Channelising of resources including Human Resource for the Inclusive and sustainable development of India to achieve target under Sustainable Development Goal 2030 IAS Target

India Economy and Mobilization of Resources

22 Feb 2020

Category : Economical Issue

Topic: India Economy and Mobilization of Resources

Mobilizing is the process of assembling and organizing things for ready use or for a achieving a collective goal. The term mobilization of resources should be seen in the same context. Mobilization of resources means the freeing up of locked resources. Every country has economic resources within its territory known as domestic resources. But often they might not be available for collective use. The percentage of resources used when compared to the potential is often very low. For a country to grow, identification and mobilization of its resources is necessary. It should be available for easy use and for central and state level planning.

Types of Resources of India:

Natural Resources Natural resources are resources that exist without any actions of humankind. On Earth, it includes sunlight, atmosphere, water, land (includes all minerals) along with all vegetation, crops, and animal life that naturally subsists upon or within the previously identified characteristics and substances.
Human Resources Human resources is the set of the people who make up the workforce of an organization, business sector, industry, or economy. A narrower concept is human capital, the knowledge which the individuals embody. Similar terms include manpower, labour, personnel, associates or simply people.

Mobilization of Natural Resources

India, though a country with sufficient reserves, due to policy bottlenecks, is importing coal and iron. This is increasing our Current Account Deficit.

Mobilization of Human Resources

Organizing human potential for ready use is necessary for growth of India. In-fact, as country of more than 130 crore people, India now is eyeing more on its human resource potential. The demographic dividend is also in favour of India.
  • Mobilization of human resources highlights the need to empower human resources.
  • Weaker sections like women, children, SC, ST, OBC etc should be brought into mainstream.
  • There should be right employment opportunities for human resources, and when there is lack of skill the job demands, there should be skill development programs.
  • Utilize the demographic dividend.
  • India is currently levering on its technologists – engineers, doctors and scientists.

Mobilization of Financial Resources

Revenue Tax Revenue
Non-tax Revenue
Expenditure of the government is dominantly financed by tax revenue.

Tax revenue
  • Direct Taxes
    These involve taxes such as income tax, wealth tax, corporate tax etc. Peculiar feature of direct tax is that person who is charged to tax himself is liable to pay tax.

  • Indirect Taxes
    In this case, tax is generally on transactions, commodities etc. In this case person who pays tax can claim tax so paid from customer. This way whole burden is shifted on ultimate consumer.
Non-Tax Revenue Non-tax revenues of the centre mainly consist of:
  • Interest and dividend receipts of the government,
  • Receipts from the services provided by central government like:
    • supply of central police force,
    • issue of passport and visa,
    • registration of companies, patents and licence fees,
    • royalty from offshore oil fields,
    • Coal mines and
    • various receipts from the telecom and other sectors.

Further, there are sometimes handsome proceeds in from of non-debt capital receipts, which arise from disinvestments. Disinvestments targets last year were failed at miserably and this year government is quite optimistic about reaping benefits from good stock valuations at stock markets. Disinvestment was discussed at length here.

Private Sector mobilization of domestic resources

The private sector mobilizes the savings of households and firms through financial intermediaries, which allocate these resources to investment in productive activities. Government of India retains a big role in economy. In aftermath of LPG reforms, it has pulled back substantially from private sector, yet its presence is unquestionable and desirable in social sector, defense and security, provision of public goods and services etc.

LPG

LPG stands for Liberalization, Privatization, and Globalization. India under its New Economic Policy approached International Banks for development of the country. These agencies asked Indian Government to open its restrictions on trade done by the private sector and between India and other countries.

Liberalization It is a process whereby a state lifts restriction on some private individual activities. Liberalization occurs when something which used to be banned is no longer banned, or when government regulations are relaxed. Economic liberalization is the reduction of state involvement in the economy.
Privatization It mean different things including moving something from the public sector into the private sector. Also known as deregulation when a heavily regulated private company or industry becomes less regulated. Government functions and services may also be privatised. Some examples include revenue collection, law enforcement, water supply, and prison management
Globalization Globalization or globalisation is the process of interaction and integration among people, companies, and governments worldwide. Globalization is considered by some as a form of capitalist expansion which entails the integration of local and national economies into a global, unregulated market economy. Globalization has grown due to advances in transportation and communication technology.

