The paper analyses important issues in Indian public finance in the context of the India’s economic development. Given the predominance of working population and with children in the age group 0-14 constituting over 40 per cent of the population, government finance has a critical role not only in protecting life and property but also in creating physical infrastructure to expand economic activities to generate employment opportunities and in providing social infrastructure to empower them to get productively employed. The analysis public spending, however, shows that spending on education and healthcare is woefully inadequate and expenditures on interest payments, subsidies and transfers have crowded out spending on physical and social infrastructures.

 

The reasons for the above phenomenon have to be found in the low levels of taxation apart from lopsided priorities. Based on the 98 country average behaviour, the paper shows that the tax-GDP ratio in the country is lower by 2-3 percentage points for its level of per capita GDP. The reasons for the low tax ratio have to be found in the exemption to agricultural incomes, widespread tax preferences due to multiple objectives loaded into tax policy, tax abuse by multinationals and poor tax administration.

 

The low tax collections are also the reasons for the persistence of large deficits and debt. Despite passing the FRBM Act to follow the rule based fiscal policy, containing the government deficits and debt has continued to be a major challenge and the targets are diluted, new concepts created and repeatedly postponed. The paper argues that there is a strong case for creating a fiscal council by amending the FRBM Act and it is should be appointed by the Parliament and should be reporting to it as recommended by the Fourteenth Finance Commission. This is in contrast to the Fiscal Review Committee’s recommendation according to which the Fiscal council should be appointed by the Finance Ministry and should report to it.

 

Keywords: Taxation and subsidies General

 

JEL Classification Codes: H20