Central finances in India - alternative to procrustean fiscal correction

Abstract

This paper examines the trends in Central finances over a threedecadal period beginning from the 1970s. It is found that there is lack of buoyancy in all the major sources of revenue of the Central Government. This calls for devising new methods of revenue mobilisation. There are political economic limits to the premise that direct taxes with its simplified rate structure and administrative reforms will make good the losses from the cuts in customs duty revenue. The analysis of the issues involved would require an examination of the influence of dominant classes on the state. Very recently however, the thrust of the tax reform seems to be on introduction of a Central Value Added Tax (VAT). Total expenditure of the Central Government as a proportion of the Gross Domestic Product (GDP) has not increased during the 1990s when compared to the 1980s. But the composition of expenditure has shifted more towards revenue expenditure. An emphasis on expenditure allocation with targetting at a detailed level and innovative tax reforms aimed at more revenue mobilisation are necessary to achieve qualitative fiscal correction, But this is often stymied for political economic reasons. Procrustean fiscal correction aiming merely at deficit targeting is not a very desirable method. The study finds that the main problem in achieving fiscal consolidation at the Central level is falling revenue and tax receipts during the 1990s.