Arvind Subramanian cautions against poor tax revenue of local bodies

PATNA

: “Though the introduction of goods and services tax (GST) regime has led to indirect tax buoyancy, the country will head towards ‘low equilibrium trap’ unless tier-III urban and rural local bodies raise taxes by delivering better public services,” India’s Chief Economic Adviser

Arvind Subramanian

said on Wednesday.


Delivering a lecture on ‘An analytical Framework for Fiscal Federalism in India’, organised by the Centre for Economic Policy and Public Finance of

Asian Development Research Institute

(ADRI) in Patna, Subramanian said for ‘good equilibrium’ to occur, the state governments and decentralised tier-III local bodies would have also to raise taxes to sustain their performance.

“If the governments show accountability and deliver services, people also show willingness to pay taxes,” Subramanian said and added tier-III bodies generally hesitated to raise tax revenues because “the closer the government is to the people, the more unwilling it is to raise taxes”. According to him, however, tier-II governments – or state governments – have impeded the growth of tier-III bodies.

The eminent economist praised the double-digit growth rate of Bihar during the last 10 years. It should be continued for the next 15 years for the state to catch up with the developed states, he said.

To escape from the ‘low equilibrium trap’, Subramanian suggested recourse to three R’s --- Redistribution of Resources, Risk Sharing and Rewards and incentives for high performance of local bodies. He said the recommendations of the XV FC headed by N K Singh were being greatly awaited as they would be the first FC recommendations in the new situation created by the GST regime.

He favoured special allocation for “shocks like drought and flood” and incentives like matching grant for high-performing urban and rural local bodies.

Deputy CM Sushil Kumar Modi also spoke at the event attended by economists and bureaucrats as well as representatives of Bihar Industries Association and Bihar Chamber of Commerce and Industries. ADRI member- secretary Shaibal Gupta welcomed the guests, and its economist P P Ghosh gave the vote of thanks.

The deputy CM said Bihar’s share in the central pool of taxes, as recommended by the XIV Finance Commission (FC), had increased to 42% from 32% under the XIII FC. The allocation for urban and rural bodies also increased five-fold from Rs 5,000 crore under the XIII FC to Rs 25,000 crore under XIV FC. He gave a detailed account of the “historical reasons” for Bihar’s backwardness.