Talk of ‘public finance' and what springs to mind is the widening fiscal deficit, the Government's perpetual borrowings to fund this deficit and the leakages in expenditure. But the canvas of public finance is far wider.

In the book, Development and Public Finance - Essays in Honour of Raja J. Chelliah, many eminent economists have provided insights into public finance and development economics.

These include Dr C. Rangarajan, Dr M. Govinda Rao and Dr Parathasarthy Shome. Faculty members of Madras School of Economics have also contributed to this set of essays.

Essay topics

The book is divided equally between public finance and development economics, with the 18 essays spanning topics relevant to the present scenario in India, such as disinvestment, double tax avoidance agreements, goods and sales tax, Budget deficits, monetary policy, climate change, financial inclusion and de-centralisation of development. The essays seem a fitting tribute to the great economist, Dr. Raja Chelliah. Recognised by many as the architect of India's tax reforms, Dr Chelliah's achievements go beyond chairing the Tax Reforms Committee.

As recalled by his colleagues and acquaintances in the third section of the book (In Memoriam), Dr Chelliah began his career as a senior economist at the National Council for Applied Economic Research. He later on took various academic positions in universities before joining the International Monetary Fund (IMF). On his return to India, he founded the National Institute of Public Finance and Policy (NIPFP). He was a member of 9th Finance Commission. Dr Chelliah established Madras School of Economics in 1993.

On wasteful expenditure

We hear a lot of talk of how Government should cut wasteful expenditure. Dr Chelliah was seized of this problem way back in the nineties. Dr T.S. Rangmannar's tribute takes note of a study by NIPFP about the growth of civilian expenditure in the Government.

“The study revealed that there were as many as 131 secretaries in the Government, up from 65 in 1984. The number of additional secretaries and joint secretaries had also increased….The study disclosed that a savings of Rs 1,600 crore a year was possible if the resultant vacancies after retirement were not filled up in certain departments.

This was a surprise. This idea was picked up by no less a person that Mr P.V. Narasimha Rao, the then Prime Minister.”

Dr Deena Khatkhate, an economist who was with IMF, recalls that it was Dr Chelliah's IMF paper ‘Alternative Concepts of Budget Deficit' that clarified the implications of running a fiscal deficit on money supply and demand management. This was the period when the Government defined Budget deficit in terms of the ways and means advances extended to it by the Reserve Bank of India.

On disinvestment

The book begins with Dr Vijay Kelkar's take on disinvestment, in which he observes that the Government's role as a regulator is in conflict with its presence in a given sector. Hence, privatisation of public sector units is warranted. But he makes the point that the stake shouldn't be divested to a small set of investors but to a large number of small investors. That seems to be in direct contradiction with the currently fashionable mode of divestment –placing shares with a few institutions!

The recent Budget saw a hue and cry about securities transaction tax and how it is bad for the markets. Dr Parthasarthy Shome presents cross-country research on whether this tax reduces the volatility of financial markets. He concludes that it doesn't. The motivation for introduction of such taxes is the low cost of tax collection and revenue generation. He concludes that such taxes should only be used for short periods.

On tax treaties

The book sheds light on the ongoing debate about tax treaties, too. In the essay- ‘Economic Analysis of India's Double Taxation Avoidance Agreement (DTAA)' Dr Arindam Das-Gupta argues that such agreements are sub-optimal, as they cause great revenue loss for India. He points out that significant foreign direct investment into India originates from Mauritius, Singapore, Cyprus and the UAE, all of which have DTAAs with India and low tax rates as well. An administrative and information sharing tax treaty would be better than the DTAA, he argues. “If a DTAA is persisted with, it should not provide only for residence country taxes but should also provide for source country tax withholding”, he adds.

Fiscal stimulus

In the essay “On the Political Economy of Fiscal Imbalances in India”, Dr D.K. Srivastava highlights the problems of using fiscal stimulus for political gains. As the deficit widens, increasingly funded by debt, the capacity to stimulate the economy during a downturn erodes.

The author advocates building up a Budget stabilisation fund by keeping expenditures on trend and adhering to borrowing limits in boom years. This can be spent in recession years as a ‘counter cyclical' strategy.

The development finance essays feature an essay by Dr C. Rangarajan where he says that the monetary policy should not be fixated on price stability but should consider objectives such as growth, asset price stability and money supply.

The other topics include fiscal decentralisation, climate change, investments and subsidies in Indian agriculture and banking in rural areas.

Overall, while the essays do shed new light on subjects such as accounting of deficits, foreign investments in the knowledge industry and carbon tax, the topics cut a very wide swathe across subjects.

The extensive use of econometric models in some essays, too, may make it a difficult read for students of public finance. However, it is a good read for academics and researchers in economics in general and public finance in particular.

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