Analysing inequality effect of fiscal policy is an elusive area of research in public economics. Using the unit record data of two recent NSS rounds on health, this paper analyses the benefit incidence of public health spending on inpatient service delivery, categorised by region, gender and economic class. Inpatient morbidity data among quintile-wise MPCE classes across three Indian states – Bihar, West Bengal and Kerala - are examined to decipher whether the benefit incidence of public health expenditure is pro-poor. The concentration curves and computed unit costs followed by polarisation ratios and odds-ratios reveal significant regional and gender differentials in access and utilisation of health services at sub national levels. West Bengal has remained unchanged in both the rounds in case of both the differentials – gender and region while Bihar has shown a significant improvement in bringing down regional differential. Kerala, however, explicate a different scenario where poor ‘voted with feet’ from public sector. The co-existence of private and public service provisioning in health sector may be one of the reasons for this behavioural ‘exit’ in Kerala, however, it is equally interesting to note the ‘voice’ elements when the targeting of public spending is pro-rich. 

Against the backdrop of UN 2030 Sustainable Development agenda, this paper analyses the measurement issues in gender-based indices constructed by UNDP and suggests alternatives for choice of variables, functional form and weights. Despite their relevance, the composite indices like Gender Development Index (GDI) and Gender Empowerment Measure (GEM) have been criticized for their technical flaws and later replaced with Gender Inequality Index (GII).  While GII conceptually reflects the loss in achievement due to inequality between men and women in three dimensions - health, empowerment and labour force participation – we argue that assumptions and choice of variables to capture these dimensions remain inadequate and erroneous, resulting in the partial capture of gender inequalities. Since the dimensions used for GII are different from HDI, we cannot say that a higher value of GII represents loss in HDI due to gender inequalities. However, it could be debatable whether using GII over GDI (GDI is equally distributed equivalent of HDI which measures gender gap in three dimensions of human development - health, education and command over economic resources) is advantageous, one of the main drawbacks of using GII is that along with the inequality indicators of women vis-à-vis men, it also contains absolute indicators that are defined specifically for women - like maternal mortality rate (MMR) and adolescent fertility rate (AFR). The corresponding values for men for these absolute variables are taken as 1 which is unrealistic and leads to overestimation of the gap between women and men’s health standards. The technical challenge remains -interpreting the index by combining women-specific indicators with gender-disaggregated indicators. GII is a partial construct as it has not captured many significant dimensions of gender inequality. Though this requires a data revolution, we tried to reconstruct GII in the context of Asia-Pacific using three scenarios: (i) improving the set of variables incorporating unpaid care work, pay gap, intra-household decision making, exposure to knowledge networks and feminisation of governance at local levels; (ii) constructing a decomposed index to specify the direction of gender gaps and (iii) an alternative index using Principal Components Index (PCI) for assigning weights. The choice of countries under the three scenarios is constrained by paucity of data. The results revealed that UNDP GII overestimates the gap between the two genders and using women-specific indicators leads to a fallacious estimation of gender inequality. The estimates are illustrative. The implication of the results broadly suggests a return to GDI for capturing gender development, with an improvised set of choices and variables.

It is often emphasised that seigniorage financing of public sector deficits is technically a “free lunch” if the economy has not attained the full employment levels. However, conservative macroeconomic policies in many emerging and developing economies, especially in the last two decades, have moved away from seigniorage financing to debt financing of deficits to give greater autonomy to the central banks. Against this backdrop, the paper analyses the fiscal and monetary policy co-ordination in India by constructing a fiscal seigniorage Laffer curve. If such a curve exists, it is possible to derive a seigniorage-maximizing inflation rate to estimate the optimal level of seigniorage financing of deficits. The illustrative estimates from the Indian data using error correction mechanism models confirm the possibility of a fiscal seigniorage Laffer curve. 

