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Editorial Notes

Editorial Notes 23rd September 2016

Advancing Budget Date; GST Council; Monetary Policy Committee (MPC)
By By IT's Editorial Notes Team
September 23, 2016

Contents

Economy

  • Pros and cons of advancing Budget date
  • Something for everyone
  • The RBI remains in charge of policy

 

Economy

GS (M) Paper-3: “Government Budgeting”

Pros and cons of advancing Budget date

Introduction:

The Cabinet has decided in principle to advance the presentation of the Union Budget by a month, from February to January.

iastoppers-advancing-budget-date

The objective is to have the Budget constitutionally approved by Parliament and assented to by the President, and all allocations at different tiers disseminated to budget-holders, before the financial year begins on April 1.

Arguments in favour of advancing Budget date

  • The new system will eliminate the need for the executive to obtain a vote-on-account budget approval to incur expenditure during the first two months.
  • All spending authorities within the system and those financially dependent on the Centre be in a position to work out their activities with assured resources in the beginning of the year itself.
  • A more planned and regulated expenditure profile during the year is expected.
  • It will give individuals and companies more time to firm up savings and tax payout plans.
  • Advancing the budget would conclude the process by March allowing for the changes to roll out from the beginning of the financial year. For instance, service tax was increased to 15% from 14% from June 1 this year, though the finance minister announced the change in the budget presented on February 28.
  • Many times proposals announced in February are rolled back (like taxation on withdrawal of EPF), partially or fully during the finance bill’s passage in May, because these may have been politically unpopular triggering off howls of protest. So it would dilute the confusion.
  • If the Budget session is advanced, parliamentary approval of the final batch of supplementary demands (that is, for additional budgeted funds) and re-appropriation relating to the current financial year, may be feasible a few weeks before the end of the financial year. This will enable additional releases from the Centre to the States in February or early March, thus giving states more time to utilise their funds.

Arguments against advancing Budget date

  • Whether the chambers of Parliament and its standing committees (PSCs) will get adequate time to deliberate on the budget is a moot point.
  • The scrutiny by PSCs is all the more important because, in the recent past, many of the Budget demands have had to be guillotined without debate in Parliament owing to paucity of time.
  • A Public Fund Management System (initially PFMS dealt with Plan Funds only but later covered all funds) has been introduced by the Centre to track its fund flow-based expenditure up to the lowest tier where goods and services are obtained against payments.
  • Though PFMS is being progressively expanded, it still does not encompass all State governments’ echelons and establishments, notwithstanding Central funds being spent through the latter to a large extent under schemes and projects funded substantially by the Centre.
  • If the budget is presented in January, there will be overlap of the winter and budget sessions of Parliament. Parliamentary work will be hampered.
  • Why to drop a time-tested norm.
[Ref: Business Line]

 

GS (M) Paper-3: “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.”

Something for everyone

Introduction:

Recently, the Union Cabinet has approved setting up of GST Council and setting up its Secretariat. The GST Council will lay the foundation for the future of India’s cooperative federalism.

iastoppers-gst-council

Composition of the GST Council:

As per Article 279A of the amended Constitution, the GST Council which will be a joint forum of the Centre and the States, shall consist of the following members:

iastoppers-gst-council-table

Functions of the GST Council:

As per Article 279A (4), the Council will make recommendations to the Union and the States on important issues related to

  • GST, like the goods and services that may be subjected or exempted from GST,
  • Model GST Laws,
  • Principles that govern Place of Supply,
  • Threshold limits,
  • GST rates including the floor rates with bands,
  • Special rates for raising additional resources during natural calamities/disasters,
  • Special provisions for certain States, etc.

Significance of GST Council

  • Neither the European Union nor the United States nor even China exhibits such stark contrasts in demographics, human development and economic parameters across their large provinces as India. In this context, this transition to a uniform GST regime is both extremely audacious and laudable
  • Single and uniform regime of taxation (indirect) would improve ease of doing business, tax compliance etc.

Challenges ahead for GST council

Revenue Neutral Rate(RNR)

  • It is being deemed as a utopian chase.
  • It is futile to agonise over an exact rate at which there will be no loss of tax revenues for all the States

Fear of larger states viz. loss of revenue

  • Largely an exaggeration
  • Large States can also benefit from a significantly higher share of service tax revenues under the destination-based GST regime

False notion:

  • False notion that high GST rates will not affect the poor since half of the consumption basket is not taxed.
  • This assumption, that the government knows precisely what the poor and rich consume, is bizarre and outdated.

Given India’s stark economic diversity, there are no uniform standards for the poor across the country.

Guiding Principles to build on consensus in GST

Tax buoyancy:

  • Instead of RNR guarantee a minimum to all state. This will relieve them of the risks of tax buoyancy.

