Paper-3, Booklet-3, Economic Development

PRESENTS THE KEY TO UPSC MAINS 2019 PAPER 3 Copyright © Aspire IAS All rights are reserved. No part of this document may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission of Aspire IAS.

ECONOMIC DEVELOPMENT 2

INDEX 3

PAST YEAR QUESTIONS Access to affordable, reliable, sustainable and modern energy is the sine qua non to achieve Sustainable Development Goals (SDGs). Comment on the progress made in India in this regard. (UPSC 2018) Comment on the important changes introduced in respect of the Long-term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019. (UPSC 2018) What do you mean by Minimum Support Price (MSP)? How will MSP rescue the farmers from the low income trap. (UPSC 2018) Examine the role of supermarkets in supply chain management of fruits, vegetables and food items. How do they eliminate number of intermediaries? (UPSC 2018) Sikkim is the first ‗Organic State‘ in India. What are the ecological and economical benefits of Organic State? (UPSC 2018) How are the principles followed by the NITI Aayog different from those followed by the erstwhile Planning Commission in India? (UPSC 2018) How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? (UPSC 2018) Assess the role of National Horticulture Mission (NHM) in boosting the production, productivity and income of horticulture farms. How far has it succeeded in increasing the income of farmers? (UPSC 2018) How has the emphasis on certain crops brought about changes in cropping patterns in recent past? Elaborate the emphasis on millets production and consumption. (UPSC 2018) With growing energy needs should India keep on expanding its nuclear energy programme? Discuss the facts and fears associated with nuclear energy. (UPSC 2018) Among several factors for India‘s potential growth, savings rate is the most effective one. Do you agree? What are the other factors available for growth potential? (UPSC 2017) 4

Account for the failure of manufacturing sector in achieving the goal of labour-intensive exports rather than capital-intensive exports. Suggest measures for more labour-intensive rather than capital-intensive exports. (UPSC 2017) Examine the developments of Airports in India through Joint Ventures under Public-Private Partnership (PPP) model. What are the challenges faced by the authorities in this regard. (UPSC 2017) Explain various types of revolutions, took place in Agriculture after Independence in India. How these revolutions have helped in poverty alleviation and food security in India? (UPSC 2017) What are the reasons for poor acceptance of cost effective small processing unit? How the food processing unit will be helpful to uplift the socio-economic status of poor farmers? (UPSC 2017) One of the intended objectives of Union Budget 2017-18 is to ‗transform, energize and clean India‘. Analyse the measures proposed in the Budget 2017-18 to achieve the objective. (UPSC 2017) ―Industrial growth rate has lagged behind in the overall growth of Gross-Domestic-Product(GDP) in the post-reform period‖ Give reasons. How far the recent changes in Industrial Policy are capable of increasing the industrial growth rate? (UPSC 2017) What are the salient features of ‗inclusive growth‘? Has India been experiencing such a growth process? Analyze and suggest measures for inclusive growth. (UPSC 2017) What are the major reasons for declining rice and wheat yield in the cropping system? How crop diversification is helpful to stabilize the yield of the crop in the system? (UPSC 2017) How do subsidies affect the cropping pattern, crop diversity and economy of farmers? What is the significance of crop insurance, minimum support price and food processing for small and marginal farmers? (UPSC 2017) How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is increased informalization detrimental to the development of the country? (UPSC 2016) Women empowerment in India needs gender budgeting. What are the requirements and status of gender budgeting in the Indian context? (UPSC 2016) Pradhan Mantri Jan-Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional finance fold. Do you agree with this for financial inclusion of the poorer section of 5

the Indian society? Give arguments to justify your opinion. (UPSC 2016) What are ‗Smart Cities? Examine their relevance for urban development in India. Will it increase rural-urban differences? Give arguments for Smart Villages‘ in the light of PURA and RURBAN Mission. (UPSC 2016) ‗ Justify the need for FDI for the development of the Indian economy. Why there is gap between MOUs signed and actual FDIs? Suggest remedial steps to be taken for increasing actual FDIs in India. (UPSC 2016) Comment on the challenges for inclusive growth which include careless and useless manpower in the Indian context. Suggest measures to be taken for facing these challenges. (UPSC 2016) What is water-use efficiency? Describe the role of micro-irrigation in increasing the water-use efficiency. (UPSC 2016) What is allelopathy? Discuss its role in major cropping systems of irrigated agriculture. (UPSC 2016) Discuss the role of land reforms in agricultural development. Identify the factors that were responsible for the success of land reforms in India. (UPSC 2016) Given the vulnerability of Indian agriculture to vagaries of nature, discuss the need for crop insurance and bring out the salient features of the Pradhan Mantri Fasal Bima Yojana (PMFBY). (UPSC 2016) Give an account of the current status and the targets to be achieved pertaining to renewable energy sources in the country. Discuss in brief the importance of National Programme on Light Emitting Diodes (LEDs). (UPSC 2016) 6

ECONOMIC PLANNING IN INDIA Independence came to India with the partition of the country on 15 August 1947. In 1948, an Industrial Policy Statement was announced. It suggested the setting up of a National Planning Commission and framing the policy of a mixed economic system. On 26 January 1950, the Constitution came into force. As a logical sequence, the Planning Commission was set up on 15 March 1950 and the plan era started from 1 April 1951. The Commission was instructed to: (a) Make an assessment of the material capital and human resources of the country, and formulate a plan for the most effective and balanced utilisation of them. (b) Determine priorities, define the stages for carrying the plan and propose the allocation of resources for the due completion of each stage. (c) Identify the factors which tend to retard economic development. (d) Determine the conditions which (in view of the then current socio-political conditions) should be established for the execution of the plan. OBJECTIVES OF FIVE-YEAR PLANS Long term objectives of our Five Year Plans are:  A high rate of growth to improve the standard of living of residents.  Economic self-reliance.  Equity - Social justice and reduction of inequalities.  Modernization of the economy.  Economic stability for prosperity. 7

OVERVIEW OF 12 FYPs An overview of all plans implemented in India is given below. The first eight plans had their emphasis on growing the public sector with massive investments in basic and heavy industries, but since the launch of the Ninth Plan in 1997, attention has shifted towards making government a facilitator in growth. PLAN OBJECTIVES/FEATURES ASSESSMENT First Five year Plan (1951- Rehabilitation of refugees, rapid Targets and objectives more or 56) agricultural development to less achieved. With active role achieve food self-sufficiency in of state in all economic the shortest possible time and sectors. Five Indian Institutes control of inflation. of Technology (IITs) were started as major technical institutions. Second Five year Plan (1956- Nehru- Mahalanobis model was Could not be implemented 61) adopted. ‗Rapid industrialisation fully due to shortage of foreign with particular emphasis on the exchange. Targets had to be Third Five year Plan (1961- development of basic and heavy pruned. Yet, Hydroelectric 66) industries‘ Industrial Policy of power projects and five steel 1956 accepted the establishment mills at Bhilai, Durgapur, and of a socialistic pattern of society Rourkela were established. as the goal of economic policy. Failure. Wars and droughts. ‗Establishment of a self-reliant Yet, Panchayat elections were and self-generating economy‘ started.• State electricity boards and state secondary education boards were formed. Annual Plans ( 1966-69) Crisis in agriculture and serious A new agricultural strategy food shortage required attention was implemented. It involved distribution of high-yielding varieties of seeds, extensive use of fertilizers, exploitation of irrigation potential and soil conservation measures. 8

