Sunday, October 12, 2008

Public finance of India

Let us first understand what is meant by Public Finance. Public finance of country, as is obvious by the name, is the money collection of a country’s Government by way of taxes. The sources of revenue of the States and the Centre are called the public finance of a country, and this is because this amount of money is the money earned by the public and given to the Government for development works, and this is exactly why this money is termed as public finance.
Lately, the sources of revenue of the State and Centre have both declined considerably and the contribution of tax revenue has come down from about 37 percent in 1950-51 to just a 12 per cent in 1993-94. In the case of Central revenue, the direct tax share has declined from 36 per cent to 16 percent, while in the State tax revenue has taken a dive from 38 per cent to 11 per cent. On the other hand, rate of indirect taxes, the revenue has gone up from 14.14 per cent to 14.57 per cent. At this direct and indirect taxes. Direct taxes are taxes levied on the individual for his income, for his purchase etc. On the other hand, indirect taxes are taxes which are levied as extra to the cost of an item, e.g. customs tax. As item which has been bought for say Rs. 1000% is brought to India. There at the customs counter, the purchaser has to pay some extra amount as a tax on the item already bought and paid for. This is termed as an indirect made for the purchase of an item.
As far as India is concerned, in our discussion of Public Finance, we have to consider other points also, such as the distribution of incomes. The distribution of incomes and property in india are at such a variance that, the tax base for direct taxes becomes very very narrow. Besides this, there is a wide range of tax evasion. This problem of tax evasion is being met by the Government by reducing the rate of taxes, on the top of the scale. The real problem in india is this basic problem of tax evasion and it is this only which makes the revenue earnings minimal. This is because the category that can and should give the maximum tax, is just the category that evades tax, which in turn results in revenue loss for the Government. Besides these people which include the highest earning gentry, there are several small business in which there can not be an assessment of the actual incomes, and so, this category also gilts the Government. Thus it may be seen that, in India it is only the salaried class which only is bound to pay the tax regularly and correctly, and this is the class which has the least income. Thus, the poor and the rich classes in India all manage to avoid taxation and thus population. This tax evasion should be dealt with an iron hand, and the richer classes who take the lion’s share of income pay nothing or a nominal tax, should be forced to pay the tightful tax. It would be quite relevant to talk at this point of the VDIS scheme of the Government implemented in 1997, which brought out millions of worth of tax from the rich classes who had all along evaded tax.
There being an evasion of taxes all along, the non-tax revenues have seen an upward trend. This is due to interest receipts on loans given to various sectors for social and economic services. The failure also of a large number of public enterprises to generate surplus, makes this source of public revenue also get depleted.
On the other hand, the total government expenses as a percentage of the GDP has recorded in increase between 1950-51 and 1993-94. Development expenditure has shown faster growth in this period, compared to non-developmental expenditure. The expense incurred on education, health and family planning has been five fold in relation to the GDP, whereas, public expenditure on agricultural and rural development in ten times more than the increase in the GDP, between 1950-51 and 1993-94. Since there has been a faster growth of public expenditure in relation to the revenue, the gap between the expenditure and the revenue has been growing steadily. Though this gap has been encountered by borrowing from the Reserve Bank of India, it has brought with it an increased burden of interest so be paid. The central loan jumped from 2000 crores to 98000 crores between the period of 1950-51 and 1997-98and the interest burden hiked 200 time, over the same period. Even the States are facing a similar debt problem. Even foreign debt has increased at a phenomenal rate, it increased from 32 crores in March 1951 to 11000 crores in 1961 and at the end of 1988, this foreign debt is 23 times more than what it was is March 1961. These deficits of the Central and the State Government are an increasingly depressing phenomena of the Indian fiscal scenario.
Another important phenomena of the India fiscal system is the growing dependence of the State Government on the Central Government which becomes a continuous drain on the central pool of money resources.
To cap all this drawback of India’s public, finance is the worst factor to be encountered and this is the administration of the public finance. The concealing or evading of taxes should be minimal through an efficient administrative procedure. However, estimates show that, the actual tax evasion in India is in some cases even up to ¾ of the actual liability. This attributes to the major chunk of financial loss of revenue and also helps in developing a “parallel economy”.

Even since independence, the Government of India has been continuously resorting to the printing press via the Reserve Bank of India by means of issuing ad hoc treasury bills. The R.B.I. could refuse to print currency notes but it has not done so as yet. It has only pointed out from time to time the problems that can arise by creating paper money, which has all these years fuelled inflation. However successive Indian Government have recklessly shown a deficit graph going constantly up till at last in 1992-93, the deficit amount rose to Rs.12,300 crores. The unchecked Government expenditure mounting higher and higher every year has been the major cause of an unprecedented price rise through the years.
Now if a balance has to be struck in India’s public finances, expenditure of the Government must slashed down, and the mischief of tax evasion must be dealt with an iron hand. Without these who points being followed strictly and immediately, no retrievel of our financial position could be achieved.

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