, budget forecast errors, climate change, state finances.

JEL codes: H30, H50, H70, Q58

Abstract

India has entered into the Inflation Targeting (IT) monetary policy regime in 2015. Under this rule-based monetary policy regime, changes in the policy rate transmits to the economic activities and current inflation rate by altering the inflation expectation of the rational economic agents. This study empirically investigates whether monetary policy can anchor inflation expectation of economic agents in India. In our analysis, the survey based measure of households’ inflation expectation published by the Reserve Bank of India (RBI) captures inflation expectation of private agents. Using a co-integrated Vector Auto Regression (VAR) model, we find moderate but significant monetary policy transmission in India via interest rate channel. However, inflation expectation seems to be unanchored by monetary policy conduct in the country. Our finding is found to be robust under alternative modeling frameworks.

JEL Clasification: C32, C5, E31, E52, E58.

Keywords: Inflation expectation, Monetary policy, Co-integrated VAR, India.

Abstract

In a recent innovative policy reform, India’s corporate income tax system was overhauled with optional lower rates in lieu of giving up complex deductions. However, official data reveals a puzzle wherein larger companies ha ve op ted mo re fo r th e lower optional rates while smaller ones appear reticent in switching to the optional regime. This paper explores this issue using empirical methods. The evolution of tax rates is tracked through reforms simplifying the tax system in the 1990s, the subsequent conundrum of zero tax companies leading to introduction of minimum alternate tax, and the persistence of lower effective tax rates for larger c ompanies. This provides the rationale for a simpler tax regime with lower rates but fewer deductions. The user cost of capital approach is used to examine the economically relevant tax impact across various sectors and ownership types. The results indicate that in terms of user cost, the various lower tax options are not attractive, and under certain situations may be worse for younger and smaller companies. In light of the analysis, policy options are suggested to improve the scheme so as to achieve the laudable objective of implementing a simple tax regime with lower rates and minimal deductions.

Keywords: Corporate income tax, User cost of capital, Minimum alternate tax

JEL Codes: D21, E22, H25

Abstract

By comparing comparable revenue streams of pre- and post-GST periods, in this paper we assess the revenue performance of GST in India for the period 2012-13 to 2022-23. Sustaining revenue streams of the Union and State governments (in terms of percentage share in nominal Gross Domestic Product or GDP) between the pre- and a post-GST period is important for sustainable Public Finance Management. We observe that post-GST tax buoyancy in the GST regime has improved for the Union, state and general governments. The GST-to-GDP ratio of the Union as well as state governments has not yet improved during the post-GST period as compared to the equivalent share of respective revenue streams in GDP during the pre-GST period. Based on available information, we estimate C-efficiency ratio (or collection efficiency), Effective Tax Rates, Compliance Gap and Policy Gap of GST for the period Q2:2017-18 to Q3:2022-23. We find that average C-efficiency of GST is 0.54 (or 54%) which is in line with available evidence from developing Asian countries. Average ETR has gone up from 10.91 per cent in 2020-21 to 12.21 per cent in 2021-22 and 12.56 per cent up to Q3:2022-23 of 2022-23. The share of policy gap in C-efficiency is higher than compliance gap which is in line with available evidence from EU and OECD countries. 

Assessing the revenue implications of GST on Indian state finances cannot be contained to compare the revenue stream which is subsumed into GST with State GST collection alone. Since GST subsumes many taxes from state tax bases, comparing the revenue performance of taxes which are outside the GST framework would be equally important. Moreover, in federal system revenue implication of shortfall in tax collection of the federal government is also likely to spill-over to sub-national finance in terms of lower tax devolution. Sustaining revenue streams of state governments is important for sustainable Public Finance Management (PFM) and therefore a comprehensive assessment of state finances before and after GST would be important. This paper attempts to fill the gap in exiting literature by assessing the revenue of 18 major states during pre- and post-GST periods.

The COVID pandemic imposed dual pressures on state finances. Contraction in revenues was coupled with an increased pressure to expand public spending to counter the adversities of the pandemic. Evidence from 26 states suggest that aggregate revenues fell by about 5 per cent in the pandemic year, 2020-21. Despite this fall, States have maintained a 5 per cent average growth rate of aggregate spending. Public expenditure in social sector grew at a significantly higher rate than economic services. Within social services, health expenditure in 15 selected major states grew at 16 per cent, the highest among all. This rise in health spending has however, come at the cost of expenditures in a number of other important sectors.  Expenditures in education and nutrition remained nearly stagnant in the pandemic year.