Economic Survey 2015-16: Fiscal Capacity for the 21st Century {Chapter Summary}

Fiscal capacity is related to capacity of the government to tax and spend. India’s fiscal capacity can be assessed through tax-GDP and spending-GDP ratios.

Tax Policy Council and Tax Research Unit

To bring consistency in taxation policy, Finance Ministry has set up two committees – one under Finance Minister and other under Revenue Secretary. While the Tax Policy Council (TPC) under the Finance Minister will take important policy decisions, the Tax Policy Research Unit (TPRU) under Revenue Secretary will be a multi-disciplinary body. The two committees would start functioning from April 1, 2016.

Does India tax and spends less?

India taxes and spends less than OECD countries and less than its emerging market peers. India’s spending to GDP ratio is lowest among BRICS and is lower than both the OECD and EME (Emerging Market Economies) averages. India’s tax to GDP ratio at 16.6 per cent also is well below the EME and OECD averages of about 21 per cent and 34 per cent, respectively.

India’s expenditure on health and education was 5.1 per cent of its GDP in 2013-14. Overall public expenditure constituted 26.6 per cent of the GDP in 2013-14.

India’s spending and tax ratios are also the lowest among economies with comparable purchasing power parity adjusted GDP per capita like Vietnam, Bolivia and Uzbekistan. The ratios, respectively, stood at 28 per cent and 22.2 per cent, 43.3 per cent 25.5 per cent, and 33.4 per cent and 25.6 per cent for Vietnam, Bolivia and Uzbekistan for the latest year available.

India’s shares of income and property tax in GDP, 5.6 per cent and 0.8 per cent, respectively, were also comparatively low, with the exception of China in the case of direct tax.

The government has made limited progress in increasing its taxing and spending capacity. India’s tax-GDP ratio has increased by about 10 percentage points over the past six decades from 6 per cent in 1950-51 to 16.6 per cent in 2013-14.

India’s tax-GDP ratio is about 5.4 percentage points less than that of comparable countries in a sample of 77 nations. Similarly, India spends on average about 3.4 percentage points less on health and education vis-a-vis these countries.