To remove cascading effect of taxes and provide a common nation-wide market for goods and services, India is moving towards introduction of Goods and Services Tax (GST). Under the proposed indirect tax reform both Central and State Governments will have concurrent taxation power to levy tax on supply of goods and services. It is expected that the proposed regime will improve tax collection and minimize leakage, as both Central and State Tax Administrations will monitor and assess same set of tax-payers. There are several challenges before introduction of GST and these can be classified into two broad heads – a) GST Design and Structure related, and b) GST Administration and Institutional. On design related issues, broad consensus on choice of revenue neutral rates (RNRs), harmonization of GST rate(s) across States, harmonization of list of exempted and excluded goods and services and thresholds for mandatory GST registration across States are yet to be reached. Similarly, there are several issues involved in tax administration (between Central and State Tax Administrations and also across State Tax Administrations) which are not yet solved. Taking cognizance of discussion available in the public domain this paper attempts to provide a broad contour of the proposed GST regime and highlights major challenges which require immediate attention of the Governments. 

Against the backdrop of the new monetary policy framework, this paper analyses the determinants of inflation in the deregulated financial regime. The paper upfront has been kept free from adherence to any particular school of thought on inflation, particularly fiscal theories of price determination (where inflation targeting is emphasised) and the monetarist axioms. Using the ARDL methodology, the determinants of inflation based on Wholesale Price Index (WPI) and the Consumer Price Index (CPI) have been empirically tested for the financially deregulated period. The results reveal that the supply-side variables are indeed significant and have a considerable effect on inflation. This result has policy implications especially in the context of a shift from discretion to rule-based monetary policy in the context of India.

The paper theoretically explores the impact of introducing bureaucratic competition on corruption. For this purpose it considers three different measures of corruption such as corruption incidence (CI), relative corruption incidence (CRI) and corruption rents (CR) in two different types of economies namely corruption-tolerant economies and corruption-reliant economies. As it compares both intensive margin (i.e. the magnitude of bribe) and extensive margin (i.e. the number of bribe incident) of corruption with and without bureaucratic competition, it turns out that as traditionally perceived the introduction of bureaucratic corruption does not necessarily reduce corruption in an economy. The outcome depends on the type of the economy that has been studied, the measure of corruption being used and the initial level of corruption in the economy. Among the counterintuitive results, we find that in a corruption-tolerant economy going by the CI measure, corruption is always higher under competitive regime compared to monopoly regime. The same holds true if the CR measure is used in such economies with sufficiently high share of corrupt officials. In a reliant economy, if CRI measure is applied, corruption is more in competitive regime.

This paper presents an empirical model for minimising selection failure by tax departments in selecting cases for scrutiny assessment. This model also provides a new methodology for estimating tax gap from limited information that the department collects on a regular basis through scrutiny assessments. Using a maximum-likelihood procedure that corrects for sample selection bias, and the data on the scrutiny assessment exercise carried out by the income tax department, we estimate the model which relates the probability and extent of under-reporting to various inputs provided by the tax filer. The estimated model provides a mechanism to analyse the trade-off between two types of cases of failure - wrong selection of a case and failure to take up the potential underreporter. 

The paper aims to explore the dynamics between components of public expenditure and public debt using an intertemporal optimization framework based on Turnovsky (2007). Public expenditure is classified as ‘productive’ and ‘less-productive’ based on the rationale that a proportion of the productive public expenditure (phi) corrects disequilibrium in the public debt in the long-run. The ‘second-order’ conditions resulting from the model demonstrate that as phi increases, the marginal social value of a unit of capital reduces. Thus, beyond its optimal level, an increase in phi could still affect public debt inversely; however, this will be at the cost of ‘crowding out’ of private investment. To test the theoretical representation and to analyse the relationship between public expenditure and debt, an empirical analysis using Indian Public Finance data (1980-2013) is carried out in this study. Time series methods are employed to test the hypothesis that capital expenditure of the government is productive public expenditure. The correlation, cointegration and ECM results show that real capital expenditure is cointegrated with real public debt of the Central and the General government. Additionally, in the long run, real capital expenditure adjusts to bring real public debt on a convergent path. The amount of disequilibrium corrected is 0.01 and 0.035 for the Central and the Consolidated General Government respectively. Key policy implications point towards a scope for increasing public capital expenditure in the Indian economy while complementing it with private investment stimulus to stabilize public debt in the long run. 

