Recent and Upcoming Fiscal Reforms in South Asia

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Recent and Upcoming Fiscal Reforms in South Asia

• M. Govinda Rao
• Director, National Institute of Public Finance
  and Policy
• Member, Economic Advisory Council to the Prime
  Minister

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Presentation Scheme

• Introduction
• Growth Outlook
• South Asia Fiscally Stressed Region.
• Fiscal Situation in India.
• Legislated fiscal discipline Is it effective?
• Selected Research Issues

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Introduction

• Important to understand the fiscal policies in
  South Asia for a variety of reasons.
• The recent financial crisis and the expansionary
  fiscal policy stance has been a laboratory type
  experiment. Can learn a lot from the experience
  of one another.
• South Asia presents a variety of cases. Self
  sufficient versus external dependence high debt
  situation to low debt case internal debt versus
  external debt.

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Growth Outlook in South Asia

• Recovery Phase
• Macroeconomic Environment.
• Savings Investment ratios.
• Balance of Payments.
• Fiscal Imbalances

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Economic Performance in Four South Asian Countries (2009) Economic Performance in Four South Asian Countries (2009) Economic Performance in Four South Asian Countries (2009) Economic Performance in Four South Asian Countries (2009) Economic Performance in Four South Asian Countries (2009) Economic Performance in Four South Asian Countries (2009)
Country/Variable Bangladesh India Nepal Pakistan Sri Lanka
GDP Growth () 5.9 7.2 4.7 -3 2
Agriculture () 6 -0.2 2.2 2.2 4.7
Industry () 6 8.2 1.8 1.8 -3.6
Services () 6 8.7 5.8 5.8 3.6
Gross Domestic Investment ( of GDP) 24.5 34.5 29.7 19.7 25.6
Inflation rate () 6.7 3.6 13.2 20.8 3.5
Current a/c Balance ( of GDP) 2.8 -1.9 4.3 -5.6 0.3
Central Revenues 11.2 20.6 18 14.1 14.6
Central Expenditures 15.3 30.2 20 19.3 24.7
Central Fiscal Balance -4.1 -9.7 -1.9 -6.1 -10.2
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South Asia Fiscally Stressed Region

• Broad Contours of the Fiscal Problem
• Large fiscal deficits and debt and the associated
  problems.
• Huge expenditure requirements for social sector,
  physical infrastructure and security.
• Low levels of taxation and poor tax
  administration.
• Commonalities and Differences
• Indian Debt to GDP ratio is overwhelming larger
  than other countries in the region. But over
  95 of the debt is rupee denominated in India
  unlike other South Asian countries. Thus, other
  countries are more vulnerable even when their
  debt-GDP ratios are lower.
• All the countries suffer from poor infrastructure
  and try to impart competitiveness through
  subsidies and tax preferences which is not very
  effective.
• Some countries in the region have legislated
  fiscal discipline Are they effective?
• Lessons from one another can be useful.

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Fiscal Indicators of Central and State Governments Fiscal Indicators of Central and State Governments Fiscal Indicators of Central and State Governments Fiscal Indicators of Central and State Governments Fiscal Indicators of Central and State Governments Fiscal Indicators of Central and State Governments Fiscal Indicators of Central and State Governments Fiscal Indicators of Central and State Governments Fiscal Indicators of Central and State Governments Fiscal Indicators of Central and State Governments
  State State State Centre Centre Centre Consolidated Consolidated Consolidated
  Revenue Deficit Primary Deficit Fiscal deficit Revenue Deficit Primary Deficit Fiscal deficit Revenue Deficit Primary Deficit Fiscal deficit
2000-01 2.54 1.81 4.25 4.08 0.93 5.70 6.60 3.70 9.50
2001-02 2.65 1.43 4.14 4.40 1.47 6.19 7.05 2.90 10.32
2002-03 2.33 1.25 4.06 4.40 1.11 5.91 6.72 2.36 9.97
2003-04 2.30 1.46 4.38 3.57 -0.03 4.48 5.87 1.43 8.85
2004-05 1.24 0.68 3.42 2.49 -0.04 3.99 3.73 0.64 7.42
2005-06 0.20 0.17 2.52 2.58 0.39 4.09 2.77 0.55 6.61
2006-07 -0.60 -0.38 1.87 1.94 -0.19 3.44 1.34 -0.56 5.31
2007-08 -0.90 -0.65 1.40 1.10 -0.90 2.70 0.20 -1.55 4.10
2008-09 -0.10 1.00 2.60 4.50 2.60 6.00 4.40 3.60 8.60
2009-10 0.6 2.1 3.2 5.3 3.2 6.7 5.90 5.30 9.90
2010-11 1.5 2.8 3.5 4.0 1.9 5.50 5.50 4.70 9.00
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Budget 2010-11

• Marginal Stimulus withdrawal Total expenditure
  increase 8.5. Rev. Exp 5.8. Total Tax
  increase- 17.9 Additional revenue mobilized
  Rs. 20500 crore (0.3 of GDP).
• Fiscal deficit reduced from 6.7 to 5.5 of GDP
  Rev. Def. from 5.3 to 4.0.
• Roadmap for fiscal consolidation 4.8 and 4.1
  in the next two years.
• Sources of adjustment
• Pay and pension arrears Rs. 200000 million.
• Loan waiver Rs. 150000 million.
• Spectrum 3G Auction Rs. 350000 million.
• Additional Disinvestment Rs. 150000 million
• Partial withdrawal of stimulus from pay revision
  Pay and Allowances as a ratio of GDP increased
  from 0.9 in 2007-08 to 1.6 in 2009-10 and is
  budgeted at 1.3 in 2010-11.
• Are the targets realistic? No provision for oil
  subsidies.
• Fertilizer subsidy Will it deliver? Nutrient
  based subsidy without dismantling administered
  price mechanism is meaningless.
• Capital Expenditure is Budgeted to increase,
  marginally . The fiscal adjustment since 2003-04
  entailed sharp reduction in capital expenditures
  from 4 per cent of GDP in 2003-04 to 1.6 in
  2008-09 before increasing to 1.9 per cent in
  2009-10 and budgeted at 2.2 per cent in 2010-11.

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Selected Issues for Research

1. Fiscal situation in South Asia Global Economic
   Slowdown and accommodating Fiscal Policy.
2. Impact of expansionary policies Impact of
   fiscal stimulus - Estimation of fiscal
   multipliers either through macro models or VAR
   models.
3. Political economy of fiscal deficits.
4. Impact of Fiscal deficits Crowding out versus
   crowding in.
5. Volume of Public debt- internal and external
   vulnerability - sustainability and solvency
   analysis.
6. Fiscal responsibility legislations Design and
   implementation issues Effectiveness and
   incentives in imparting fiscal discipline.
7. Fiscal impact of capital flows.
8. Intergovernmental finance Calibrating
   coordinated fiscal policy.
9. Volume and composition of subsidies political
   economy of subsidies impact of subsidies.