Tax Hike or Expenditure Cut?
Most analysts agree that India must urgently bring its gigantic fiscal deficit down. The real question is how precisely to do it: through tax hike or expenditure cut? The two remedies have very different effects on aggregate savings and therefore investment.
India has to lower its fiscaldeficit and the best way to do that is by both raising tax revenues and cutting expenditure. Dogmatic insistence on just one route to fiscal discipline is ill-advised, says Arvind Panagariya
Most analysts agree that India must urgently bring its gigantic fiscal deficit down. The rare exceptions occur only in the context of the defence of specific, favourite expenditure proposals. For instance, Mrs Sonia Gandhi and the Left parties would sacrifice deficit reduction if it means a compromise on the National Employment Guarantee scheme.
Likewise, between higher expenditure on infrastructure and lower fiscal deficit, the Planning Commission deputy chairman would probably opt for the former. But in the broader macroeconomic context, even these exceptions yield to the necessity of deficit reduction.
Likewise, between higher expenditure on infrastructure and lower fiscal deficit, the Planning Commission deputy chairman would probably opt for the former. But in the broader macroeconomic context, even these exceptions yield to the necessity of deficit reduction.
The real question confronting India therefore is how precisely to bring the deficit down. Unsurprisingly, there are no magical answers. A deficit, whether it relates to the household or national budget, can be cut in only three ways: an increase in income, a cut in the expenditure or a combination of the two. In the case of the national budget, income comes from taxes so that the government must choose among higher taxes, lower expenditures or a combination of the two.