This study attempts to construct a consistent macroeconomic framework for India to review the macro-fiscal linkages over the 14th Finance Commission period of 2015-19. The existing NIPFP model has been reworked to add a full-fledged real sector block comprising of agriculture, industry, services and infrastructure, with the overall economy comprising of real sector block, external block, monetary block, fiscal block and macroeconomic block. The estimated model was used for policy simulations that are relevant for the 14th Finance Commission. The various scenarios include (a) shock due to 7th Pay Commission award, (b) targeting deficit and debt and (c) targeting higher growth. The results suggest that while Pay Commission award would result in slightly higher growth compared to the base case, this also results in higher inflation, fiscal-revenue deficits, current account deficit as well as higher government liability. Further simulation results suggest that expenditure switching policy, which is the core of expansionary fiscal consolidation mechanism, of increasing higher government capital expenditure and reducing the government transfers could result in higher growth with a manageable fiscal deficit of 5.3 per cent that also brings down the government (centre plus states) liability to around 60 per cent by 2019-20.

Many of the most promising low-carbon technologies currently have higher costs than the fossil-fuel based technologies. It is only through incremental learning from research, development and deployment that these costs can be reduced. Government intervention in the innovation process through fiscal policy instruments can be useful to accelerate this process, and catalyse early adoption. This paper reviews the best practices associated with the choice and design of such instruments and identifies the main lessons learned of their implementation in the case of renewable energy. The paper outlines an analytical framework which identifies the characteristics of drivers and barriers in innovation of RETs; sequencing of various steps involved in promoting innovation; and various policy tools in the context of each barrier that will help accelerate the process and enhance the outcomes. The paper notes that the issue of design and implementation of fiscal policy measures for RE technologies is complex and requires a nuanced, case by case approach, however, some useful broad conclusions can be drawn on the lessons learnt from these programs for future policy design and implementation

There has been a lot of interest in understanding and measuring the size of unaccounted incomes in economies. There are several methods to measure size of unaccounted income (or shadow economy) - e.g., monetary approach (or currency demand approach), latent variable approach and global indicator approach. Present paper proposes an alternative method by using transport as a universal input. The method is applied to Indian data. To capture the changing structural relationship between input-output and annual volatility of demands, we tested the methodology for two successive Input-Output tables and three consecutive financial years. Since the analysis is based on assumptions, a comparative static analysis is carried out to check the sensitivity of estimates to changes in the assumptions.

Unincorporated enterprises often bypass formal regulations in general and taxation in particular. However, escaping formal regulations does not always favour business of unincorporated enterprises and attracts multiple sources of exploitation (e.g., paying bribe to local administration, police and politicians). In other words, the benefits of that enterprises could reap by becoming part of the formal regulatory system often exceeds the costs of becoming a formal entity. Bringing unincorporated enterprises under taxation system is a challenge often faces by tax administrators and it is in this regard the present study explores the factors which influence decision of unincorporated enterprises to get registered with State tax authority. However, registration with State tax authority does not imply that the enterprises have to pay taxes and/or file return if they are not active or annual turnover does not exceed the threshold level. The study throws up interesting results for policy makers and tax administrators. 

This study looks into various sources of financing infrastructure and the demands for infrastructure investments and highlights the mismatch between demand and supply of funds for infrastructure financing in India. In order to address this mismatch, and given the constraints of traditional sources of infrastructure finance in India, this paper suggests credit enhancement scheme (CES) as an alternative framework for mobilizing long-term infrastructure finance. It suggests for scaling up CES as one of the options for leveraging global finance for long-term investment in infrastructure projects. The suggested scheme of credit enhancement could be scaled up at the G-20 level for mobilizing finance from sources which were earlier shying away from investing in infrastructure projects (e.g., pension and insurance fund). This study also suggests a possible structure for operationalizing this scheme at the G-20 level. The proposed scheme is not specific to G-20 countries, but could be used by other countries (including developing countries which have low sovereign ratings) to leverage long term finance for infrastructure sector.