Simple and low standard GST rate: 

  • A simple and low standard GST rate should be set to incentivise tax compliance and boost overall tax collections.
  • In order to minimise overall inflationary impact, the standard GST rate slab should be 15 per cent, equal to the current services tax rate including all cesses.
  • There can then be a slab for low rate, a merit rate and a high de-merit rate. It is then up to the GST council to categorise goods and services into these four slabs

No more State-specific tax incentives:

  • Different States have different thresholds under which businesses are exempt from State taxes. Typically for large States, any business with an annual turnover of less than Rs.10 lakh is exempt.

New job creation:

  • Since a uniform GST will remove the States’ ability to attract new businesses with tax incentives, there is an understandable fear of new job creation in the more developed States.
  • Raising this threshold for GST exemption from the current average of Rs.10 lakh to, say, Rs.40 lakh can incentivise existing small businesses to grow faster, thereby creating new jobs.

Minimal categories of exemption:

  • Petroleum and petro products along with sin goods such as alcohol and tobacco are already exempt from the current GST law, allowing States to levy appropriate taxes on these goods.

Incentivise States for GST collection:

  • The key to a successful GST regime is increased tax revenues to States failing which it is bound to get fractious in the years to come.
  • Since GST is a destination tax concept, it is best to give each State the greater responsibility to collect both Central and State GST taxes within its State.
[Ref: The Hindu, PIB]

 

GS (M) Paper-2: “Separation of powers between various organs”
GS (M) Paper-3: “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.”

The RBI remains in charge of policy

Introduction:

India’s monetary policy is soon going to be reviewed in the new regime of a Monetary Policy Committee (MPC) that has been put in place, with the government appointing three economists as its nominees.

From left to right: Ravindra H Dholakia, Pami Dua and Chetan Ghate
From left to right: Ravindra H Dholakia, Pami Dua and Chetan Ghate

What is Monetary policy?

  • Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

Monetary policy in India:

  • In India, the central monetary authority is the Reserve Bank of India (RBI). It is so designed as to maintain the price stability in the economy.

Objectives of the monetary policy of India:

As stated by RBI, objectives of the monetary policy of India are:

Price Stability:

  • Price Stability implies promoting economic development with considerable emphasis on price stability.
  • The centre of focus is to facilitate the environment which is favourable to the architecture that enables the developmental projects to run swiftly while also maintaining reasonable price stability.

Controlled Expansion of Bank Credit:

  • One of the important functions of RBI is the controlled expansion of bank credit and money supply with special attention to seasonal requirement for credit without affecting the output.

Promotion of Fixed Investment:

  • The aim here is to increase the productivity of investment by restraining non-essential fixed investment.

Restriction of Inventories and stocks

  • Overfilling of stocks and products becoming outdated due to excess of stock often results in sickness of the unit. To avoid this problem, the central monetary authority carries out this essential function of restricting the inventories.
  • The main objective of this policy is to avoid over-stocking and idle money in the organization.

To Promote Efficiency

  • It is another essential aspect where the central banks pay a lot of attention. It tries to increase the efficiency in the financial system and tries to incorporate structural changes such as deregulating interest rates, ease operational constraints in the credit delivery system, to introduce new money market instruments etc.

Reducing the Rigidity:

  • RBI tries to bring about the flexibilities in the operations which provide a considerable autonomy. It encourages more competitive environment and diversification.
  • It maintains its control over financial system whenever and wherever necessary to maintain the discipline and prudence in operations of the financial system.

Composition and functions of the new monetary policy committee:

  • Under the new monetary policy framework, a six-member panel chaired by the RBI governor will decide on interest rates.
  • The decision of the committee — three each nominated by the government and the central bank – will be binding.
  • The governor cannot override the panel’s decision by using a veto, but can cast a vote in case of a tie. While it has not been made clear, the next monetary policy review on October 4 will likely be the first to be overseen by the MPC.

Earlier system:

  • In the earlier system, the governor was guided by the RBI’s Monetary Policy Department (MPD). Views of the Technical Advisory Committee (TAC), a panel of experts, were also factored in while deciding on repo rate—the rate at which the central bank lends to banks.
  • The governor, however, enjoyed overriding powers on interest rate decisions.

Why changes are needed?

  • The RBI has to juggle many roles, and, on many occasions it can lead to conflict of interests.
  • For instance, when inflation is rising the central bank is generally expected to raise interest rates to slow down demand and tame price rise. But, the RBI is also the public debt manager. In its capacity as the government’s sole merchant banker and sovereign bond regulator, its aim is to maintain low interest rates.
  • The new framework removes such ambiguities by making inflation targeting the central bank’s primary focus. Effectively, it implies that RBI will choose inflation management as its first choice should a toss-up were to be made between multiple goals

Conclusion:

  • The present system is a definite improvement over that proposal for a rate-setting body without any accountability to the people of India.
  • However, the desirability of monetary policy being determined solely by inflation expectations, without concern for financial stability in this era of large cross-border capital flows in response to cues that apply to the world at large rather than to the individual jurisdictions where they originate, is open to question.
[Ref: Economic Times]

 

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