Government has huge bureaucracy which consumes enormous national resources. Further, in line with modern concept of Market Socialism government intervenes in case of market failures for which it needs to provide services or goods significantly below cost. In effect, government’s expenditure generally surpasses its revenue which results into Revenue or Fiscal deficit. In the first place, major source of government revenue is from taxation, but there are non-tax sources too. At last, government resorts to deficit financing to fullfill its commitments. All this happens under aegis of Finance Ministry.

Finance Ministry

Departments under Finance Ministry are:
  • Economic Affairs
  • Expenditure
  • Revenue
  • Financial Services
  • Disinvestment

Expenditure Plan Expenditure
Non-Plan Expenditure

Plan Expenditure As the name suggests, plan expenditure is directed toward building productive social and physical assets or we can say achieving the goals of development. Expenditure on all Centrally Sponsored Schemes like, NREGA, ICDS etc. are part Plan Expenditure. Gross budgetary outlay for plan – Central plan plus central assistance to state and UTs
Non Plan Expenditure Non-plan revenue expenditure is incurred on interest payments, subsidies (mainly on food and fertilizers), wage and salary payments to government employees, grants to States and Union Territories governments, pensions, police, economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments. It also includes defense, loans to public enterprises, loans to States, Union Territories and foreign governments.

On March 1, 2016, the government announced to do away with Plan and Non-Plan classification of expenditure from 2017-18 that was recommended by the Rangrajan in 2010. Plan and non-plan classification was a major exercise in planning era. Plan expenditures were done as per planning and were also called development expenditures. Generally they produced some tangible assets such as roads, bridges or improvement in social indicators (this was not always through). The two kinds of expenditures were further divided into plan revenue and capital expenditures and non-plan revenue and capital expenditures.
Rangarajan Committee in 2010 recommended that this distinction should be done away with. Reason was that this distinction resulted in over focus on Plan expenditure and neglect of Non plan expenditure. It projected Non Plan expenditure as a waste expenditure, and various welfare lobbies kept pressurizing government to increase proportion of plan expenditure at cost of non-plan. This resulted in substandard quality and underfinancing of basic responsibilities of government which rely on Non-plan expenditure. It is felt that in absence of this distinction, Non-plan expenditure can outpace Plan expenditure and major Safety net schemes will suffer a set-back. Apart from this expenditure is also classified into, Capital and Revenue Expenditure. Former involves creation of durable capital assets and latter is consumption expenditure with no durable assets created.

Value Added Tax (VAT):

A value-added tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT that the user pays is on the cost of the product, less any of the costs of materials used in the product that have already been taxed.
More than 160 countries around the world use value-added taxation, and it is most commonly found in the European Union. But it is not without controversy. Advocates say it raises government revenues without punishing success or wealth, as income taxes do, and it is simpler and more standardized than a traditional sales tax, with fewer compliance issues. Critics charge that a VAT is essentially a regressive tax that places an increased economic strain on lower-income taxpayers, and also adds bureaucratic burdens for businesses.

Important Points

  • A value-added tax, or VAT, is added to a product at every point on the supply chain where value is added.
  • Advocates of VATs claim that they raise government revenues without punishing success or wealth, while critics say that VATs place an increased economic strain on lower-income taxpayers and bureaucratic burdens on businesses.
  • Although many industrialized countries have value-added taxation, the U.S. is not one of them.

Example of VAT:

If Indirect tax (say Sales tax) is 10%, it will be collected at three stages on same product.
  • So new prices will be Manuf. = 100+10% = 110;
  • Wholesaler = 110 + 10% (tax) = 121 + Rs 20 (profit) = 141;
  • Retailer= 141+ 10% (tax) = 155 + 30 (profit) = Rs 185.