This paper attempts to study financial access of unorganized manufacturing enterprises in India given their importance to the economy and the fact that finance has been the main constraint on their growth. We approach financial access from the macroeconomic growth perspective and hence focus on the availability of financial resources for the purpose of productive investment. Financial access is analysed at two distinct levels: 1) enterprises availing loan from the formal financial system; and 2) adequacy of loan from the formal financial sources in taking care of productive investment undertaken. The latter is measured as financial resource gap i.e. the proportion of productive investment not financed by the formal financial sources. Firm-level characteristics such as scale of operation, technology, performance, owned assets, ownership, education of owner, enterprise type, maintenance of accounts records and registration with government agencies, are considered as possible factors influencing financial access of enterprises. With the help of NSS unit level data and using Probit and Tobit, the results suggest that the unorganized manufacturing enterprises have limited financial access and large financial resource gap. Scale of operation, proportion of owned assets, enterprise type and ownership type, maintenance of accounts and registration with the government agencies found to have significant impact on the financial access of enterprises. Regarding financial resource gap, scale of operation, capital intensity, proportion of owned assets, education, maintenance of accounts and registration with government agencies turned out to be statistically significant factors. 

To deal with rising current account deficits, the government often uses instruments such as increase in customs tariffs. These are expected to induce an appreciation in the currency. In the presence of hawala markets which constitute an alternative payment mechanism, the control exerted by the customs tariffs is diluted, thereby reducing the effectiveness of this policy in controlling depreciation of the currency. The paper explores the impact of the existence of such a mechanism on the effectiveness of various policy instruments in influencing outcomes on the official foreign exchange markets and GDP.

We explore the normative fiscal assessments of the Finance Commission of India, and realisation of fiscal policy with regard to Central Finances over the period 1990-2012. We employ the Theil’s inequality coefficient to investigate the magnitude of assessment errors and its partitioning in to bias, slope and random components. Furthermore, this paper also evaluates the efficiency, biasedness and persistence of forecast errors. The robustness of the efficiency results are confirmed with the application of maximum entropy bootstrap. The objective of this study is to examine the structural basis on which Finance Commissions make their awards rather than examining the predictability of the forecasts.  The story of Finance Commissions assessments reflects an interesting political economy theatre of contention between aspirations and outcomes. Our key findings are as follows: Firstly, source of errors for assessments of tax revenue, non-tax revenue, interest payments, defence revenue expenditure, plan revenue expenditure and fiscal deficit is principally due to random component. However the errors in the remaining economic parameters originate due to systemic components i.e. mean and slope errors. Secondly, the expenditure side predictability is lower than the revenue side predictability. 

The importance of strengthening the human development (HD) achievements in a country to augment its growth potential is well known in development literature. Several initiatives to enhance the HD level have been introduced in India in recent past. However, the HD achievements still vary significantly across Indian States. The current paper attempts to observe the HD achievements for 28 Indian States over the last three decades and analyze their influence on growth patterns. The methodology adopted in the National Human Development Report 2001 has been applied for constructing the Human Development Index (HDI) in the current analysis, and the indices for rural and urban areas within each State are calculated separately. The results indicate importance of State-specific HD path and also the presence of high rural–urban disparity.

In the aftermath of global food & fuel price spikes and the recent global financial crisis, understanding of external sector behaviour has become crucial. More specifically, the transmission mechanism of external sector shocks to domestic macroeconomic variables is essential for undertaking relevant policies to mitigate adverse impact of such shocks. Here an attempt has been made to review the theoretical and empirical issues relating to India’s external sector behaviour and present a suitable analytical framework for macro modeling. 

This paper examines the dependence of states on central fiscal transfers. The pattern of dependence of states on central transfers is studied with respect to five groups of states, namely, high, middle and low income general category states and two groups of special category states categorized into high and low income states. We make a distinction between transfers that are in the form of an entitlement like states’ share in central taxes or statutory grants vis-a-vis transfers that are discretionary and depend on centre’s decisions. In terms of groups of states, the extent of dependence is relatively quite high for the special category states and the low income states. The extent of dependence was lowest during the period covered under the Tenth Finance Commission period. It has since increased, for all states considered together, by about 3.5 percentage points, from 37.4 percent to 40.9 percent of states’ revenue receipts. This increase comes both from entitlement transfers and discretionary transfers to the extent of 2.1 and 1.3 percentage points, respectively.

