REALISTIC REVENUE FORECASTS FOR JHARKHAND
A Fiscal Policy Analysis Cell (FPAC) Project Government of Jharkhand
By Dr (Mrs.) Ranjana Srivastava Post-Graduate Department of Economics Ranchi University
Ranchi
September 2005
Phone: +91651 2560471(R) +91651 2233885(O) +9194311 74449 (M)
Acknowledgements:
I am grateful to Mr. Rahul Sarin, Principal Secretary, Finance Department, Government of Jharkhand and Mrs. Alka Tiwari, Additional Finance Commissioner, Government of Jharkhand, for initiating this study. I am obliged to the officers of the Commercial Tax Department, Finance Department and Budget Section, Government of Jharkhand, for providing the necessary inputs for the study. My special thanks are due to Dr. Khwaja Sultan, Dr. P. K. Aggarwal, Mr. B. B. Lal, Dr. Janusz Szyrmer, Dr. Brijesh C. Purohit and Mr. Perwej Alam of REFORM Project, USAID/India for their support, expert guidance and invaluable suggestion in preparing the report.
Dr (Mrs.) Ranjana Srivastava 27th September 2005
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Table of Contents Acknowledgements: .................................................................................................... 28 List of Tables .............................................................................................................. 30 Executive Summary .................................................................................................... 31 I. Introduction ............................................................................................................. 32 II. Objective of the Study ........................................................................................ 32
III. Fiscal Position of Jharkhand and Centre ............................................................. 32 IV. Need for Realistic Revenue Forecasts ................................................................ 33 V. Methodology for Forecasting Revenue ............................................................... 36
VI. Tax Revenue Forecasts ....................................................................................... 37 Approach – A .......................................................................................................... 37 Forecasting total tax revenue on the basis of forecasts for commercial tax ....... 37 Approach – B Forecasting of total tax revenue directly ............................................ 39 VII. VIII. Limitations of the forecasts .............................................................................. 41 Major Findings and Comments ....................................................................... 42
Appendix:.................................................................................................................... 43 A Brief Review of the Indian Economy ..................................................................... 43 Glossary ...................................................................................................................... 46 X. References ............................................................................................................ 47
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List of Tables Table No. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. A.1 Particulars Fiscal and Revenue Deficits of Jharkhand. Present Position and Targets (as % of GSDP) for Jharkhand & All States Average Budget Estimates & Actual, Tax & Non-Tax Revenue of Govt. of Jharkhand (Rs. Crore) Proposed and Actual Expenditures of Govt. of Jharkhand (Rs. Crore) Share of Tax Revenue in Total Revenue (2001-02) (Rs. Crore) Jharkhand Finances Tax Revenue/ GSDP Ratio of Jharkhand Plan and Non-Plan Expenditure of Jharkhand (Revenue) Targets & Actual Revenue Collection ( Rs. Crore) in various Departments of Ranchi District, 2004-05 (up to October 2004) GSDP , Tax Revenue and Commercial Tax (Rs. Crore) Results of Regression of Commercial Taxes on GSDP Result of Trend Equation of GSDP Over Time Forecasts for GSDP, Commercial Tax and Total Tax Revenue (in Rs. Crores)(Approach A method 1) Result of Trend Equation of Commercial Tax (Y1) Over Time (T) Forecasts for Commercial Tax and Total Tax (in Rs. Crores)(Approach A Method 2) Contribution of Five Major Items to Commercial Tax Contribution of Mining, Quarrying & Manufacturing to GSDP Jharkhand: GSDP Composition Results of Regression and Forecasts for Total Tax Revenue for 2005-06 (Rs. Crores) (Approach B Method 1 & 2) Forecasts for Total Tax Revenue (Rs. Crores) for 2005-06 obtained by different approaches and methods Ratio of Tax Revenue & Commercial Tax Revenue to GSDP Macro Economic Trends over the Past Two Decades