Fourth Five year Plan (1969- ‗Growth with stability‘ and Was ambitious. Big failure. 74) Achieved growth of 3.5 progressive achievement of self- percent but was marred by reliance‘ Garibi Hatao Target: Inflation. The Indira Gandhi government nationalized 14 5.5% major Indian banks and the Green Revolution in India Fifth Five year Plan (1974-79) ‗Removal of poverty and advanced agriculture. attainment of self-reliance‘. High inflation. Was terminated Sixth Five year Plan(1980-85) ‗Direct attack on the problem of by the Janta govt. Yet, the poverty by creating conditions of Indian national highway an expanding economy‘. system was introduced for the first time. Most targets achieved. Growth: 5.5 pc. Family planning was also expanded in order to prevent overpopulation. Seventh Five year Plan (1985- Emphasis on policies and With growth rate of 6 pc, this 1990) programmes that would accelerate plan was proved successful in the growth in food grains spite of severe drought production, increase employment conditions for first three years opportunities and raise consecutively. This plan productivity. introduced programs like Jawahar Rozgar Yojana. Annual Plans (1989-91) No plan due to political It was the beginning of uncertainities. privatization and liberalization in India. Eighth Five year Plan (1992- Rapid economic growth, high Partly success. An average 97) growth of agriculture and allied annual growth rate of 6.78% sector, and manufacturing sector, against the target 5.6% was growth in exports and imports, achieved. improvement in trade and current account deficit. to undertake an annual average growth of 5.6% 9

Ninth Five year Plan (1997- Quality of life, generation of It achieved a GDP growth rate 2002) productive employment, regional of 5.4%, lower than target. balance and self-reliance. Growth Yet, industrial growth was Tenth Five year Plan (2002 – with social justice and equality. 4.5% which was higher than 2007) growth target 6.5% targeted 3%. The service industry had a growth rate of 7.8%. An average annual growth rate of 6.7% was reached. To achieve 8% GDP growth rate, It was successful in reducing Reduction of poverty by 5 poverty ratio by 5%, points and increase the literacy increasing forest cover to 25%, rate in the country. increasing literacy rates to 75 % and the economic growth of the country over 8%. Eleventh Five year Plan(2007 Rapid and inclusive growth. India has recorded an average – 2012) Empowerment through education annual economic growth rate and skill development. Reduction of 8%, farm sector grew at an of gender inequality. average rate of 3.7% as against Environmental sustainability. 4% targeted. Industry grew To increase the growth rate in with annual average growth of agriculture, industry and services 7.2% against 10% targeted. to 4%, 10% and 9% resp. Provide clean drinking water for all by 2009. Twelfth Five year Plan(2012- ―Faster, sustainable and more 2017) inclusive growth‖ proposes a growth target of 8 percent. Raising agriculture output to 4 per cent. Manufacturing sector growth to 10%. Target of adding over 88,000 MW of power generation capacity. The Planning Commission was replaced by the think tank called NITI Aayog (National Institution for Transforming India). The appraisal of the twelfth five year plan is now the responsibility of the 10

NITI Aayog. Further, it has also been stated by the Vice Chairman of the NITI Aayog, Mr. Arvind Panagariya that the five year plans would now terminate with the end of the twelfth five-year plan and would be replaced by three documents. The documents are said to cover the short-term by the formulation of a three-year Action Plan, the medium-term by the conceptualisation of a seven-year strategy and the long-term by laying down a 15 year Vision Document. The Vision document is said to express what India would achieve in 2022-23. India is, thus, all set to experience the new action plans of the NITI Aayog. Today, NITI Aayog acts as not only a think tank and advisory body to the government, but also gives various draft policies on various matters to both states and centre. It also administers schemes like Atal Innovation Mission, etc. All its recommendations are the result of expert opinion and after considering multiple stakeholders, with a bottom-up approach. 11

UNEMPLOYMENT A populous and demographically young country like India has a lot to gain if the expanding working-age population can join the labour force and be provided with gainful employment. More hands at work can ensure greater prosperity and relatively evenly spread growth. Unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. The most frequent measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labour force. National Sample Survey Organization (NSSO) defines employment and unemployment on the following activity statuses of an individual:  Working (engaged in an economic activity) i.e. 'Employed'.  Seeking or available for work i.e. 'Unemployed'.  Neither seeking nor available for work. The first two constitute the labour force. Unemployment rate is the percent of the labour force that is without work. TYPES OF UNEMPLOYMENT IN INDIA  Disguised Unemployment: is a phenomenon  Technological Unemployment: is loss of jobs wherein more people are employed than actually due to changes in technology. In 2016, World needed. It is primarily traced in the agricultural Bank data predicted that the proportion of jobs and the unorganised sectors of India. threatened by automation in India is 69% year- on-year.  Seasonal Unemployment: occurs during certain seasons of the year. Agricultural labourers in  Frictional Unemployment: also called as Search India rarely have work throughout the year. Unemployment, refers to the time lag between the jobs when an individual is searching for a  Structural Unemployment: arise from the new job or is switching between the jobs. It is mismatch between the jobs available in the often considered as a voluntary unemployment market and the skills of the available workers in because it is not caused due to the shortage of 12

the market. Many people in India do not get job job, but in fact, the workers themselves quit their due to lack of requisite skills and due to poor jobs in search of better opportunities. education level, it becomes difficult to train them.  Vulnerable Employment: means, people  Cyclical Unemployment: is result of the working informally, without proper job contracts business cycle, where unemployment rises during and thus sans any legal protection. These persons recessions and declines with economic growth. It are deemed ‗unemployed‘ since records of their is mostly found in capitalist economies. work are never maintained. CAUSES OF UNEMPLOYMENT (i) Caste System: In India caste system is prevalent. The work is prohibited for specific castes in some areas. In many cases, the work is not given to the deserving candidates but given to the person belonging to a particular community. So this gives rise to unemployment. 13

(ii) Slow Economic Growth: Indian economy is underdeveloped and role of economic growth is very slow. This slow growth fails to provide enough unemployment opportunities to the increasing population. (iii) Increase in Population: Constant increase in population has been a big problem in India. It is one of the main causes of unemployment. The rate of unemployment is 11.1% in 10th Plan. (iv) Agriculture is a Seasonal Occupation: Agriculture is underdeveloped in India. It provides seasonal employment. Large part of population is dependent on agriculture. But agriculture being seasonal provides work for a few months. So this gives rise to unemployment. (v) Joint Family System: In big families having big business, many such persons will be available who do not do any work and depend on the joint income of the family. Many of them seem to be working but they do not add anything to production. So they encourage disguised unemployment. (vi) Fall of Cottage and Small industries: The industrial development had adverse effect on cottage and small industries. The production of cottage industries began to fall and many artisans became unemployed. (vii) Slow Growth of Industrialisation: The rate of industrial growth is slow. Though emphasis is laid on industrialisation yet the avenues of employment created by industrialisation are very few. (viii) Less Savings and Investment: There is inadequate capital in India. Above all, this capital has been judiciously invested. Investment depends on savings. Savings are inadequate. Due to shortage of savings and investment, opportunities of employment have not been created. (ix) Causes of Under Employment: Inadequate availability of means of production is the main cause of under employment. People do not get employment for the whole year due to shortage of electricity, coal and raw materials. 14

(x) Defective Planning: Defective planning is the one of the cause of unemployment. There is wide gap between supply and demand for labour. No Plan had formulated any long term scheme for removal of unemployment. (xi) Expansion of Universities: The number of universities has increased manifold. There are 385 universities. As a result of this educated unemployment or white collar unemployment has increased. (xii) Inadequate Irrigation Facilities: Even after the completion of 9th five plans, 39% of total cultivable area could get irrigation facilities. Due to lack of irrigation, large area of land can grow only one crop in a year. Farmers remain unemployed for most time of the year. (xiii) Immobility of labour: Mobility of labour in India is low. Due to attachment to the family, people do not go to far off areas for jobs. Factors like language, religion, and climate are also responsible for low mobility. Immobility of labour adds to unemployment. VARIOUS ASSOCIATED PROBLEMS/IMPACT  If India cannot provide employment to its growing working-age population, it does not just miss a chance to become a prosperous country but also risks becoming an unmanageable or unruly country. Unemployed youth, beyond a threshold, can lose hope of a job and can easily stray into becoming antisocial elements.  Statistics give us clues about the brewing problem and its insidious nature. First, we are in the midst of a serious investments deficit. The impact of this fall in investments is visible in shrinking jobs. This fall in jobs is not translating into a proportionate rise in unemployment. But it is showing up in a fall in the labour participation rate. A rise in unemployment is bad, but a fall in the labour participation rate is worse.  The urgent crisis confronting the economy, then, is underemployment. Underemployment occurs when workers are unable to find employment that makes use of their qualifications and skills. Underemployment refers to the sharing of low-productivity work, as is common in agriculture. Persistent underemployment also contributes to the decline in labour force participation rates. As people grow frustrated with their inability to find a good job, they may stop looking for work and drop out of the labour force altogether. 15