To remove this distortion and cascading effect, Value added tax was introduced. In this case tax was charged only on ‘value addition’ at every stage. At first stage 10% tax will be paid by manufacturer and goods will be invoiced at 110, now wholesaler will sell at Rs 100 (actual cost) + Rs 20 Profit @ Rs 120 + 10% (VAT).He will collect Rs 12 from retailer and while paying this 12 to government he’ll deduct Rs 10 he already paid to manufacturer as VAT. This is called input credit.
This was that product will reach customer as 100+20+30=150 + 10% = Rs 165 and customers pays Rs. 150 to retailer and Rs 15 (10%) to government, through retailer.
So VAT removed cascading effects of sales tax, yet there is plethora of other indirect taxes (such as Service tax, excise duty, custom duty, luxury tax etc.) which add up to the costs because of their cascading effect. Further, VAT is chargeable in different states at different rates. In case of goods sold from one state to another CST is charged for which input credit is not allowed. All this create impediments in intercourse of national markets and trades, which is much desirable for competitive markets, industry and low prices. This multiplicity of taxes has unfavourable impact on GDP as to avoid complexities; people prefer to conceal their transactions. It is estimated that GST will push growth rate up by 1-1.5%. Further, it obviously makes India performing poorly at indexes like ’ease of doing business’. This is because all these taxes have separate compliance provisions and reporting mechanisms. This increases compliance costs and time significantly. More requirements for compliance naturally create more avenues for corruption and rent seeking.

Goods and Service Tax (GST):

  • One Hundred and First Amendment of the Constitution of India.
  • The basic principal governing behind GST is to have single Taxation System for Goods and Services across the country
Goods and Services Tax (GST) is an indirect tax (or consumption tax) imposed in India on the supply of goods and services. It is a comprehensive multistage,destination based tax. It is comprehensive because it has subsumed almost all the indirect taxes except few; multi-staged as it is imposed at every step in the production process, but is meant to be refunded to all parties in the various stages of production other than the final consumer. As a destination based tax, as it is collected from point of consumption and not point of origin like previous taxes.
The tax rates, rules and regulations are governed by the GST Council which consists of the finance ministers of centre and all the states. GST is meant to replace a slew of indirect taxes with a federated tax and is therefore expected to reshape the country's more than 2.4 trillion dollar economy, but not without criticism. Trucks' travel time in interstate movement dropped by 20%, because of no interstate check posts.

GST will:

  • Simplify and harmonize the indirect tax regime in the country.
  • GST will broaden the tax base. It is feature of a good taxation regime that while keeping tax rates low they should attempt to include as much people as possible under tax net.
  • Result in better tax compliance due to a robust IT infrastructure.
  • Reduce cost of collection for government: Currently government has huge bureaucracy collecting different taxes. Integration will naturally result into downsizing of bureaucracy and hence reduction of collection costs.
  • Impact on Inflation: In long term, GST will undoubtedly result in easing of inflation. However as initially rates of integrated GST are expected to be kept as high as 16% or more, it is well above current service tax, excise or VAT rates. In case of services, it will increase prices directly. In case of other goods inflation depends upon their present component of taxation viz. excise, VAT, Custom etc. For e.g. some goods which are currently exempted from excise (but are chargeable to VAT) will bear new burden of excise in form of increased rate (approx. 16%) of GST.

Criticism:

Technicalities of GST implementation in India have been criticized by global financial institutions, sections of Indian media and opposition political parties in India. World Bank's 2018 version of India Development Update described India's version of GST as too complex, noticing various flaws compared to GST systems prevalent in other countries; most significantly, the second highest tax rate among a sample of 115 countries at 28%. GST's implementation in India has been further criticized by Indian businessmen for problems including tax refund delays and too much documentation and administrative effort needed. Allegation of "destroying small businessmen and industries" in the country.

Tax-reforms in India:

  • Income Tax:
    In 1973-74, there were 11 income tax slabs, ranging from 10 per cent to 85 per cent. The tax reforms of 1986-87 reduced the tax slabs from 8 to 4 and brought the marginal tax rate down from 60 to 50 percent. The major tax reforms took place in 1991-92 and 1996-97, lowering the marginal tax rate to 35 percent. The reforms further eliminated the Wealth tax. The Kelkar Task force recommendations for simplification of tax structure was accepted with certain modifications by Government in 2005-06.

  • Corporation Tax:
    The rate of taxation varied highly for different types of Corporations until Two decades ago. Tax effective rate of taxation for corporates was 45 to 65 percent. The tax reforms of 1991-92 and 1996-97 reduced the marginal tax rates to 40% and further to 35% respectively. The subsequent budgets have further reduced it to 25% in the coming years.

