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

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

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.

Growth Outlook in South Asia Recovery Phase Macroeconomic Environment. Savings – Investment ratios. Balance of Payments. Fiscal Imbalances

Economic Performance in Four South Asian Countries (2009) Country/VariableBangladeshIndiaNepalPakistanSri Lanka GDP Growth (%) Agriculture (%) Industry (%) Services (%) Gross Domestic Investment (% of GDP) Inflation rate (%) Current a/c Balance (% of GDP) Central Revenues Central Expenditures Central Fiscal Balance

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.

Fiscal Indicators of Central and State Governments StateCentreConsolidated Revenu e Deficit Primary Deficit Fiscal deficit Reven ue Deficit Primary Deficit Fiscal deficit Revenu e Deficit Primary Deficit Fiscal deficit

Budget Marginal Stimulus withdrawal: Total expenditure increase – 8.5%. Rev. Exp – 5.8%. Total Tax increase- 17.9%; Additional revenue mobilized: Rs 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 million. –Loan waiver : Rs million. –Spectrum 3G Auction: Rs million. –Additional Disinvestment: Rs million Partial withdrawal of stimulus from pay revision: Pay and Allowances as a ratio of GDP increased from 0.9% in to 1.6 % in and is budgeted at 1.3% in 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 entailed sharp reduction in capital expenditures from 4 per cent of GDP in to 1.6 in before increasing to 1.9 per cent in and budgeted at 2.2 per cent in

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.