Paul Krugman & Vijay Kelkar

The Economic Messiahs
The following document is an attempt to focus on major work in the field of Economics done by well known economists Paul Krugman and Vijay Kelkar

1980) with transactional costs to show how single currency can emerge as an international medium of exchange. Emergence of a core-periphery pattern depends on transportation costs. He developed a model of payment equilibriums (Journal of Money Credit and Banking. 1991. Earlier trade theories focussed on trade as a result of comparative advantage of countries with different characteristics. in economics from Yale University in 1974 and his PhD from the Massachusetts Institute of Technology (MIT) in 1977. Thus the economic regions with most production will be more profitable and will therefore attract even more production. economic geography and international finance. 1979. which will become densely populated and also have higher levels of income. He earned his B.A. Centenary Professor at the London School of Economics and an op-ed columnist for the New York Times. economies of scale. He studied the portfolio approach in terms of finance theory (1981. general equilibrium model of non-comparative advantage trade. Krugman was born and grew up in New York. Krugman is known for his work in international economics including trade theory. technology and factor endowments. in the Journal of Political Economy. Production will tend to concentrate in a few regions.Paul Krugman Introduction Paul Robin Krugman is an American economist and professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University. He writes about topics ranging from income distribution to international economics. arguing that differences in the portfolios of different countries explain why changes in the world distribution of wealth affect exchange rates. thus the trade can also occur between countries with similar characteristics of taste. Krugman is known for his work on the New Trade theory. and the share of manufacturing in national income. It states that in order to realize scale economies while minimizing transport costs. He mentioned that the two main important factors driving trade are consumer’s preference for a diverse choice of brands and production economies of scale. . In his research paper The Journal of International Economics. Krugman has won the Nobel memorial prize in economic sciences for his contributions to New Trade Theory and New Economic Geography. This model of trade was called the New trade Theory An extension to this theory came in the form of The New economic geography. manufacturing firms tend to locate in the region with larger demand. he described a simple. Economies of scale lead to imperfectly competitive markets. but the location of demand itself depends on the distribution of manufacturing. NBER Working Papers 0651). He is the 20th most widely cited economist in the world and is ranked among the most influential academic thinkers in the US. Krugman’s contribution in the field of International Finance has also been significant. liquidity traps and currency crisis.

The core of Krugman's policy proposal for addressing Japan's liquidity trap was inflation targeting. and investment banks unregulated. In response to economists who point out that the Japanese economy recovered despite not pursuing his policy prescriptions. he considered the Obama administration's actions to prop up the US financial system in 2009 to be impractical and unduly favorable to Wall Street bankers. he argued most nearly approaches the usual goal of modern stabilization policy. which he believes to be a significant drag on global economic recovery from the Late-2000s recession. Krugman has also been critical of some of the Obama administration's economic policies. and he has advocated a "surcharge" on Chinese imports to the US.Krugman identifies as a Keynesian. In the early 2000s. He has done much to revive discussion of the liquidity trap as a topic in economics. financial markets. He recommended pursuing aggressive fiscal policy and unconventional monetary policy to counter Japan's lost decade in the 1990s. He criticized the Obama stimulus plan as being too small and inadequate given the size of the economy and the banking rescue plan as misdirected. Krugman claimed that these efforts could lead the global economy into the early stages of a "third depression" and leave "millions of lives blighted by the absence of jobs. since the central bank could not drop interest rates any lower to escape economic stagnation. He argued that the tax cuts enlarged the budget deficit and worsened the income distribution in the US. Krugman has repeatedly expressed his view that Alan Greenspan and Phil Gramm are the two individuals most responsible for causing the subprime crisis. military. arguing that the country was stuck in a Keynesian liquidity trap. and unlike permanent tax cuts. He advocated lower interest rates (to promote investment and spending on housing and other durable goods). would only temporarily increase the budget deficit. which is to provide adequate demand in a clean. Krugman has since drawn parallels between Japan's 'lost decade' and the late 2000s recession. Krugman points to them for the key roles they played in keeping derivatives. In his June 28. in light of the recent G-20 Toronto Summit." He advocated instead the continued stimulus of economies to foster greater growth." In particular. Krugman wrote in The New York Times: "an overwhelming majority [of the American public] believes that the government is spending too much to help large financial institutions. 2010 column in The New York Times. arguing that expansionary fiscal policy is necessary as the major industrialized economies are mired in a liquidity trap. Krugman has recently criticized China's exchange rate policy. arguing that these policies would have a larger stimulus effect. unobtrusive way that does not distort the allocation of resources. and unemployment benefits. Krugman maintains that it was an export-led boom that pulled Japan out of its economic slump in the late-90s. Krugman argued in The Return of Depression Economics that Japan was in a liquidity trap in the late 1990s. rather than reforms of the financial system. . which. Krugman criticized world leaders for agreeing to halve deficits by 2013. This suggests that the administration's money-for-nothing financial policy will eventually deplete its political capital. Krugman repeatedly criticized the Bush tax cuts. and increased government spending on infrastructure.

