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The Rediff Pre-budget Special/Nirupam Bajpai, Jeffrey D Sachs

Wanted: tax reforms, higher allocations for health and education

Part I: Lowering revenue deficit, subsidies hold key to fiscal consolidation

Part II: Benefit of privatisation: larger national savings

While progress has been made in the area of tax reforms, the tax structure in India still remains very complicated with high rates of taxation with regard to both direct and indirect taxes.

In the area of direct taxation, while rates of personal income tax are pretty much in line with those outside India, corporate tax rates are high.

As regards excise duties, there has not been much progress in moving from the modified value added tax (MODVAT) to a full VAT. Under the Modvat scheme, credit of duty is allowed on inputs that are used either for producing excisable finished products or intermediate products. Over time, the ambit of Modvat has been extended to include more commodities/sectors.

However, the transformation of existing Modvat into a full-fledged central VAT up to the manufacturing stage is far from being complete. More importantly, import duties are still high and need to be brought down considerably. While the country has come a long way from being a closed economy to a relatively open one, India still is a highly protected economy by current international standards.

In our view, the government needs to give greater attention to, and provide larger resources for, primary education and primary health. In the sphere of raising the literacy levels and providing greater access to basic health services, the government is required to play a much more enlarged role.

The government has a particularly urgent and critical role in spreading literacy and access to primary health care to all the Indians so that they can all participate in a meaningful manner and benefit fully from India's economic transformation.

Much higher levels of literacy could be achieved through creative mobilization of new IT approaches, better school attendance, and other policies, all with a clear focus on inclusion of girls and other traditionally disadvantaged groups.

The economic and social returns from such an initiative would be huge. Evidence from across the world suggests that high levels of literacy have helped raise growth rates and reduced fertility rates over time. Additionally, aggressive public health campaigns are required to address major infectious diseases (pneumonia, diarrheal diseases and malaria) and especially the incipient AIDS epidemic, which now threatens India with tens of millions of cases unless properly addressed.

Rather than providing across-the-board subsidies on food prices which tend to get dissipated in corruption, administrative costs and lower food prices for the wealthy, in part these programmes could be targeted at school children, by guaranteeing one nutritious meal a day for every school child in every school throughout the country.

Schemes such as mid-day meals for school children, should be expanded. However, the scheme currently being implemented does not envisage any re-targeting of subsidies as we suggest. Not only would this help to target the aid to needy households, but would also provide a vital economic incentive for poor parents to send their children to school.

Expenditure on educating girls is perhaps one of the most productive expenditure. It has shown to help bring down both fertility and infant mortality rates. The impact on the former is seen to be significant and similar in most Indian states. Besides, female literacy would also be instrumental in greater female labour force participation and raising the status of women in the society.

The central government needs to provide greatly enhanced transfer payments to the states to help support primary health and education. This may be done on a matching-grant basis, so that state governments are given an incentive to increase their own effort in expenditures directed at these areas. In addition, some part of the privatisation revenues could also be earmarked for increased expenditures on primary health and education. Briefly put, a reorientation is required in the government's social policy -- high priority to human resource development.

Part IV: Thrust on liberal labour laws, exports, services and IT will make the difference

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