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TRADE OFF BETWEEN EQUITY AND EFFICIENCY.

Efficiency: Optimal production and allocation of resources given existing factors of

production.

Equity : How resources are distributed throughout society.

• Vertical Equity: Concerned with the relative income and welfare of the whole
population, how fairly resources are distributed and may imply higher tax rates for high
income earners.

• Horizontal Equity: Treating everyone in same situation the same i,e everyone earning rs.
150000 should pay the same tax rates.

• Equity –efficiency trade off is an economic situation in which there is a perceived trade
off between equity and efficiency of a given economy. This trade off is viewed within
the context of the production possibility frontier where any additional gains in
production efficiency must be offset by a reduction in the economy's equity.

• Community charge (Poll Tax) was economically efficient because it doesn’t distort
economic behaviour. However by making a millionaire pay the same tax as a poor
pensioner, it was considered to be unfair.

• A country may devote 60% of GDP to the manufacture of armaments. They may achieve
technical and productive efficiency. But such an economy may have a great deal of
inequality with large portions of the population struggling to have enough to eat.

• A tax on Cigarette increase social efficiency. The tax makes people pay the social cost of
smoking. A Cigarettes tax is highly regressive, it takes bigger % of income from low
income earners.

• Trade off is the principle in economics. Since resources are scare every Society need to
decide their priorities and then distribute the resources. In such a situation Society
faced trade off between efficiency and equity.

• The Govt. environmental policy is best example of this trade off.

• The Projects undertaken would have an adverse effect on the local people who might be
living there from many generations. But Govt. Projects would have multiple objectives in
the larger interest of the nation.

• There would have to be trade off between the efficient use of resources in that area and
the equity of resource distribution to the people in that area. In order to do that the
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people who are enjoying the benefits of the policy would have to pay for the victims of
the policy and make them stakeholders in the developmental works undertaken.

• Sometimes Equity- Efficiency go hand in hand. Providing educational opportunities and

health infrastructure at the same time.

• To balance Equity and Efficiency economy alone is not enough, the issues involves the
social and political factors also.

• After Independence tax system in India- Progressive

• After liberalisation economic and political agenda differed on the views on equity and
efficiency and incentive to work.

• High tax rates reduce economic efficiency and incentive to work so tax reforms were
brought. Even the highest earner would pay not more than 30% of his income as tax.
There is a constant trade off in this case.

• Decisions regarding equity and efficiency would be taken under guided and well-
informed policy making environment, so that it works for the overall wellbeing of the
Society concerned.

PUBLIC DEBT MANAGEMENT.

• Public debt management is the process of establishing and executing a strategy for
managing the Govt’s debt in order to raise the required amount of funding, achieve its
risk and cost objectives. Management of Public debt involves- repayment of Public debt,
controlling the amount of borrowings and productive use of borrowed funds for
development.

PUBLIC DEBT MANAGEMENT OF THE UNION GOVT IN INDIA.

• The overall objective of the Central Govt’s debt management policy as laid out by the
Central Govt. status paper in November 2010 is to “ meet Central Govt’s financing needs
at the lowest possible long term borrowing costs and also to keep the total debt within
sustainable level. Additionally, it aims at supporting development of a well-functioning
and vibrant domestic bond market”.

• In the fiscal policy strategy statement laid before the Parliament, Govt. outlines the
prudent debt management strategies so as to ensure that the public debt remains
within sustainable limits and does not crowd out private borrowing for investment.
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• As per the Fiscal policy strategy statement, the public debt management policy of the
Govt. is driven by the principle of gradual reduction of public debt to GDP ratio.

• On financing debt, Govt policy focuses on the following principles:

• Greater reliance on Domestic borrowing over external debt.

• Preference for market borrowing over instruments carrying administered interest rates.

• Development of a deep and wide market for Govt securities to improve liquidity in
secondary market.

ACCOUNTING OF DEBT AND RISK MEASUREMENT.

• India runs Single Treasury Account.

• Both Cash flow method and accrual accounting method are used for measuring the cost
of public debt.

• Risk of the debt portfolios is measured in terms of different parameters like future cash
flows and level of projected deficit and borrowings. Based on the different scenarios,
internal limits are defined.

• Meetings with Primary Dealers are generally held twice a year or more depending on
the market conditions.

INSTITUTIONS RESPONSIBLE FOR MANAGEMENT OF PUBLIC DEBT.

• Reserve Bank as an agent of the Govt. (both Union and the State) used to implement the
borrowing programme. The RBI draws necessary statutory powers for debt
management from sec. 21 of RBI Act 1934.

• The jurisdiction of various institutions responsible for public debt management is given
below:

• Reserve Bank of India- Domestic Marketable Debt i.e. dated securities, treasury bills,
cash management bills.

• Ministry of Finance (MOF)- Office of Aid and Accounts Division –external debt.

• Ministry of Finance, Budget Division and RBI- Other liabilities such as small savings,
deposits, reserve funds etc.

• For monetary and fiscal co-ordination there is a cash and debt management committee
which meets regularly. The members comprise of officials from RBI and MOF.
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THE SOLUTION TO MANAGE PUBLIC DEBT IN INDIA.

1. REDUCTION IN PRIMARY DEFICIT; Action must be directed toward slowing down the
pace of growth of the debt ratio and attempts must be made to contain most revenue
expenditures within the revenues raised by the Govt. so that Govt’s net borrowing is
used only for productive purposes.

2. REDUCTION IN GROWTH OF CURRENT EXPENDITURE; In order to reduce primary deficit,

emphasis has to be placed more on reducing the growth of current expenditure of the
Govt than on raising the rate of growth of revenues.

3. RAISING EFFICIENCY OF BORROWING PROG. OF CENTRAL GOVT; RBI takes into account
the cash needs of the Govt, the liquidity conditions in the market and primary and
secondary markets yields. All this has helped in making the borrowing programme.
More market oriented.

4. FOREIGN INVESTORS AND PUBLIC DEBT ; Foreign Investors have been permitted to
invest in Govt. debt. In respect of Govt debt, they are permitted to invest only in dated
Govt securities.

5. DISINVESTMENT POLICY ; Disinvestment in Govt’s sick industries will enable the Govt to
raise funds which can be utilized to repay a part of the public debt.

6. PROPER MONITORING OF EXPENDITURE ; The Govt. should make effort to monitor the
use of funds. The wastage of funds should be monitored by Govt. Authorities.

7. IMPROVING THE STATE OF DEBT MARKET ; RBI has taken various measures to improved
debt market in India like uniform price auction of 91 days treasury bills, sale of capital
index bonds etc.

8. REFORMS IN DEBT MANAGEMENT OF STATES ; It is necessary to bring flexibility in the

borrowing programs of the state Govts with the help of RBI initiatives.