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Realistic Revenue Forecasts for Jharkhand (an FPAC Study) Executive Summary
Jharkhand has tremendous potentials. However, because of weak fiscal management, investment on infrastructure has been minimal. As a result of poor infrastructure, Jharkhand has, until recently, not been able to attract the kind of capital that it could potentially command. Improving fiscal responsibility is imperative. Realistic revenue forecasts are essential for preparing credible budgets. In the last four years, fiscal deficits of Jharkhand have soared resulting in rising indebtedness. Together with rising revenue deficits, the budget has little room for developmental spending. According to recent estimates, the debt figures of the Government of Jharkhand stood at Rs. 10,569 crores at the end of fiscal year 2003-04, an increase of Rs. 1,646 crores in one year. To control its indebtedness, it is imperative for the state to initiate fiscal reforms. In order to monitor and analyze the fiscal situation, and provide policy inputs, the Government of Jharkhand has set up a Fiscal Policy and Analysis Cell (FPAC) within the Finance Department. This study has been conducted by FPAC with a view to developing a methodology for realistic revenue forecasting in Jharkhand and then estimating the revenue for the next five years, using this scientific methodology. Another aim of the study was to compare the fiscal position of Jharkhand with that of the Centre and with other states in order to emphasize the need for coordinated fiscal correction. Forecasts for commercial taxes revenue and total tax revenue have been obtained using regression techniques. Our results indicate that the commercial taxes have a high potency of increasing tax revenue of the state (buoyancy being greater than one during the reference period: 1995-96 to 2004-05). But the relative tax base of commercial taxes has declined. Curbing this trend can improve the buoyancy of the tax. This would require effective measures to tap revenue from faster growing sectors. Further, buoyancy can also be improved and the state revenue can be enhanced through better tax administration and checking tax evasion that is perceived to be of high order. An improvement in buoyancy and enhanced revenue collection will go a long way in checking fiscal and revenue deficits of the state.
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Realistic Revenue Forecasts for Jharkhand
Dr. Ranjana Srivastava P.G. Deptt. Of Economics, Ranchi University, Ranchi
I. Introduction Jharkhand, a newly carved out state in the political map of India, has all potentials for being an ideal state so far as fiscal solidarity is concerned. Given its rich mineral resources, large industrialized base, efficient human resources, to name a few, there should be no dearth of revenue generation. With a focused vision and bold long term policies it can achieve a respectable growth rate of 7% to10 %, together with strong fiscal position. Despite its rich mineral and human resources base, Jharkhand had until recently not attracted investments to the extent of its potential, mainly due to lack of adequate infrastructure. Therefore, the need of the hour is to enhance development expenditure through active participation of both the government and the private sector. In the last four years, fiscal deficits of Jharkhand have soared indicating its rising indebtedness. Together with rising revenue deficits the budgets can safely be dubbed as non-developmental. Government of Jharkhand has endeavoured to initiate fiscal reforms. It has set up a Fiscal Policy and Analysis Cell (FPAC) to provide policy inputs to the government. The current study is being conducted as part of the activity of FPAC. II. Objective of the Study
To compare the fiscal position of Jharkhand with that of the Centre in order to
III. stress on the need for coordination in fiscal reforms. To analyse various aspects of the earlier budgets of the state stressing on the need for realistic budgets. To highlight the urgency for realistic revenue forecasts for Jharkhand To develop a methodology for revenue forecasting in the state. To forecast revenue for the next five years beginning 2005-06. Fiscal Position of Jharkhand and Centre
Table 1. Fiscal and Revenue Deficits of Jharkhand. Year GSDP at Fiscal Revenue Fiscal factor cost deficit (Rs. deficit deficit as % at current Crore) (Rs. of prices (Rs. Crore) GSDP Crore) 2001-02 30,513 1,367 306 4.48 2002-03 33,027 1,724 57 5.22 2003-04 (RE) 35,735 2,188 973 6.12 2004-05 (BE) 38,665 3,368 901 8.71