Krugman. "Vehicle Currencies and the Structure of International Exchange. Paul R.References: 1. 5. and Distribution Effects in International Financial Markets. pages 469-479. 4. vol. pages 513-26. Credit and Banking." NBER Working Papers 0651." Journal of Money. National Bureau of Economic Research. Blackwell Publishing. November. 1981. "Increasing returns. Krugman. 1991. "Increasing Returns and Economic Geography. Krugman. pages 483-99. vol. Paul R. http://www." Journal of Political Economy. August. and international trade. Elsevier. Paul. 1979. Krugman." Journal of International Economics. 3. vol. monopolistic competition. "Consumption Preferences. Paul. 99(3).wikipedia. Inc. 2. Asset Demands.. 12(3).com/ . 9(4) 6. 1980. June. http://en. University of Chicago Press.

and to push important messages out in the public domain. Kelkar always says that in an open society. but still there were fiscal problems in India. We will analyze his contributions to above mentioned reform programs one by one: Kelkar Task Force and FRBM In 1990s various tax reforms were done. so it was important to build good ideas. leading the transformation of income tax administration through innovative institutional arrangements in the form of the Tax Information Network (where the implementation was contracted out to NSDL). who is currently the Chairman of the Forum of federations. Kelkar to suggest reforms. Kelkar (born 15 May 1942) is an Indian economist and academic. Ottawa & India Development Foundation.VIJAY KELKAR Introduction Vijay L. analyzing and championing the Goods and Services Tax (GST) and leading the 13th Finance Commission. Fiscal Responsibility and Budget Management Act(FRBM) was enacted by central government in 2004. The tax to GDP ratio of India was very low in comparison to many countries all over the world. even when this makes many people uncomfortable. To address this problem the government constituted two task forces under Dr. translating the intent of the FRBM Act into a concrete work plan. ideas matter. He has been involved in carrying forward the tax reform agenda of the 1990s. New Delhi. FRBM Act aims at reduction of revenue deficit by an amount .

a 20 per cent tax on income of Rs 100. He proposed two slab income tax rate of 20 and 30 percent with Rs.000. both globally and nationally. The Kelkar committee recommended that a single copy challan system should be implemented against the 4 challan system for tax payment which was been introduced from 1st June 2004 for the simplicity of tax payer.e. RBI and IBA. Swarup.000 annually and 30 per cent for beyond Rs 400. The High Power Committee under RBI constituted a SubGroup on Business Processess Designing for the OLTAS(On-Line Tax Accounting System). chaired by Shri R. State Bank of India and with representatives from Income Tax Department. On-line tax accounting system Under the chairmanship of Dr Vijay Kelkar the advisory group of tax reform recommended networking of Income Tax Department. Banks. 1. Soon after enactment of FRBM. .000 exemption limit and recommended bringing in agricultural income of non agriculturist under tax net.equivalent of 0. Central Board of Direct Taxes (CBDT) to recommend suitable measures in this regard. Member (Inv. Kelkar to suggest policies to achieve FRBM targets.5% of GDP after every year.000-400. Managing Director (IT). The Sub-Committee finalized the record structure and file format for the On-Line Transmission of tax information from the collecting banks to the TIN (Tax Information Network at NSDL) and the Income Tax Department. Dy. RBI to facilitate the on-line transmission of details regarding tax collection/refunds between banks and Income Tax Department and RBI.N. CBDT. accomplished by raising revenues more than by compressing expenditure. Ramanathan.). The Task Force was of the view that fiscal consolidation should be revenue-led i. getting the tax reform accomplished earlier than later. a task force was constituted under Dr. The Committee constituted a Technical Sub-Committee. This would help us guard against possible deterioration of macroeconomic situation.000. to address all issues for conducting pilot studies on On-Line Tax Accounting System (OLTAS). The RBI constituted a High Power Committee in February 2003. under the Chairmanship of Shri B. Two slab Income tax rate Dr Kelker suggested drastic steps to end “exemption raj”. the Task Force stressed on "front loading" of tax reform i. This would also mean more revenue for the states.00. Apart from this. Kelkar recommended exemption limit to Rs 100. Controller of Accounts.e.