  • Custom Duty:
    India started levying high customs duties on its imports. Throughout the 1970s and 1980s, India had a very complex and regressive custom duty structure. India also maintains a huge negative list of imports along with quantitative restrictions. Things started to change post-1991 Crisis, and with liberalization and opening up of the Indian economy, the peak rates of customs duty were slashed from 300% to 30% in the successive budgets. The peak rate was further lowered after Setting up of the WTO.

  • Excise Duty:
    India’s excise duty structure dis-incentivize the manufacturers. The Excise duty had a cascading effect (tax on tax) as the manufacturer gets no input credit (Tax already paid by him on the previous round of purchase). To revamp India’s manufacturing, GOI decided to make fundamental changes in Excise duty structure. As a first step, India introduced the MODVAT in 1986, which was further simplified and renamed as CENVAT in the year 2000.

  • Sales Tax/VAT:
    The indirect taxation enquiry committee was constituted in 1976 for suggesting reforms in India’s indirect tax structure. The committee recommended the imposition of ad valorem type of tax due to their high-income elasticity. The committee further recommended that excise duty and sales tax should be replaced by a single commodity tax or VAT.

  • Service Tax:
    A key drawback of India’s tax system was that it was discriminatory towards Goods. The discrimination between goods and services when it comes to taxation violated the concept of neutrality of taxation. This is especially so when the services are more income elastic and consider to be a progressive form of taxation. To remove the biasness towards services, the GOI introduced the service tax in 1994-95.

  • Minimum Alternate Tax:
    Government has, in order to attract investments in various backward geographic locations, or in exports or in certain crucial industry like Food processing or in SEZ/EOU, keep rolling out tax holiday schemes. Under these scheme investment as per some conditions, attracts a certain tax exemption for a certain period.
    Under these planning companies often used some or other loophole to secure more tax exemption than was reasonably due under spirit of the scheme. Eventually, these companies declared significant profits and dividends year after year, but ‘taxable profit’ as per income tax rule remained nil. So say with aggressive tax panning ‘book profits’ are Rs 100 Crore, but after adjustments ‘taxable profits’ comes out to be NIL.
    To remedy this Minimum alternate Tax was introduced under which Minimum Floor rates were introduced on which companies will, notwithstanding any exemptions it enjoy, was liable to taxes. This rate was kept high. By this move situation moved to opposite extreme. Now bona-fied investor, who invested only because of concessions were forced to pay taxes. This kept investment away from Indian Special economic zones and other incentivized destinations.

  • Retrospective Taxation
    Few years back Hutchison (Telecom Company based in Hong Kong) sold its stake in Hutch Essar to Vodafone PLC, and reaped huge profits. But all this profit which accrued in India, escaped from income tax by exploiting loopholes in the law. This was enormous loss to exchequer. Since this event, income Tax department had been desperately trying to recover tax from Vodafone. For this government in 2012 budget gave itself power for retrospective amendment in Income Tax and finance acts. Through this government can make new laws or change current laws or cancel amendment, all with force from backdate. Note that Article 20 prohibits retrospective legislation in case of criminal law only and it allows same for civil laws.

  • General Anti Avoidance Rules
    It was to be introduced wef. 1stApril, 2014 to check aggressive tax planning and flouting of income tax laws. It gives more power to Income Tax officials on how treat a suspicious entry in books of accounts. Onus to prove that entry is bonafied is on assesse.
    All this (MAT, retrospective taxation and GAAR) gave Indian Government and Income Tax department much bad name in eyes of all types of investors and business community. State was accused of unleashing ‘tax terrorism’ on businesses to make good its own weaknesses and messed up fiscal situation. The government tried to revive investor sentiment by constituting an expert committee chaired by Parthasarathi Shome to re-examine the provisions on GAAR and retrospective amendments. The committee recommended a significant curtailment of GAAR and cautioned against retrospective amendments, except in the rarest of rare cases.

  • Tax Administration Reforms Commission (TARC)
    Also under Mr. Parthasarathi Shome. Its terms of reference, as name suggests included overall reforms in tax organization structure, processes, practices so as to reduce cost of tax collection and increase tax base. This involved capacity building of Tax departments in order to minimize tax evasion etc.