 There also an argument saying what India has is a wage problem. Wage problem is when there is no or very less increase in wages. WAY FORWARD  India has been creating formal jobs in large numbers. Further, deliberations based on other proxy databases like vehicle sales, the annual reports of the IT department, and MUDRA loan disbursals help ascertain jobs in large job-creating markets like transport, the professional sector, and small-scale entrepreneurship, respectively. This provides us with a robust methodology of ascertaining employment. 16

 There is a need to improve the quality of jobs by improving productivity in agriculture and in enterprises.  The government should align education, technical and vocational education and training to market demand and make enduring and long-term investments in human capital through good-quality education, skills, and on-the-job training, as well as in basic social protection.  Need to improve our labour market information system. This way, emerging demand for skills are spotted quickly and the necessary training and certifications for the same are created quickly. This calls for an agile public-private partnership in capturing demand for skills and following through with quick investments in skill-building to match demand with supply.  Another need of the hour is labour market reforms. Some good moves have been seen over the last few years, with the Apprentices Act being modified to make it more attractive for employers to hire young workers and the extension of fixed-term labour contracts from textiles to all industries in the last budget. Even 4 labour codes will simplify laws and facilitate formalisation, along with Pension Reforms, PF reforms, etc. Government schemes like PM Rozgar Protsahan Yojana also help.  Finally, there is a large scope for more employment expansion in government—but of the right kind. Despite the general assumption that government is too bloated, the reality is that governments—at central, state and local levels—have a low capacity to employ more people due to their tendency to spend state budgets on freebies (deeply subsidized food, farm loan waivers, etc.) instead of public goods (good policing and legal systems, good schools and hospitals). 17

JOBLESS GROWTH Jobless growth is a multi-cause, systemic problem. In a jobless growth economy, unemployment remains stubbornly high even as the economy grows. This tends to happen when a relatively large number of people have lost their jobs, and the ensuing recovery is insufficient to absorb the unemployed, under-employed, and those first entering the workforce. Jobless growth of the Indian economy is a ―5C‖ problem: a Complicated Condition Created by Combinations of Causes. Recently, it was reported that unemployment in India is today, highest in the last 45 years. JOBS SCENARIO IN INDIA  CMIE and Labour Bureau data indicates that India continues to face the jobless growth problem.  Multiple data sources clearly show that job opportunities in India are, at present, limited, with the average annual addition to regular jobs during 2012-16 falling to 1.5 million from 2.5 million in 2004-12.  Besides, job creation in India‘s organized manufacturing sector experienced a sharp fall in 2012, later recovering only to a level considerably below any prior year during 2006-12.  Furthermore, the share of regular workers with any form of social security has declined from 45% in 2011-12 to 38% in 2016.  The labour force participation rate has declined systematically. It was 43% in 2004-05, 40% in 2009-10, 39.5% in 2011-12 and 36.9% in 2017-18.  Rapid advances in digital technologies and automation are displacing people from work in all sectors of the economy—in manufacturing, in services, and even in knowledge industries. 18

SKILL INDIA CAN TACKLE JOBLESS GROWTH In the words of the Mahatma, ―The brain must be educated through the hand. The teacher must learn the craft and correlate his knowledge to the craft. The craft cannot be separated from education.‖ Under Skill India Mission, the Ministry of Skill Development and Entrepreneurship is implementing a flagship scheme PMKVY with an objective to provide skilling to one crore people across the country for four years (2016-2020).The impacts of the Skill India mission in the last 4 years are-  NSQF recognises prior learning, through which an estimated 20 million school dropouts can get a second chance.  There is a substantial increase in the number of people who were skilled in FY17 and FY18. Notably, the rise is phenomenal, it has risen more than four times, from over 3.5 lakh people in FY17 to nearly 16 lakh people in FY18.  About 30% of the skilled persons have found jobs under the mission in FY2018.  Approximately 76 percent of the candidates have been placed in wage employment and 24 percent placed in self-employment/ entrepreneurship.  Recognition of Prior Learning (RPL) is designed for those who already have a job or are self- employed and require up-skilling and certification for better prospects. Till date, more than 4.5 lakh candidates have been certified under this component of PMKVY (2016-20). But, PMKVY also suffers from some challenges:  The targets allocated are very high and without regard to any sectoral requirement. Everybody was chasing numbers without providing employment to the youth or meeting sectoral industry needs.  The focus of PMKVY has been largely on the short-term skill courses, resulting in low placements. There has been an over emphasis on this scheme and hence it is seen as the answer to all skill-related issues.  The Comptroller and Auditor General (CAG) has pointed out flaws in the design and operations of the NSDC and National Skill Development Fund which has resulted in falling short of skill development goals. Majority of them also could not achieve the placement targets for the trained persons. 19

 The Sharada Prasad Committee, held the NSDC responsible for poor implementation of the Standard Training Assessment and Reward (STAR) programme. It highlighted that only 8.5 per cent of the persons trained were able to get employment. That is what has been claimed by NSDC.  The Report also cites ―serious conflict of interests‖ in the functioning of the National Skill Development Corporation. NSDC has not been able to discharge its responsibilities for setting up sector skill councils (SSCs) owing to lots of instances of serious conflict of interest and unethical practices.  The skilling courses are not in line with the Industrial Revolution 4.0 which is round the corner. OTHER STEPS TO OVERCOME JOBLESS GROWTH  Improving the labour market information system where emerging demand for skills are spotted quickly and the necessary training and certifications for the same are created.  Quick improvements in public-private partnership in capturing demand for skills and following through with quick investments in skill-building to match demand with supply.  Jobs and skills planning should be decentralized and it has to be done at state and district levels, where there is granular information on education, skills and job options.  Implementing a new model of manufacturing which is high-skilled, and where high-end cottage manufacturing can create employment at the small scale level.  If urbanization is good and well planned, then job growth will be positive. Government should concentrate on the development of towns and narrow areas and service it with good infrastructure to generate employment alongside development.  If government starts spending on public goods (schools, hospitals, dams, roads etc.) instead of spending on freebies (deep subsidies on food, farm loan waivers etc.) the capacity of government to create employment increases. 20

CONCLUSION India needs a new strategy to counter the phenomena of jobless growth. This requires manufacturing sector to play a dominant role. The focus of economic policy must be the creation of jobs and creating an enabling policy for youth to take up entrepreneurship and create more jobs in the market. India does not need five companies worth 5000 crores turnover but needs 5000 companies of 5 crore turnover. 21

GOVERNMENT BUDGETING The Constitution refers to the budget as the ‗annual financial statement‘. In other words, the term ‗budget‘ has nowhere been used in the Constitution. It is the popular name for the ‗annual financial statement‘ that has been dealt with in Article 112 of the Constitution. The budget is a statement of the estimated receipts and expenditure of the Government of India in a financial year, which begins on1 April and ends on 31 March of the following year. In addition to the estimates of receipts and expenditure, the budget contains certain other elements. Overall, the budget contains the following: 1. Estimates of revenue and capital receipts; 2. Ways and means to raise the revenue; 3. Estimates of expenditure; 4. Details of the actual receipts and expenditure of the closing financial year and the reasons for any deficit or surplus in that year; and 5. Economic and financial policy of the coming year, that is, taxation proposals, prospects of revenue, spending programme and introduction of new schemes/projects. 22