Sources: 1∙ Finance Department, Govt. of Jharkhand 2∙ www.jharkhand.nic
Revenu e deficit as % of GSDP 1.00 0.17 2.72 2.33
Table 1 suggests that both fiscal and revenue deficits have been rising implying an increase in debt liability of the Government of Jharkhand. According to recent estimates 32
reported in Hindustan Times, June 30th, 2005, the debt figures of Govt. of Jharkhand stood at Rs.10,569 crores on 31-3-04 (an increase of Rs.1646 crores in one year). If the state has to check its indebtedness, it must initiate fiscal reforms. Recommendations of the XIIth Finance commission (see Appendix) provided further boost to the states to follow fiscal discipline. It recommended loan write-offs for improved fiscal performance of the states as measured by parameters like fiscal capacity, fiscal effort, fiscal efficiency, fiscal and revenue deficits etc.(See Appendix for brief review of the Indian economy, trends and targets for the Tenth Plan.) The present fiscal position of Jharkhand in comparison with all states average, as well as the targets to be achieved by 2009-10, are given in Table 2. The required average adjustments per year have been worked out for achieving the targets by 2009-10. Table 2: Present Position and Targets (as % of GSDP) for Jharkhand & All States Item 2004-05 2009-10 Required Average Adjustment per Year Jharkhand All Target Jharkhand All States States Tax revenue 6.2 8.4 9.7 0.70 0.26 Total revenue 9.4 11.6 13.2 0.45 0.32 Rev. deficit 2.3 2.0 0.0 -0.46 -0.40 Fiscal deficit 8.7 4.5 3.0 -1.74 -0.30
Source: Twelfth Finance Commission Report 2005-10 and Finance Department, Govt. of Jharkhand
It is clear from Table 2 that Jharkhand would require to follow a greater fiscal discipline as compared to an average state. For Jharkhand, the tax/GSDP ratio has to be adjusted by 0.7 percentage points per year as compared to 0.26 percentage points per year in all states combined. Similarly total revenue/GSDP ratio has to increase annually by 0.45 percentage points in comparison to 0.32 percentage points. Likewise reduction in fiscal deficit/GSDP ratio has to be 1.74 percentage points per year compared to 1.98 percentage points. These figures may be slightly relaxed in practical sense keeping in mind that Jharkhand is one of the poorest state in India. Eg. Tax/GSDP ratio may not be expected to be comparable to that in richer states. Yet efforts should be focused to move as close as possible to these targets. IV. Need for Realistic Revenue Forecasts
In accordance with the fiscal targets, of the Tenth Plan (Appendix), the XIIth Finance Commission has made recommendations mainly to restore the imbalances (both vertical and horizontal), and to give momentum to the fiscal consolidation efforts in order to bring macro economic stability. Like all states, Jharkhand is supposed to enact a Fiscal Responsibility Legislation Bill, which should at the minimum provide for: Eliminating revenue deficits by 2009-10 Reducing fiscal deficits to 3% of GSDP (or its equivalent, defined as the ratio of interest payment to revenue receipts) Bring out annual statements on its fiscal performance Moreover the centre has explicitly clarified its stand as regards loans of the states, and 33
expects greater responsibilities in this respect from the states. FPAC, Government of Jharkhand, has made an earnest start to improve its fiscal performance. Realistic Revenue Forecasts are an effort in this direction. A brief analysis of some important aspects of the earlier budgets of Jharkhand will point out the weaknesses of the budgeting process and hence stress on the need for realistic budgeting for which realistic Revenue forecast is essential.
A. There have been large discrepancies between budget estimates and actuals as
apparent from the following Table. Table 3: Budget Estimates & Actual, Tax & Non-Tax Revenue of Govt. of Jharkhand (Rs. Crore) Year Tax Revenue Non Tax Revenue
B.E. 2001-02 2002-03 2003-04 2004-05 3,208 4,584 3,100 4,519 Actual 1,585 1,759 2,100 2,402 Difference -1,622 -2,825 -1,000 -2,117 % -50.6 -61.6 -32.3 -46.9 B.E. 978 960 1,094 1,219 Actual 852 987 1,038 1,219 (Q.E.) Difference -126 +27 -56 % -12.9 +2.8 -5.1 -
Source: ∙ Budget Document, Govt. of Jharkhand and Finance department, Govt. of Jharkhand
Tax Revenue collection has always fallen short of budget estimates and the shortfall has been in the range of 32-62%.The discrepancy in non-tax revenue is not much but as tax revenue is the major source of states own revenue, the entire budgeting exercise is meaningless unless realistic estimates are made.