Major recommendations were:

  • Merge Central Board of Direct Taxes and Central Board of Excise and Customs (these are currently under department of revenue and oversees direct and indirect taxes, respectively)
  • Abolish post of revenue secretary and instead “council of chairmen of boards” should be appointed for job.
  • Work of Dept. Of Revenue be allocated to above two boards, it will result in better efficiency in collection.
  • At least 10 % of tax administration budget should be spent on tax-payer services
  • Income Tax return – should include wealth tax return, Pre filled returns could be considered.
  • PAN number should be made common business identification number, to be used by other government departments also such as customs, central excise, service tax, DGFT and EPFO
  • Avoid retrospective amendments in TAX LAWS , results in Protracted disputes
  • Tax council headed by the chief economic advisor in the finance ministry be set up to develop a common tax policy, analysis and legislation for both direct and indirect taxes
  • Efficient and speedy payments of tax refunds and Passbook scheme for TDS

Tax being main source of government finance is central for resource mobilization in economy. But in India Tax to GDP ratio is quite low. Combined (state-centre) tax to GDP ratio is only 15%. In other developing countries it is as high as 35%. For center alone in India it is (11-12%). Main reason is narrow taxation base and huge Tax Expenditure (or Tax foregone) by government of India.

Tax Expenditure/Tax Foregone/ Tax Subsidies:

The statutory rates of taxes as notified by respective laws are divergent from the actual or effective rates of taxes, which is attributable to tax provisions that allow:
  • Deductions or exemptions from the taxpayers’ taxable expenditure, income, or investment,
  • Deferral of tax liability,
  • Preferential tax rates

These provisions allow people to pay lower taxes by claiming deductions under various rules. Consequently, significant amount of tax is legally not received by government. This point remains most potent weapon in hands of left leaning parties to attack government. A tax expenditure statement was laid before the Parliament for the first time in 2006-07 and it seeks to list the revenue impact of tax incentives or tax subsidies that are a part of the tax system of the central government. Introduction of MAT significantly reduced tax foregone. While the magnitude of tax expenditures or revenue forgone from central taxes is showing an upward trend for both direct and indirect taxes, it is imperative to introduce sunset clause with every provision which facilitates tax expenditure. Revenue foregone forms significant part of GDP at 4-5%

Budgetary Deficits:

High spending in social and physical infrastructure which is often as per plan expenditure, even higher non-plan commitments, low tax to GDP ratio and high tax foregone, all this boil downs to Deficits i.e. spending more than earning. There are different forms of budget deficit viz. primary Deficit, Revenue Deficit, Fiscal Deficit.
Whenever we are told that government expenditure has exceeded its receipts, in short that we have incurred budget deficit, before arriving at any conclusion we need to ask some further questions before arriving at any conclusions. These questions may be like – was ‘capital receipts’ or ‘borrowings’ used to finance revenue expenditure? If so this is undesirable and correction in this should be prime focus of government.
If revenue expenditure is greater than Revenue income than Revenue deficit takes place. (RE-RI = RD) In this situation deficit will be financed by capital receipts. Capital receipts come from productive investments. Under resource mobilization we are attempting to tilt national income, away from consumption, towards savings and then eventually towards productive investment. But, note here what’s happening? Here Investment resources are sold off to fund consumption.

Now capital (or even revenue) expenditure financed through borrowings? If so we have incurred fiscal deficit. It is arrived at as:
(Total Expenditure – Total Income) – borrowings = fiscal deficit

There may be situation where Revenue deficit was nil, but Fiscal Deficit was positive, this indicates that borrowing, were used to finance capital asset creation. Now policymakers and observers are keen to see that assets which are created on back of borrowings are productive enough to serve the interest rates.

Revenue Deficit Revenue receipts – Revenue expenditure (negative)
Effective Revenue Deficit Revenue deficit exclude those revenue expenditures of the GOI which were done in the form of GoCA. (grants for creation of capital assets like for road, irrigation, urban development etc)
Fiscal Deficit Total receipts (revenue + capital ) – Total expenditures (revenue + capital ) [ if negative]. Means govt spending more than its income FD may be shown in quantitative form or in percentage form of the GDP
Primary Deficit It shows the FD for the year in which the economy had not to fulfil any interest payments on the different loans and liabilities which it is obligated to