The Railway Budget was separated from the General Budget in 1921 on the recommendations of the Acworth Committee. Until 2016 (for 92 years), the budget of the Indian Railways was presented separately to Parliament and dealt with separately. Even then the receipts and expenditure of the Railways formed part of the Consolidated Fund of India and the figures relating to them are included in the ‗Annual Financial Statement‘. The last Railway Budget was presented on 25 February 2016 by Mr. Suresh Prabhu. Since 2017, Railway Budget is merged with the Union Budget. Revenue Expenditure Revenue Receipts Capital Expenditure Capital Receipts It neither creates any They are receipts of It either creates assets or They either create liabilities or reduces assets nor reduces any the government reduce liabilities. assets. liability for the incomes which Examples: Purchase of Examples: Market government. borrowings by the cannot be reclaimed land, machinery, government from the public, Borrowings from back by the citizens building and the RBI, Borrowings Revenue expenditure is from the government. equipment‘s; investment from commercial banks expenditure for normal or financial institutions in shares; loans and through the sale of T- BILLS, loans received running of the It can be divided into advances by the central from foreign governments or government department Tax Revenue (direct government to state international financial institutions, post office and various services, or indirect) or Non- governments and UTs. savings, post office saving certificates and interest charges on debt tax Revenue. PSU‘s Disinvestment. incurred by government, subsidies and so on. Example: Salaries of employees, Interest payments on past debts, grants given to state governments etc. 23

GOVERNEMNT DEFICITS TYPE OF DEFICIT IMPACT SOLUTIONS REVENUE DEFICIT  Revenue deficit signifies that A high revenue deficit warns government‘s own earning the government either to Revenue deficit is excess of is insufficient to meet curtail its expenditure or total revenue expenditure of normal functioning of increase its tax and non-tax the government over its total government departments and receipts. Thus, main remedies revenue receipts. Alternatively, provision of services. are: the shortfall of total revenue  Revenue deficit results in  Government should raise receipts compared to total borrowing. Simply put, rate of taxes especially on revenue expenditure is defined when government spends rich people and any new as revenue deficit. more than what it collects by taxes where possible, or way of revenue, it incurs improve compliance to Revenue deficit = Total revenue deficit. increase tax revenue.  Non-tax revenue like fines, Revenue expenditure – Total  Revenue deficit indicates fees, etc can also be Revenue receipts dis-saving on government account because government increased by reducing has to make up the corruption and uncovered gap by drawing digitalisation. upon capital receipts either  Government should try to through borrowing or reduce its expenditure and through sale of its assets avoid unnecessary (disinvestment). expenditure.  Since borrowed funds from capital account are used to meet generally consumption expenditure of the government, it leads to inflationary situation in the economy with all its ills.  Given the same level of fiscal deficit, a higher revenue deficit is worse than lower one because it implies a higher repayment burden in future not matched by benefits via investment. This increases revenue 24

expenditure in future leading to greater revenue deficit. EFFECTIVE REVENUE  Effective Revenue Deficit ------ DEFICIT signifies that amount of While revenue deficit is the capital receipts that are being difference between revenue used for actual consumption receipts and revenue expenditure of the expenditure, the present Government. accounting system includes all grants from the Union Government to the state governments/Union territories/other bodies as revenue expenditure, even if they are used to create assets. Such assets created by the sub- national governments/bodies are owned by them and not by the Union Government. Nevertheless they do result in the creation of durable assets, and therefore, should not be treated as unproductive in nature. Effective Revenue Deficit = Revenue Deficit – Grants to states for creation of capital assets FISCAL DEFICIT  Fiscal deficit is financed by (a) Measures to reduce public Fiscal deficit is the difference borrowing. And borrowing expenditure are: between the government‘s total expenditure and its total creates problem of not only  A drastic reduction in receipts excluding borrowing. In simple words, it is amount payment of interest but also expenditure on major of borrowing the government of repayment of loans. subsidies. Ultimately, government may  Reduction in expenditure on be compelled to borrow to bonus, LTC, leaves finance even interest encashment, etc. 25

has to resort to meet its payment leading to  Austerity steps to curtail expenses. emergence of a vicious circle non-plan expenditure. Gross fiscal deficit = Total expenditure – (Revenue and debt trap. (b) Measures to increase receipts + Non-debt creating capital receipts)  Deficit financing by RBI revenue are: leads to inflationary  Tax base should be pressures in the economy. broadened and concessions  Borrowing is in fact financial and reduction in taxes burden on future generation should be curtailed. to pay loan and interest  Tax evasion should be amount which retards effectively checked. future growth of economy.  More emphasis on direct taxes to increase revenue.  Restructuring and sale of shares in public sector units. PRIMARY DEFICIT  Zero primary deficits means The government must look at Primary deficit is defined as that government has to resort quick repayment of existing fiscal deficit of current year minus interest payments on to borrowing only to make loans to control primary deficit previous borrowings. It shows how much government interest payments. and thus, prevent falling to a borrowing is going to meet expenses other than Interest  It is generally used as a basic debt trap. payments. measure of fiscal irresponsibility. Primary deficit = Fiscal deficit – Interest payments 26

FISCAL RESPONSIBILITY AND BUDGET MANAGEMENT (FRBM) ACT The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 which set targets for the government to reduce fiscal deficits. The targets were put off several times. In May 2016, the government set up a committee under NK Singh to review the FRBM Act. The government believed the targets were too rigid. The recommendations of the committee can be listed as: 1. Public debt to GDP ratio should be considered as a medium-term anchor for fiscal policy in India: The combined debt-to-GDP ratio of the centre and states should be brought down to 60 per cent by 2023 (comprising of 40 per cent for the Centre and 20% for states) as against the existing 49.4 per cent, and 21per cent respectively. 2. Fiscal deficit as the operating target: The Committee advocated fiscal deficit as the operating target to bring down public debt. For fiscal consolidation, the centre should reduce its fiscal deficit from the current 3.5% (2017) to 2.5% by 2023. 3. Revenue deficit target The Committee also recommends that the central government should reduce its revenue deficit steadily by 0.25 percentage (of GDP) points each year, to reach 0.8% by 2023, from a projected value of 2.3% in 2017. 27

4. Formation of an independent Fiscal Council to advice the government and forecast key macro variables. It will also do a monitoring role, besides advising about the use of escape clause and also specify a path of return. 5. ‗Escape Clause‘ to accommodate counter-cyclical issues and ‗buoyancy‘ to reduce fiscal deficit target during higher economic growth. Here, the committee recommends fiscal flexibilities to go above or below the fiscal deficit targets in the form of ‗escape clauses‘. The Committee set 0.5% as buffer for fiscal deficit target. 6. Fiscal consolidation responsibility should be shared by states, given that their fiscal position has improved after greater resource transfer to them by the Fourteenth finance Commission. Now, total state expenditure (as a percent of GSDP) is even greater than the Centre. 8. The Committee observed that both monetary and fiscal policies must ensure growth and macroeconomic stability in a complementary manner. For this, the Inflation Targeting (IT) regime and Fiscal Rules (FRs) have to interact with each other. Recently, Budget 2018 proposed to stop setting targets on revenue deficit reduction from next year through an amendment in the Fiscal Responsibility and Budget Management framework. While accepting the NK Singh committee recommendations, the government decided to improve fiscal discipline and bring down debt-to-GDP ratio to 40% by 2024-25. They also accepted the recommendation to use fiscal deficit target as the key operational parameter. Necessary amendment proposals are included in the Finance Bill. 28

