| (From left) Parthasarathi Shome, director of the Singapore Training Institute of the IMF, with S. K. Bajoria, past-president, Indian Chamber of Commerce, in Calcutta on Friday. Picture by Kishor Roy Chowdhury.
Calcutta, Oct. 18: India should widen the tax base and reform state-level taxes so as to reduce the fiscal deficit, according to Parthasarathi Shome, director of the International Monetary Fund, Singapore Training Institute.
Shome, who was in the city to address the Indian Chamber of Commerce, also said the tax burden on the manufacturing sector is too high at a time when it is passing through a bad patch. He added the service sector should be brought within the tax net.
Shome has charted out a five-pronged strategy to address India’s fiscal deficit, which includes restructuring central government tax and expenditure, reforming state level taxes and pervasive subsidies and further decentralisation.
He said over the last decade, the decline in central government’s revenue performance in terms of gross domestic product (GDP) is due to falling tax revenues. Moreover, an increasing interest burden has co-existed with diminishing expenditure, both Plan and non-Plan.
The fiscal deficit of the central government has shown no clear declining trend over the 1990s. Shome said this has happened because the non-Plan expenditure has exceeded total receipts (as well as gross tax revenue) during the decade. Since 1995-96, interest payments have been higher than Plan expenditure and within Plan expenditure, capital expenditure has remained below Plan revenue expenditure since 1991-92.
“Even if we regard the interest payments as a legacy of the past and look at other items of non-Plan expenditure, we find that there has been a rise in non-internal non-plan expenditure. It becomes more disturbing when one considers that the expenditure trends have been accompanies by a renewed decline in tax revenue,” he said.
Commenting on the poor state finances he said that while the non-tax revenue has declined since 1995-96 there has been a steep rise in expenditure of the states. The rise is accounted for entirely by revenue expenditure (both interest payments and administration costs) at the cost of productive expenditure, which has experienced a marked decline. He said each state should work out separate models to address their fiscal problems.
Shome said the government should reduce subsidies in sectors like electricity and irrigation, but continue with those in health and education.