The study analyses the impact of keeping crude petroleum, natural gas, motor spirit (gasoline/ petrol), high speed diesel (diesel), aviation turbine fuel (ATF) and electricity out of the Value Added Tax (VAT) scheme. Specifically, the study finds that keeping these items out of the input tax credit mechanism (either partially or fully) would result in cascading. Through an input-output framework, this study proposes some alternatives to the proposed design of GST and assesses the implications for cascading and prices. It captures the degree of cascading across 48 sectors under different scenarios and explores alternative policy options to phase out under-recoveries of oil market companies on account of sales of diesel and petrol under the administered pricing mechanism.

A hornet’s nest could be an apt simile for fossil fuel prices in India. Over years a policy maze has evolved around it, with sharply diverging influence on disparate constituencies. We estimate the increase in total cost of farming as a multiple of direct input costs of fossil fuels in farming. Over the period between 1990-1 and 2010-1, direct use of fossil fuels on farms has risen and there is also increasing indirect use of fossil fuels for non-energy purposes. Consequently, for Indian agriculture both energy intensity and fossil fuel intensity are rising. But, these are declining for the aggregate Indian economy. Thus, revision of fossil fuel prices has acquired greater significance for Indian agriculture than for the remainder of the economy. We validate these findings by utilising an input-output table for the Indian economy to assess the impact of fossil fuel price increase. We assess that fossil fuels sector has strong forward linkages and increase in its price has a steep inflationary impact. Using a three-sector I-O model for Indian economy, we estimate that a 10 per cent increase in fossil fuel price could cause, mutatis mutandis, the wholesale price index (WPI) to rise about 4.3 percentage points with 0.7 percentage points being contributed by the farm sector alone.

Monetary policy in India has moved towards an increasingly flexible exchange rate regime without any explicit framework for an alternative nominal anchor. The failure of monetary policy to anchor inflationary expectations of agents, coupled with negative supply shocks has kept inflation above the acceptable range of 5-5.5% for last five years in India. In this paper we present a model for policy analysis for India that provides insights in the setting of an inflation targeting framework to anchor inflationary expectations. The model offers an understanding of the extent to which various shocks, including the post-global crisis fiscal stimulus, accommodative monetary policy and ensuing decline in global demand, explain growth and inflation in India.

Exchange rate stability is crucial for inflation management as a stable rate is expected to reduce domestic inflation pressures through a ‘policy discipline effect’- restricting money supply growth, and a ‘credibility effect’- inducing higher money demand and reduced velocity of money. Alternatively, the impossibility trillema predicts that in the presence of an open capital account, a stable exchange rate may lead to lack of control on monetary policy and, hence, higher inflation. Using a monetary model of Inflation, this paper investigates the impact of the de facto stable exchange rate regime on inflation in India during different episodes of exchange rate stability. The results show that the impact of exchange rate regime on inflation is not visible in Indian case, which could be because of the offsetting sterilization policy undertaken by Reserve Bank of India (RBI) during expansionary money supply growth resulting from its large scale intervention to even out exchange rate volatility.

Impact of fiscal policy at the firm level is a rare field of research. A major lacuna to date is the paucity of studies on the impact of public policy –especially fiscal policy –on the mining firms and their competitiveness. This paper on the mining sector is an attempt to analyse the sector, in particular, at its competitiveness. Against the backdrop of the Planning Commission’s High-level Committee Report on National Mineral Policy 2006, and the subsequent Mines and Minerals (Development and Regulation) Bill, 2011, this paper attempts at the legal and fiscal policy transition in the mining sector of India. The results challenge the popular view that the competitiveness of the mining industry is largely determined by the quality of mine endowments, geological characteristics and production cycle, and highlighted that fiscal policy regime – taxation and royalty regime – that affects the productivity of the mining firms more than the mine-specific factors. Recently, though the legal framework of the mining sector has incorporated the environmental and human developmental aspects in its policy, the fiscal regime related to mining is in a state of flux. Particularly, the current methodology of royalty estimation on an ad valorem basis on the ore, linking to London Metal Exchange (LME) reference Prices, in the non-ferrous non-atomic non-fuel mining sector requires a relook. From the public policy perspective, the royalty estimation should incorporate the mineral value chain and estimate royalty on the basis of concentrate, and in plausible cases, the metal at the end of the mine value chain, after the process of beneficiation and smelting process.