UNION BUDGET 2019-20 The Union Budget for 2019-20 was announced by Ms Nirmala Sitharaman, Minister for Finance and Corporate Affairs, Government of India, in Parliament on July 05, 2019. India is all set to become US$ 3 trillion economy by the end of FY20. The budget focusses on reducing red tape, making best use of technology, building social infrastructure, digital India, pollution free India, make in India, job creation in Micro, Small and Medium Enterprises (MSMEs) and investing heavily in infrastructure. Total expenditure for 2019-20 is budgeted at Rs 2,786,349 crore (US$ 417.95 billion), an increase of 14.09 per cent from 2018-19 (budget estimates). Highlights of Union Budget 2019-20  Overview of the economy o India was a US$ 1.85 trillion economy in 2014 and it has reached US$ 2.7 trillion in five years, the fastest growing major economy and the sixth largest economy in world, compared to 11th largest in 2013-14. o Metro rail network of 657 km has become operational in the country. o India target to become US$ 5 trillion economy in the next five years and might become a US$ 10 trillion economy in the next eight years thereafter. o The Indian economy grew at 6.8 per cent in 2018-19 and fourth quarter growth slumped to 5.8 per cent which was a 17 per cent quarter low. o Movement of cargo on Ganga is estimated to rise four times in next four years.  Major Expenditure Items o Total capital expenditure will be Rs 876,209 crore (US$ 131.43 billion) for 2019-20. o Centrally sponsored schemes have been allocated Rs 331,610 crore (US$ 49.74 billion) in 2019-20. o Defence budget is Rs 305,296 crore (US$ 45.79 billion) for the first time in 2019-20. o Amount of Rs 174,300 crore (US$ 26.14 billion) has been approved for pension in the budget 2020. o The government has allocated Rs 184,220 crore (US$ 27.63 billion), Rs 79,996 crore (US$ 11.99 billion) and Rs 37,478 crore (US$ 5.62 billion) for Food, fertiliser and Petroleum subsidies respectively.  Labour and Youth Welfare o National Sports Education Board to be setup under Khelo India to prepare youth for new age skills, Artificial Intelligence, IoT, Big Data, 3D Printing, Virtual Reality etc. 29

o National Research Foundation to be established to fund, coordinate and promote R&D. o Rs 400 crore (US$ 60 million) provided for ‗World Class Institutions‘ for FY20 o ―Study in India‖ to bring foreign students to higher educational institutions o The Government of India has decided to extend the pension benefit to about three crore retail traders & small shopkeepers whose annual turnover is less than Rs 1.5 crore (US$ 0.22 million) under ―Pradhan Mantri Karam Yogi Maandhan Scheme.  Support for Farmers o Government is planning to form 10,000 new Farmer Producer Organizations, to ensure economies of scale for farmers over the next five years. o Government will work with State Governments to allow farmers to benefit from e- NAM (National Agriculture Market). o Government might replicate ―one count: Zero Budget Farming‖ model which can help in doubling our farmers‘ income in time for our 75th year of Independence. o The focus of the government is on the ―Pradhan Mantri Matsya Sampada Yojana‖ (PMMSY) for addressing critical gaps in the value chain, including infrastructure, modernization, traceability, production, productivity, post-harvest management, and quality control.  Infrastructure o Ministry of Railways have been allocated Rs 94,071 crore (US$ 14.11 billion) in 2019-20. o The government has suggested the investment of Rs 5,000,000 crore (US$ 750 billion) for railways infrastructure between 2018-2030. o Metro rail network has reached to 657 Km. o Operating ratio improved by 95 per cent in 2019-20. o Government has announced to invest Rs 10,000,000 crore (US$ 1.5 trillion) in infrastructure over the next five years o To upgrade 1,25,000 kms of road length over the next five years, the estimated cost of Rs 80,250 crore (US$ 12.03 billion) is envisaged under Pradhan Mantri Gram Sadak Yojana-III (PMGSY) o 30,000 kms of PMGSY roads have been built using Green Technology, Waste Plastic and Cold Mix Technology. o Government has ensured power availability to states at affordable rates through model – One Nation, One Grid. 30

o Government has proposed to permit investments made by Foreign Institutional Investor‘s (FIIs)/Foreign Portfolio Investments (FPIs) in debt securities issued by Infrastructure Debt Fund. o Road - Bharatmala phase 2 going to be launched to develop the state road networks. o Government has finalised the model tendency law- promotion of rental housing.  Micro, Small and Medium Enterprises (MSMEs) and Traders o Government has proposed granting of loans up to Rs 1 crore (US$ 0.15 million) for MSMEs within 59 minutes through a committed online portal. Under the Interest Subvention Scheme for MSMEs, Rs 350 crore (US$ 52.50 million) has been allocated for FY 2019-20 o Government will create a payment stage for MSMEs to enable filing of bills and payment thereof on the platform itself. o The Government e-Marketplace (GeM) is being extended to all Central Public Sector Enterprises (CPSEs), providing more opportunities for MSMEs to sell their products.  Tax Proposals o Individual taxpayers with annual income up to Rs 500,000 (US$ 7,500) will get full tax rebate and hence will not be required to pay any tax. o Tax Deducted at Source (TDS) of 2 per cent on cash withdrawal exceeding Rs 1 crore (US$ 0.15 million) in a year from a bank account to promote less cash economy o Effective tax rate for individuals having taxable income above Rs 2 crore (US$ 0.30 million) has been increased. o Limit for applicability of lower corporate tax rate of 25 per cent increased from Rs 250 crore (US$ 37.50 million) to Rs 400 crore (US$ 60 million) o Enhanced interest deduction up to Rs 350,000 (US$ 5,250) for purchase of an affordable house. o The government increased income tax surcharge for HNIs (high net worth individuals) earnings more than Rs 2 crore (US$ 0.30 million) a year. Those earning between Rs 2-5 crore (US$ 0.30-0.75 million) will have shell out 3 per cent more, with surcharge rate being increased from 15 per cent to 25 per cent. Those earning above Rs 5 crore (US$ 0.75 million) will have to shell out a surcharge of 37 per cent, from current 15 per cent. o No charges or Merchant Discount Rate (MDR) on specified digital mode of payments. These modes are to be compulsorily provided by large businesses. o The government announced Rs 150,000 (US$ 2,250) income tax deduction on interest paid on loans for purchase of electric vehicles. 31

o Sabka Vishwas Legacy Dispute Resolution Scheme proposed for quick closure of service tax and excise related litigations. o To increase Special Additional Excise duty and Road and Infrastructure Cess each by one rupee a litre on petrol and diesel. o It also proposed to increase custom duty on gold and other precious metals from 10 per cent to 12.5 per cent. o Scheme of faceless electronic tax assessment o Aadhaar and PAN to be interchangeable and permit those who do not have PAN to file Income Tax returns by only citing their Aadhaar number. o Taxpayers having annual turnover of less than Rs 5 crore (US$ 0.75 million) can now file quarterly returns. o Fully automated GST refund module shall be implemented. o An electronic invoice system is proposed that will eventually eliminate the need for a separate e-way bill  Vision for the Next Decade o The become a US$ 3 trillion economy by the end of 2019 o Make in India with emphasis on MSMEs, Start-ups, defence manufacturing, automobiles, electronics, fabs and batteries, and medical devices o Building physical and social infrastructure o Digital India reaching every sector of the economy o India plans electricity, clean cooking facilities for all Indian families by 2022. o To ensure 'Har Ghar Jal' by 2024 o 125,000 km of road to be upgraded over next 5 years at a cost of Rs 80,250 crore (US$ 12.03 billion) o Aims to achieve housing for all by 2022 o Blue Economy o Healthy society – Ayushman Bharat, well-nourished women & children. Safety of citizens o Team India with Jan Bhagidari. Minimum Government Maximum Governance. o 19.5 million households to be built in rural areas. 32

