ECON/004 Fiscal Policy in India and Canada CASELET 1 ‘The fiscal deficit is one of the most serious problems facing the Indian economy. For the year 2001-02, the central fiscal deficit was $.7 percent of the GDP. If the fiscal deficit of the state governments is included, it amounts to more than 10 percent. This is large by any standard. Despite the fact that reforms were initiated more than a decade ago, the Indian economy has failed to contain the fiseal deficit ‘The Indian economy has various fiscal problems like unproductive expenditure, and subsidies, Public expenditure affects the overall long term growth of the economy. For example, the ‘money spend on education has an impact on human capital formation, and any investment made on the physical infrastructure has an impact on productivity of private capital. On the contrary, if any expenditure is made on current consumption, it leads to rapid debt accumulation, without the benefit of any build-up of capital. With the exception of the initial suecess achieved in 1991-92 under the pressure of the BoP crisis, there hasn’t been much improvement on the fiscal front, During the financial year 1999-2000, the fiscal situation was under tremendous pressure because of post-budgetary expenditure commitments. As defense and pension payments were not fully anticipated when the budget was formulated, there was a large outgo of funds. Moreover, the proceeds from disinvestments were also far less than anticipated. On the revenue side, tax collections were much below target. All these factors contribute to the worsening fiscal situation, ie has also undergone a sea change after the 1990s, Duty rates in excise and ns have come down drastically. But analysts feel that the peak customs tariff at 40% percent is still too high by international standards. Personal and corporate taxes are low by international standards. The direct tax structure has many incentives accompanying it. Direct taxes are not passed on, so the beneficiary is clear. To remain popular with middle-class salaried voters, the incentives have not been abolished. The problem is that this complicates the tax structure [Analysts feel that the central budget for the year 2001-02 has been designed with the aim of containing the growing fiscal deficit. To reduce the fiscal deficit, the finance minister has increased the surcharge on income tax by three percent. The policy of dividend taxation is expected to fetch Rs. 1500 crore, Reduction of some ofthe benefits under Section $8 is also one of the important measures to increase revenue. Though these measures address the problem of fiscal deficit to some extent, they do not provide a comprehensive solution. Analysts fee thatthe finance ‘minister should have adopted other measures to widen the tax base. The fresh surcharge has effectively increased the tax on income by approximately three percent. The goverment seems to be following the precept of “taxing the taxed”, The government concentrates more on those who already pay tax and less on those who do not pay at all. As the tax-payers pay these surcharges, their purchasing power will come dowa and it will have a cascading effeet on corporate profits, Many economists feel that these are highly unsustainable measures, and the government should think of widening the tax base and improving compliance.