Gender responsive budgeting (GRB) is a fiscal innovation. Innovation is defined as a way of transforming a new concept into tangible processes, resources, and institutional mechanisms in which a benefit meets identified problems. GRB is a fiscal innovation in that it translates the gender commitments into fiscal commitments through applying a ‘gender lens’ to the identified processes, resources, and institutional mechanisms; and arrives at a desirable benefit incidence. Theoretical treatment of gender budgeting as fiscal innovation is not incorporated, as the scope of this paper talks broadly on the processes. GRB as an innovation has four specific components: knowledge processes and networking; institutional mechanisms; learning processes and building capacities; and public accountability and benefit incidence. This paper analyses these four components of GRB in the context of India. National Institute of Public Finance and Policy has pioneered research related to gender budgeting in India besides getting it institutionalised within the Ministry of Finance, Government of India. The Expert Committee Group on ‘Classification of Budgetary Transactions” recommendations on gender budgeting (Ashok Lahiri Committee recommendations) led to the institutionalisation process, integrating the analytical matrices of fiscal data through a gender lens and also the institutional innovations for GRB. Revisiting to the 2004 Lahiri recommendations and revamping the process of GRB in India is inevitable, at ex-ante and ex-post levels.

Incorporating time in public policy making is an elusive area of research. Despite the fact that gender budgeting is emerging as a significant socio-economic tool to analyze the fiscal policies to identify its effect on gender equity, the integration of time use statistics into this process remain partial or even nil across countries. If gender budgeting is predominantly based on the index-based gender diagnosis, a relook into the construction of the gender (inequality) index is relevant. This is significant to avoid a partial capture of gender diagnosis in the budget policy making. The “Hard-to-Price” services are hardly analysed for public policy making. The issue is all the more revealing, as the available gender (inequality) index so far has not integrated time use statistics in its calculations. From a public finance perspective, gender budgeting process often rest on the assumption that mainstream expenditure such as public infrastructure is non rival in nature and applying gender lens to these is not feasible. This argument is refuted by the time budget statistics. The time budget data revealed that this argument is often flawed, as there is intrinsic gender dimension to the non-rival expenditure.
 

A country witnesses currency exposure when locals hold a large amount of unhedged foreign currency denominated debt. However, India's capital controls continue to be guided by concerns about debt and its maturity, rather than its currency denomination. Even though the there is foreign appetite for rupee denominated debt, India has placed many restrictions on foreign investment in rupee denominated bonds. These include caps on the total as well as limits by investor class, maturity and issuer and have been implemented through a complicated mechanism for allocation and reinvestment. This paper presents the logic and rationale for why these restrictions fail to meet the objectives of economic policy today. It recommends removal of quantitative restrictions on foreign holding of Indian rupee denominated debt and suggests ways to move to a more effcient framework.

This paper attempts to present a framework for the estimation of fiscal multipliers for the Indian economy in the structural macroeconomic modelling tradition. Empirical estimates of short-run multipliers are obtained by giving shocks to a range of fiscal instruments - expenditures and taxes. As per our estimates, the values of capital expenditure multiplier, transfer payments multiplier and other revenue expenditure multiplier are 2.45, 0.98, and 0.99, respectively, while the tax multipliers are in the range of -1. Expenditure multipliers were also obtained in the presence of fiscal consolidation targets. These estimates again point to the strong multiplier effect of capital expenditure on output, and underscore the need to prioritize capital expenditure.