INTERIM BUDGET 2019 Union Finance Minister Piyush Goyal presented an Interim Budget for 2019 in Parliament on 1st February 2019. An Interim Budget usually doesn't list out new schemes or doesn't unveil any policy measures. The government then presented the vote on account for the next four-to-five months. A full-fledged Budget was presented after the House reassembled after the general election. Here are the highlights:  No income tax for earnings up to Rs. 5 lakh.  Individuals with gross income of up to Rs. 6.5 lakh need not pay any tax if they make investments in provident funds and prescribed equities.  Standard tax deduction for salaried persons raised from Rs. 40,000 to Rs. 50,000.  TDS threshold on interest on bank and post office deposits raised from Rs. 10,000 to Rs. 40,000.  TDS threshold on rental income increased from Rs. 1.8 lakh to Rs. 2.4 lakh.  I-T processing of returns to be done in 24 hours.  Within the next 2 years, all verification of tax returns to be done electronically without any interface with the taxpayer.  Package of Rs. 6000 per annum for farmers with less than 2 hectares of land. Scheme to be called Pradhan Mantri Kisan Samman Nidhi.  Vande Bharat Express, an indigenously developed semi high-speed train, to be launched.  One lakh digital villages planned in the next five years.  Fund allocation for the Northeast region increased to Rs. 58,166 crore, a 21% rise over last year for infrastructure development.  Anti-camcord regulations to be introduced in the Indian Cinematograph Act to prevent piracy and contact theft of Bollywood films.  Single window clearance for Indian filmmakers. 33

 25 per cent of sourcing for government projects will be from the MSMEs, of which three per cent will be from women entrepreneurs.  National Artificial Intelligence portal to be developed soon.  ESI cover limit increased to Rs. 21,000. Minimum pension also increased to Rs. 1000.  Mega pension scheme for workers in the organised sector with an income of less than ₹15,000. They will be able to earn ₹ 3000 after the age of 60. The scheme will be called Pradhan Mantri Shramyogi Maan Dhan Yojana.  2% interest subvention for farmers pursuing animal husbandry.  All farmers affected by severe natural calamities to get 2% interest subvention and additional 3% interest subvention upon timely repayment.  Decision taken to increase MSP (minimum support price) by 1.5 times the production cost for all 22 crops.  The 22nd AIIMS to come up in Haryana. 34

TAX REFORMS The tax structure in India is divided into direct and indirect taxes. While direct taxes are levied on taxable income earned by individuals and corporate entities, the burden to deposit taxes is on the assessees themselves. On the other hand, indirect taxes are levied on the sale and provision of goods and services respectively and the burden to collect and deposit taxes is on the sellers instead of the assessees directly. Taxes in India are levied by the Central Government and the State Governments. Some minor taxes are also levied by the local authorities such as the Municipality and the Local Governments. Prior to the liberalization of Economy, India‘s tax regime suffered numerous problems.  There was a high degree of progressiveness (rich needed to pay exorbitant taxes). On the other hand, tax collection efficiency was very low (rich were smart enough to evade tax).  There was large number of exemptions, which eroded the already narrow tax base in the country.  In terms of corporation tax, there were numerous discriminations between different kinds of the companies that discouraged the investments. Double taxation of dividends was also common in those days.  In terms of Indirect taxes, the high rates of custom / excise duties were prevalent. There was no VAT; there was no service sector within the purview of tax. The efforts to reform India‘s tax system began in mid 1980s when the government announced a Long Term Fiscal Policy, 1985. This policy recognized that the fiscal position of the country is going downhill and there was a need to make changes in the taxation system. In that decade, a technical group to review and rationalize the central excise duties was established and this led to introduction of Modified System of Value-Added Tax (MODVAT) in 1986. To rationalize the custom duties, the harmonized system (HS) of the classification of goods was introduced. The government appointed in succession the following two committees to plan substantial overhauling of the taxation system and bring it on par with the international taxation system or rates: 35

RAJA CHELLIAH COMMITTEE (1991-93) In, 1991, the Government set up the Tax Reforms Committee under the Chairmanship of Raja J. Chelliah to examine the then tax structure of the country and suggest appropriate changes therein. In its report submitted to the Government in January 1993, it has made several recommendations for reforming India‘s tax structure:  The tax system of the country and laws relating to taxes should be made as simple as possible – limited number of rates and minimum possible exemptions. Also, frequent modifications should be avoided to bring stability.  In order to make the direct tax system more effective, it is necessary to reduce the tax rate so that there is less tax evasion and avoidance. There is also the need to narrow the spread between the lowest rate and maximum marginal rate (the rate of the highest slab).  Avoid double taxation, as in case of partnership firms. It will investible profit of the business, causing industry to rise.  Reduce corporate tax rate differences between domestic and foreign companies, to encourage the flow of foreign capital.  The Committee opined that the system of long term capital gains lacked rationality because the deductions allowed in computing capital gains is not related to the period of time for which the assets have been held. The then system failed to take in effects of price inflation over the period during which taxable gain has occurred. This problem could be tackled by introducing some sort of indexation as was recommended by the Committee.  For levying wealth tax, it is necessary to bring into focus the distinction between productive and unproductive wealth. For reviving the money and capital markets, it is necessary to encourage investment in financial assets like shares, securities, bonds, as also in bank deposits. So, it is necessary to exempt such productive assets from wealth tax.  Since, before the reform-era began, ad valorem excise duties had been replaced by specific duties, the revenue of the Government from this source had fallen. So the Committee recom- mended gradual switching over to ad valorem, more so in view of increase in the prices of most excisable commodities. At the same time it suggested that where specific rates have to be retained, these were to be revised—taking into account the rate of price inflation. 36

However, the Committee cautioned that ―the process of reform should be gradual, so as to moderate the impact of adjustment both in terms of possible revenue loss and the pace at which industry is exposed to competition.‖ As a result of government‘s action on the above recommendations, peak rate of personal income tax fell from 56 p.c. in 1991-92 to 40 p.c. in 2006-07. The maximum marginal tax for personal income fell to 30 p.c. as against 97 p.c. in 1975. As far as trends in direct tax collections are concerned, greater compliance is observed. VIJAY KELKAR TASKFORCE ON DIRECT AND INDIRECT TAXES (2002) GJJ The government appointed a committee under the chairmanship of Mr. Kelkar to examine the structure of direct and indirect taxes and to make recommendations for making the tax system more broad-based, elastic and simplified. Major recommendations of this committee are the following: AREA OF REFORM COMMITTEE RECOMMENDATIONS Administration of direct  The taxpayer services should be extended both in quality and tax quantity and taxpayers should get easy access through internet and email.  PAN (Permanent Account Number) should be expanded and it should cover all citizens.  Block assessment of search and seizure cases should be abolished.  To clear the backlog, the department should outsource the data entry work.  All returns and issue of refunds should be completed in a four- month period. Dispatch of refunds should be outsourced.  The government should establish a Tax Information Network to modernize, simplify and rationalize tax collection, particular TDS and TCS.  Abolish the requirement of Tax Clearance Certificate on leaving 37

Personal income tax the country. Corporation tax Wealth tax  Empower CBDT with appropriate administrative and financial powers.  Increase in exemption limit to Rs.1 lakh for the general categories of taxpayers and further  Exemption for senior citizens and widows.  Rationalize income tax slabs, eliminate surcharge on personal income tax.  Incentivise home loans by providing interest subsidy on home loans @2%.  Increase deduction under Section 80CCC for contribution to pension funds.  Reduce the Corporate tax to 30% for domestic companies and 35% for foreign companies.  The listed companies should be exempted from tax on dividends and capital gains.  Increase rate of depreciation for plant and machinery.  Abolish Minimum Alternate Tax. Should be abolished. Today, most of the above recommendations have been implemented, causing our taxation system to become more robust, and also India‘s entry into the top 100 countries in Ease of Doing Business Report in 2017, and 77 in 2018. 38

