D. Murali

Chennai: Developing countries tend to subsidise energy prices on the consumer or end-user side, while industrialised countries and economies in transition still employ certain practices aimed at providing support on the producer side, observes one of the essays included in ‘Energy Infrastructure: Priorities, constraints, and strategies for India’ from the Asian Development Bank (www.oup.com).

“Product subsidies take many forms, such as tax credits, special transportation tariffs, and energy technology R&D expenditures by government agencies. The objectives of such subsidies are usually to guarantee a certain level of revenues, to reduce the cost of producing energy, or to assure technical progress.”

Poorly designed subsidies have various negative effects that could overwhelm the social benefits of improving accessibility for the poorest segment of the population, caution the authors, Prem Kumar Kalra, Rajiv Shekhar, and Nasser Munjee.

“Energy price subsidies, which encourage energy consumption by keeping prices below costs, impose heavy burdens on economic efficiency, environmental quality, and government budgets.” The authors find that the lack of costing transparency and adequate costing structure are major constraints to achieving a sustainable energy system.

The essay, therefore, suggests that in all circumstances, prices should be set at a level that allows energy providers to recover the long-run marginal cost (LRMC) of delivering the service, including a fair return on investment.

Imperative read.

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Tax constraints

The most important tax source for India’s states has been the sales tax, and the introduction of the VAT (Value Added Tax) has thus been a very important development, writes Marina Wes, in one of the chapters of ‘Job Creation and Poverty Reduction in India: Towards rapid and sustained growth,’ a World Bank publication edited by Sadiq Ahmed (www.sagepublications.com).

“Moving forward the preparations for a national goods and services tax will be important, as this tax would be broader based and more efficient, thus helping to achieve Fiscal Responsibility and Budget Management Act (FRBMA) revenue targets with relatively lower rates.”

In addition to the VAT, other important sources for India’s states are stamp duties and registration fees, state excises on alcohol, and motor vehicles, goods and passenger taxes, informs Wes. India’s combination of high marginal effective tax rates and numerous tax exemptions is distorting and constraining investment and growth, she rues.

“Stamp duties on property transactions are among the highest in the world (sometimes above 10 per cent, compared with 1-2 per cent in many countries), as are combined central and state indirect taxes (often 30 per cent, compared with half that in many Asian countries).”

Suggested study for an in-depth view of critical themes.

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