The Hindu : Business : Reforms could wipe out revenue deficits: World Bank

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Wednesday, Nov 24, 2004

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Reforms could wipe out revenue deficits: World Bank

By Our Special Correspondent

NEW DELHI, NOV. 23 . The World Bank has projected that the revenue deficits of all States could be wiped off by 2007-08 if they undertook sweeping fiscal reforms. The average revenue deficit of poorer States is now at 3.5 per cent of Gross State Domestic Product (GSDP) while it is 2.5 per cent for the richer States. The fiscal deficit of poorer States could come down from 6 to 3 per cent of GSDP after reforms while it could be cut down from 4.5 to 2.5 per cent for the richer States.

States' responsibility

"State governments have significant, if not the main, responsibility for many of the developmental areas — roads, irrigation, health and education, which the World Bank is financing. If State finances are not put on a stronger footing, the sustainability of investments cannot be assured and Government effectiveness will continue to suffer,'' the World Bank Country Director for India, Michael Carter, said here today after releasing a report on `State Fiscal Reforms in India — Progress and Prospects' at a function organised by the National Institute of Public Finance and Policy (NIPFP).

According to Mr. Carter, radical restructuring of State finances was not only necessary for faster development but a concerted effort was also needed in expenditure control, revenue augmentation and debt relief. He said the poorer and lagging States were particularly at risk and the Centre and the States would have to make concerted efforts to eliminate the revenue deficits of States by 2007-08. Mr. Carter also felt the proposed Value Added Tax (VAT) from April 2005 would significantly improve the financial health of States.

Value Added Tax

Pitching for early introduction of VAT, World Bank lead economist, Stephen Howes, said the switchover to the new system should be voluntary and based on floor rates. Otherwise, there would be undue delay in implementing the new tax regime because of the apprehensions of a handful of States.

According to the Bank's estimates, VAT introduction would raise revenues of the States by 0.2 per cent of GSDP in each of the fiscal years 2006-07 and 2007-08.

The bank suggested other reforms such as reduction of stamp duties and strengthening professional tax and reforming motor vehicles tax as these would raise revenues by another 0.2 per cent in 2004-05 and 0.1 per cent in 2005-06. Taxation of services from 2006 would hike revenues by another 0.2 per cent in 2007-08. The bank also suggested widening of States' tax base by allowing them to tax services and enhancing the professional tax limits. It also recommended better tax administration, which has received little attention so far.

Debt relief

On debt relief to the States, Mr. Carter said there was scope for debt restructuring by increasing the grant component and reducing loans given by the Centre to States, apart from swapping of high cost debt with low cost ones. The bank also favoured greater flexibility to the States to borrow from the market. The improvement of the overall tax: GDP ratio of the country was essential for enhancing transfer of funds to the States, especially the poorer States.

Asking all the States to enact fiscal responsibility legislations, the bank said Plan and non-Plan spending distinction should be abolished. It also suggested that the States should put a restraint on hiring and revising pay scales, which would lead to a fall in wage bill by 0.2 per cent of GSDP annually. The pension bill as a ratio of GDP should also be kept constant in the next five years.

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