OTHER IMPORTANT TAX REFORMS Tax Information Network (TIN) On behalf of the Income Tax Department, the National Securities Depository Limited (NSDL) established Tax Information Network (TIN). This is a source of the countrywide tax-related data. The basic idea behind establishing TIN was to modernise collection, processing, monitoring and accounting of direct taxes using information technology. TIN has three subsystems viz. ERACS, OLTAS and CPLGS. Electronic Return Acceptance And Consolidation System (ERACS) ERACS consists of a system for interface with the taxpayers (TIN Facilitation Centres that is TIN- FC) and an internet supported system for upload of electronic returns of Tax Deduction at Source (TDS) and Tax Collection at Source (TCS) and Annual Information Return (AIR) to the central system of TIN. Online Tax Accounting System (OLTAS) OLTAS is used for upload to the central system the details of tax deposited in numerous tax collecting branches across the country every day. Central PAN Ledger Generation System (CPLGS) It is the central system that merges the details of TDS/TCS and advances tax into the PAN. e-TDS & e-TCS TDS refers to Tax Deduction at Source. The third parties deduct tax at source and then deposits it at pre-determined bank branches. Since 2004–2005, it has been made mandatory to file TDS returns electronically for both the operators, the Government as well as corporate sector. Further, the Income Tax Act, 1961 states that when the tax is collected at source by the seller from the buyer, it is named TCS (Tax Collected at Source). Under the scheme named ‗Electronic Filing of Returns of Tax Collected at Source Scheme, 2005‘, the corporate and Government deductors have to pay electronically or physically to NSDL. 39

eSahyog initiative: Paperless Assessments Information Technology has made the life of taxpayers easy as they don‘t need physically go to banks to deposit bank challans and present the case and documents to assessing officers. To make further simple, the CBDT recently came up with a proposal paperless income tax assessment over emails. This would save the taxpayer to pay a visit to the IT office, particularly in case of small amounts. Pilot projects in this direction have been launched in Mumbai, Delhi, Chennai, Bengaluru and Ahmedabad. Sevottam: Efficient grievance redressal To bring new life to the sluggish grievance redressal system, the department is using ‗Sevottam‘ platform that connects all income tax offices in the country. The idea is to address the queries and grievances in real time. Faster refunds The IT department is working towards processing and sending tax refunds within 10 working days. The initiative to verify Income Tax Return (ITR) by Aadhaar or bank database has been taken. Pre-filled ITR forms Despite online forms, many people still use offline downloaded forms for tax purpose. The Department is now taking an initiative to offer pre-filled forms which automatically populated with user/taxpayer data and are downloaded with most information filled already. PAN camps To increase coverage of the PAN, the government has been conducting PAN camps across India. There is also a proposals to launch Income Tax Business Application-Permanent Account Number (ITBA-PAN) portal, through which anyone can apply for PAN online and get it within 48 hours. 40

GOODS AND SERVICES TAX The Goods and Services Tax (GST) is so far the biggest tax reform in the country. GST is a comprehensive indirect tax levied on manufacture, sale and consumption of goods as well as services at the national level. It has replaced all indirect taxes levied on goods and services by the Central and State Governments. GST regime was implemented from 1st July 2017, and India has adopted the dual GST model in which both the Centre and States levy taxes: The GST is applicable on all goods other than following: • Alcoholic liquor for human consumption • Five petroleum products (Petroleum crude, high-speed diesel, motor spirit, natural gas and aviation turbine fuel). GST on these is to be levied post notification about the effective date. FEATURES  It is a destination-based taxation system.  It has been established by the 101st Constitutional Amendment Act. 41

 It is an indirect tax for the whole country on the lines of ―One Nation One Tax‖ to make India a unified market.  It is a single tax on supply of Goods and Services in its entire product cycle or life cycle i.e. from manufacturer to the consumer.  It is calculated only in the ―Value addition‖ at any stage of a goods or services.  The final consumer will pay only his part of the tax and not the entire supply chain which was the case earlier.  It subsumes the following state and central taxes: STATE TAXES CENTRAL TAXES  State Value Added Tax/Sales Tax  Central Excise Duty  Entertainment Tax (Other than the tax  Additional Excise Duty  Service Tax levied by the local bodies)  Additional Customs Duty  Octroi and Entry Tax  Purchase Tax (Countervailing Duty)  Luxury Tax  Special Additional Duty of Customs  Taxes on lottery, betting, and gambling  GST COUNCIL is the 1st Federal Institution of India, whose chairman in the finance minister of India. It will approve all decision related to taxation in the country. It consists of Centre, 29 states, Delhi and Puducherry. Centre has 1/3rd voting rights and states have 2/3rd voting rights. Decisions are taken after a majority in the council.  Tax slabs are decided as 0%, 5%, 12%, 18%, 28% along with categories of exempted and zero rated goods for different types of goods and services. 42

 Further, a cess would be levied on certain goods such as luxury cars, aerated drinks, pan masala and tobacco products, over and above the rate of 28% for payment of compensation to the States. However, which goods and services fall into which bracket is still an enormous task to be completed by the GST council. Highest tax slab is pegged at 40%.  Registration system and process under GST:  TECHNICAL BACKBONE is the GST Network: 43

GSTN is registered as a not-for-profit company under the companies Act. It has been formed to set up and operate the information technology backbone of the GST. While the Central (24.5%) and the state (24.5%) governments hold a combined stake of 49%, the remaining 51% stake is divided among five financial institutions—LIC Housing Finance with 11% stake and ICICI Bank, HDFC, HDFC Bank and NSE Strategic Investment Corporation Ltd with 10% stake each. GSTN had awarded Infosys Ltd the contract to develop the hardware and software for GST. The idea behind GSTN was to set up an entity that is equidistant from both the Central government and the state governments, as it will advise both the Centre and the states on the information technology network CRITICISM/ISSUES AND COUNTER ARGUMENTS  Not all items are covered: Taxation for certain items such as Alcohol, Tobacco etc. are still not under the GST domain. States argue that including them would hamper their revenue and they would suffer a huge resource. However, some experts say that the real reason is the nexus of politicians with some business class and high profile lobbying. Further, the Finance minister of India has said in the parliament that the consensus to include alcohol and tobacco under GST regime is possible in foreseeable future.  Decision criteria for the tax bracket: There are apprehensions that how to decide about the items and the criteria that which item will fall into which tax bracket. It may lead to lobbying. To this, the Finance minister has said that the decision will be taken by the GST Council only and after due diligence and most probably by the consensus.  Multiple tax rates and brackets: The philosophical idea that GST means ―One Nation one Tax‖ is currently diluted due to multiple tax rates and brackets. To this, the Finance minister has said that since the target consumer of goods and services have different capabilities and therefore there must be a system similar to the democratic lines where higher value consumer pays more taxes.  Power to impose tax taken away by Central Government from the Parliament: The Central GST Bill, 2017 allows the central government to notify CGST rates, subject to a cap. This implies that the government may change rates subject to a cap of 20%, without requiring the approval of Parliament. Under the Constitution, the power to levy taxes is vested in Parliament and state legislatures. Though the proposal to set the rates through 44