He recommended review of direct tax code and emphasized on improving tax-GDP ratio. he urged to broaden the tax base by including the construction and housing sectors in GST tax base. independent of tax considerations. It will foster a common market across the country and reduce compliance costs. He also recommended the inclusion of rail sector to increase the GST tax base. Kelkar committee emphasized on Fiscal policies. He believes thatGST will bring about a phase change on the tax firmament by redistributing the burden of taxation equitably between manufacturing and services. Also in the medium term it will result in more economically efficient production. 13th Finance Commission And Report Of The Committee On Roadmap For Fiscal Consolidation Before handing over the chairmanship of next (14th) Finance commission to former RBI Governor Y. either immediately or during a subsequent phase which will result in lower tax rate overall. No action would result in fiscal deficit of 6. Reddy. which will fuel growth and provide employment to the growing young population. It will reduce distortions by completely switching to the destination principle. it will spur growth.1% against the budgeted 5. GST will also promote employment. V. It will promote exports. It can provide a fiscal base for local bodies to enable them to fulfill their obligations and will facilitate investment decisions being made on purely economic concerns. Pointing to an issue that was raised in the 2003 FRBM Task Force report. He believes that GST will help governments as they are large purchasers in the market for their own consumption and their cost of procurement will come down significantly with the implementation of GST. Perhaps. He said that India is facing an alarming situation of twin deficit and to avoid major crisis of the likes of 1991 we should take tough actions and should phase out subsidies in about 3 years.1%. It will lower the tax rate by broadening the tax base and minimizing exemptions. Dr Kelkar headed the 13th Finance commission and submitted the report on roadmap for fiscal consolidation. .Analyzing and championing the Goods and Services Tax (GST) Dr Kelkar is a very strong proponent of Goods and Services Tax in India. Kelkar committee also emphasized on innovative divestment processes and investing the generated money on infrastructure and employment generation programs. improved competition and more importantly greater employment. most importantly. which will promote investments.

Retrieved from: http://www.nic. Retrieved from: http://www. Report Of The Committee On Roadmap For Fiscal Consolidation Retrieved from: 1.htm 6.htm 8. Sanjiv Agarwal(2004). Retrieved from: http://ajayshahblog. Venkitaramanan(2004).pdf .com/articles/PopOpenArticle. Naunidhi Kaur(2002).htm 2. A pro-rich report 5. Report Kelkar's Tax Reforms . Ajay Shah(2011). 4. Sanjiv Misra(2012).frontlineonnet.aspx?ID=0f928327-575946d6-8a51-761648d2899c&txtsearch=Subject:%20Direct%20Taxation 10. Venkitaramanan(2004).in/2011/08/vijay-kelkar.A critique 9. Retrieved from: www. Kelkar Task Force on Indirect Taxes — The difficult challenge of tax reform 7.finmin. Vijay Kelkar 3.thehindubusinessline.blogspot. Retrieved from: http://www. S. Kelkar report on FRBM — Discussion at various levels a must. Indira Rajaraman.manupatrafast.thehindubusinessline. Vijay L

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