Post Mortem

Fiscal space question: On amended rates of tax on fuel

By Nagaland Post | Publish Date: 11/23/2020 11:53:25 AM IST

 Cars reportedly thronged petrol pumps on the eve of the effective date of the state government’s hike in fuel tax. The causal antecedent fiscal resource mobilisation by the government reflects problems of structural nature; far from being a mere tweak on tax rates. The deteriorating fiscal health of the state has been admitted by the government on several occasions. It comes to pass as perplexing that there’s no discourse on the same (outcries on social media is limited to tax hikes, never on fiscal position of the state government’s); suggesting that it is not considered an issue. The ubiquitous cloud of political imbroglio is justifiably cited for anything that goes wrong in the economy of the state. That should, however convenient and even tempting it is to resort to in relegating issues of immediate pertinence, not be so. 

Although there are idiosyncratic issues unique to the state, the even more precarious fiscal position of government of Nagaland that has come to be recently can be located within the constricting fiscal space of states in general in recent times. 

Constricting Fiscal Space of States: Financial capacity of states has been waning for myriad reasons.  The initiation of GST regime has severely restricted the scope of states to raise revenue by means of indirect taxes on goods and services save on petroleum products. The less than expected and stipulated transfer of GST revenue from the centre to the states, owing to the slowdown and now recession of the economy, has further eroded the fiscal space of the states. 

Diminishing devolution of funds from the Centre is a major contributory factor. As reported by economist Gowda, “Between 2014-15 and 2019-20, the states got Rs. 7, 97, 549 crore less than what was projected by the Finance Commission.”   The increasing resort to cess and surcharges by the centre, revenue from which does not fall into the divisible pool of revenue, has contributed in the further reduction of devolution. As reported by economist Gowda, “Between 2014-15 and 2019-20, cesses and surcharges soared from 9.3 % to 15 % of the gross tax revenue of the Union government.” All these assume greater salience for a state like Nagaland with limited base of internal fiscal resource mobilisation.

Position of Nagaland’s Fiscal Health: Nagaland, created out of political compulsion, has always been fiscally dependent on centre’s transfers. Even for expenditure of salaries, pensions and suchlike of revenue nature, it has always been dependent of revenue deficit grants and other grants from centre; which means that there’s no question of developmental expenditure of scale worth mention from state’s own internal resource mobilization. Burgeoning fiscal deficit has always been the going norm. While the fiscal deficit for the current fiscal is estimated to be Rs 2,465 crore, the accumulated public debt of the state is estimated to be Rs 10,766 crore (A staggering 39.7% of GSDP). Fiscal deficit in context is not for reason of investment, which creates assets and hence returns to clear the deficit after a lag. Accentuation of the already high fiscal deficit essentially means transferring the credit of our today’s living to tomorrow or possibly to the coming generation, which not only raises questions of public finance but of inter-generational justness.

Given the restricted flow of funds from the centre, internal resource mobilisation is imperative. It is against this backdrop that the above-mentioned hike in taxes needs to be assessed. Does the warranted end of raising funds justify the means of hike in taxes rates?

On the Tax Rate Hike: That the state government is required to enhance internal revenue generation is given. The mode of affecting it calls into action, however. That a democratic government gave no rationale is perplexing, to begin with. In a consumer state, wherein even essentials are not sufficiently produced within the state and hence brought in from outside and transported across the state, hiking a tax rate on fuels appears prima facie callously insensible. The said hike will invariably translate into increased logistic costs, and hence result in cost-push inflation. Inflation hurts the poor most, and hence the move can be construed as anti-poor. Any anti-poor policy accentuates inequality in society; and hence runs against the demand of a welfare state. 

Other more socially beneficial modes of raising revenue ought to be explored. If such means cannot be employed, the maxim ‘revenue saved is revenue generated’ should guide policy making in the short-run. Austerity measures should be accordingly put in place; and the scarce fiscal resources allocated efficiently. Enhancing taxation capability is the sustainable way forward in the long-run. Accountability and transparency should be therefore affected in projects under implementation so that productive capital assets will materialize to facilitate economic activity; and hence expansion in taxation base. The going dismal state of project implementation, bogus employment in public sector, and rent seeking does not augur well for the state’s fiscal position. It does not only deny physical means of enhancing taxation capability but also does not inspire a social attitude of tax compliance amongst the people. When there’s a trust deficit towards the government in its (mis)utilization of funds, willingness to pay taxes will be certainly low. All these will perpetuate the dismal performance of internal resource mobilisation in the state, which would mean a perpetuation of economically backward and rent seeking society with ever increasing inequality. All these are to reiterate the causality and correlation between good governance and development.

Conclusion: When the weather-beaten economy preferably requires expansionary fiscal prescription, the proscriptive fiscal intervention is sans economic logic. It not only reflects poorly on the reasoning and lack of imagination that informs policy making within the  government dispensation of the day, but also of a failure of the academia and the supposedly critiques of the current dispensation of the day in a democratic polity in enriching policy discussion. As alluded to in the beginning, the precarious fiscal state of the government requires structural reforms towards good governance. It will also help if the dispensation engages academia towards engendering a culture of informed decision making.

Dr. Tumbenthung Humtsoe, Kohima

Launched on December 3,1990. Nagaland Post is the first and highest circulated newspaper of Nagaland state. Nagaland Post is also the first newspaper in Nagaland to be published in multi-colour.

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