delegated legislation meets this requirement, the question is whether it is appropriate to do so without prior parliamentary scrutiny and approval.  Confusion regarding the location of consumption: Under GST, both state and Centre can tax the services based on their location of consumption. Now the confusion arises since the general rule to determine the location of the recipient is his location or address on record; there are specific rules for various services such as telecom, property, transportation, etc. This means that while a service may be consumed across multiple states, the tax revenue would be attributed to the state where the recipient is registered or his office is located. This could lead to higher tax attributed to states that have more registered offices. For example, suppose a company is located in Bangalore and advertises its products in the Kolkata edition of a newspaper, which has its registered office in Delhi. In this case, one may argue that the service is being finally consumed in Kolkata. However, as the recipient of services is in Bangalore, the tax would accrue to Karnataka.  Anti-Profiteering Clause: The government is planning to set up an authority to see if any reduction in tax rates after GST is passed on to the consumer by companies or not. The industry and businesses are not taking this idea kindly and they see it as a backdoor entry of inspector raj. Experts say that prices should be market determined and no government authority has the business of deciding prices for goods and services.  Confusion regarding the control over taxation: To avoid dual control, the GST council has reached a compromised formula. 90 percent of tax assesses with an annual turnover of Rs 1.5 crore or less, will be assessed by states and the rest by the Centre. For those with a turnover of over Rs 1.5 crore, the states and the Centre will share it equally. However, this ‗solution‘ has its own set of issues. For example, if an entity with a turnover of less than Rs 1.5 crore in one year, posts a turnover of Rs 1.5 crore in the following financial year, who would be the new authority to take over the assessment? And, how will the existing investigations, if any, against the entity be addressed, and by whom? ―There are a lot of procedural issues, and if these issues are not addressed properly, they would lead to litigations.  The issue of casual taxable person: If a person registered in one state moves to another state for a short period for some business transaction – say to participate in a fair or exhibition, then that person would have to get himself registered in that state for that period. 45

DIRECT TAX CODE The government has appointed a committee headed by Arbind Modi, member of the apex direct tax policy making body Central Board of Direct Taxes (CBDT), to formulate a draft DIRECT TEX CODE, thereby reforming and simplifying the direct tax regime, on the lines of indirect tex reform- GST. Objectives include simplifying tax legislation, widening the tax base, while removing a number of exemptions. The task force is in the process of drafting a direct tax legislation keeping in mind, tax system prevalent in various countries, international best practices, economic needs of the country, among others. Some of the provisions of the DTC such as General Anti-Avoidance Rule (GAAR) and Place of Effective Management (PoEM) have already been implemented. Besides, a new direct tax code may involve change in rates and slabs that will require amendments in the Finance Bill. Some key tax provisions which may be reviewed are--deduction for interest on debt, liability for dividend tax, minimum alternate tax on corporates, presumptive taxation, tax incentives for individual savings in a changing work life scenario and taxation of investment of capital as well as return on capital, among others. The significant areas on tax administration procedures could be--further leveraging technology to promote functional specialisation and ease taxpayer interface, reviewing dispute resolution mechanisms within the tax administration, and integrating tax information and filing across direct taxes and GST to reduce the compliance burden. 46

OTHER TAX REFORMS Government appointed - Tax Administration Reforms Commission (TARC) headed by Dr. Parthasarathi Shome submitted its report in four volumes containing a total of 385 recommendations that pertain to Central Board of Direct Taxes (CBDT) and 201 recommendations that pertain to Central Board of Excise and Customs (CBEC). The broad recommendations inter-alia include  Changes in structure  Improvement in taxpayers service  Enhanced use of information and Communication Technology  Exchange of information with other agencies  Strengthening of human resource management  Key Internal Processes  Customs Capacity Building  Impact assessment  Expansion of Base  Compliance Management  Revenue Forecasting  Predictive Analysis and Research for tax Governance etc. Two new bodies namely Tax Policy Council (TPC) and Tax Policy Research Unit (TPRU) should be set up for making recommendations on tax policies and other policy matters, according to the Committee. In 2016, the Government has set up a ten Member Tax Policy Council (TPC) under the Chairmanship of Finance Minister with an aim to have a consistent and coherent approach to the issue of tax policy and having regard for need to have an inter-disciplinary approach. The Council will look into all research finding of the Tax Policy Research Unit (TPRU) and suggest broad policy measures for taxation. The Council will be advisory in nature and will help the Government in identifying key policy decisions for taxation. As per the terms of reference, these bodies are permanent bodies and no periodic reports are expected. 47

BANKING NON-PERFORMING ASSETS According to RBI, an asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank. RBI has laid down specific timelines for various categories of loans:  Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan.  The account remains ‗out of order‘ in respect of an Overdraft/Cash Credit (OD/CC).  The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.  The installment of principal or interest thereon remains overdue for two crop seasons for short duration crops.  The installment of principal or interest thereon remains overdue for one crop season for long duration crops.  In respect of derivative transactions, the overdue receivables representing positive mark-to- market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. In March 2018, non-performing assets (NPAs) at commercial banks amounted to Rs. 10.3 trillion, or 11.2% of advances. Public sector banks (PSBs) accounted for Rs. 8.9 trillion, or 86%, of the total NPAs. The ratio of gross NPA to advances in PSBs was 14.6%. These are levels typically associated with a banking crisis. For example, in 2007-08, NPAs totalled only Rs. 566 billion (a little over half a trillion), or 2.26% of gross advances! 48

CAUSES EXTERNAL FACTORS INTERNAL FACTORS  Global, regional or national financial  Indiscriminate lending by some state- crisis which results in erosion of margins and owned banks during the high growth period profits of companies, therefore, stressing (2004-08) is one of the main reasons for the their balance sheet which finally results into deterioration in asset quality. non-servicing of interest and loan payments.  Bankers say there is a lack of rigour in loan (For example, the 2008 global financial appraisal systems and monitoring of crisis). warning signals at state-run banks. This is  The general slowdown of entire economy particularly true in case of infrastructure for example after 2011 there was a slowdown projects, many of which are struggling to in the Indian economy which resulted in the repay loans. Besides, these projects go on for faster growth of NPAs. 20 to 30 years.  The slowdown in a specific industrial  Poor recovery and use of coercive techniques by banks in recovering loans segment, therefore, companies in that area  The wait and watch approach of banks bear the heat and some may become NPAs. have been often blamed as the reason for  Unplanned expansion of corporate houses rising NPAs as banks allow deteriorating during the boom period and loan taken at asset class to go from bad to worse in the low rates later being serviced at high rates, hope of revival and often offer restructuring therefore, resulting in NPAs. option to corporates.  Due to mal-administration by the  A bad lending practice which is a non- corporates, for example, willful defaulters. transparent way of giving loans.  Due to misgovernance and policy paralysis  Due to natural reasons such as floods, which hampers the timeline and speed of droughts, disease outbreak, earthquakes, projects, therefore, loans become NPAs. For tsunami etc. example the Infrastructure Sector.  Poor provisioning norms and inter-bank connectivity.  Severe competition in any particular market segment. For example the Telecom sector in India.  Delay in land acquisition due to social, political, cultural and environmental reasons. 49

 Even the PSL sector has contributed substantially to the NPAs. As per the latest estimates by the SBI, education loans constitute 20% of its NPAs!  Moral hazard due to government steps like loan waiver, promotes willful default in agriculture loans. IMPACT OF NPAs  Lenders suffer a lowering of profit margins.  Stress in banking sector causes less money available to fund other projects, therefore, negative impact on the larger national economy.  Higher interest rates by the banks to maintain the profit margin.  Redirecting funds from the good projects to the bad ones.  As investments get stuck, it may result in it may result in unemployment.  In the case of public sector banks, the bad health of banks means a bad return for a shareholder which means that the government of India gets less money as a dividend. Therefore it may impact easy deployment of money for social and infrastructure development and results in social and political cost.  The shareholders of the banks will lose a lot of money as banks themselves will find it tough to survive in the market.  Twin Balance sheet syndrome of Indian characteristics that is both the banks and the corporate sector have stressed balance sheet and causes halting of the investment-led development process.  NPAs related cases add more pressure to already pending cases with the judiciary.  As the NPA of the banks will rise, it will bring a scarcity of funds in the Indian security markets. Few banks will be willing to lend if they are not sure of the recovery of their money. 50