B. As is apparent from Table 4, there have been large discrepancies on expenditure
side too. Large sums of money are surrendered by almost all departments due to lack of implementable projects Table 4: Proposed and Actual Expenditures of Govt. of Jharkhand (Rs. Crore)
Year 2001-02 2002-03 2003-04 Proposed expenditure 2,651 2,652 2,936 Actual expenditure 1,220 1,880 1,950 Actual/ Proposed (%) 45.26 70.89 66.42
Source:Prabhat Khabar, June 2005
C. Tax revenue accounts for a significant share of total revenue, both at the
centre and states. From Table 5 it would be noted that, at the state level, tax revenue accounts for about 80 per cent of total revenue. Whereas the share of tax revenue in states own revenue in Jharkhand never exceeded 67 per cent implying lesser exploitation of taxes in Jharkhand (see Table 6).
Table 5. Share of Tax Revenue in Total Revenue (2001-02) (Rs. Crore)
Centre Tax revenue 204,040 Total revenue 279,748 Tax rev. /Total rev. (%) 72.94
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States 128,097 Centre & States 332,137 Source: Aggarwal 2004
160,378 430,126
79.78 77.22
Table 6. Jharkhand Finances
Year Tax Total Tax revenue revenue rev./Total (Rs. (Rs. rev. (%) Crores) Crores) 2001-02 1,585 2,437 65.1 2002-03 1,759 2,747 64.0 2003-04LE 2,100 3,138 66.9 2004-05BE 2,402 3,621 66.3 Source: Finance Department, Govt. of Jharkhand
The gap between the tax revenue/ total revenue ration at Centre and Jharkhand is partly appreciable due to the fact that Jharkhand is one of the poorest state and so the tax ability is also low. Nonetheless appropriate steps must be taken to enhance tax revenue collection in Jharkhand.
D. Tax Revenue/GSDP ratio of Jharkhand is found lower than that of the Central
Government (see Table7). This is again partly explained by the poverty of the state.
Table 7: Tax Revenue/GSDP Ratio of Jharkhand and Central Govt.
Jharkhand Year Tax revenue (Rs. Cr.) 1,363 1,483 1,585 1,759 2,100 2,402 GSDP at factor cost at current prices(Rs. Cr.) 30,511 28,190 30,513 33,027 35,735 38,665 Tax rev. / GSDP(%) 4.5 5.3 5.2 5.3 5.9 6.2
Central Govt. Tax rev. / GDP(%) 9.4 9.2 8.9 9.4 9.5 10.0
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05
Source: Finance Department, Govt. of Jharkhand; and RBI website; Economic Survey, 2004-05, Govt. of India
Though there is a marked improvement in the tax/GSDP ratio after the formation of the state, much effort is needed to achieve the target of 8% set to be achieved by the end of the Tenth Plan (Appendix). Tax revenue figures for Jharkhand prior to formation of the state are estimated on the basis of figures of undivided Bihar for the relevant period that is 1993-94 to 2000-01. For this purpose, the proportion of tax revenue of Jharkhand to total of undivided Bihar (i.e., Jharkhand and Bihar) after the formation of Jharkhand (for which actual figures are available) was computed as: Proportional share of Tax revenue of Jharkhand tax revenue of Jharkhand = -------------------------------------------35
Tax revenue of undivided Bihar This ratio works out to be 0.156, 0.156 and 0.163 for the years 2001-02, 2002-03 and 2003-04 respectively. Taking 0.156 as a representative figure, bifurcation of figures relating to undivided Bihar for earlier years was done to obtain the tax revenue figures for Jharkhand
E. The composition of plan and non-plan expenditure in the budget also needs to be
considered to judge whether the deficits are justified and sustainable.
Table 8: Plan and Non-Plan Expenditure of Jharkhand (Revenue)
Year
Plan expenditure (Rs. Cr.)
Non-plan expenditure (Rs. Cr.)
Social
397 1378 1454 1472 1590
Plan: nonplan
10 : 90 34 : 66 29 : 71 48 : 52 51 : 49
Social
2000-01 2001-02 2002-03 2003-04 2004-05 41 519 482 1004 1190
Economic
95 612 399 1309 1519
Gen.
56 131 146 288 409
Total
192 1262 1026 2601 3117
Economic
122 452 422 537 532
Gen.
181 625 668 796 905
Total
1700 2445 2554 2805 3027
Source: Budget Documents, Govt. of Jharkhand
There is a steady improvement in the ratio of plan to non-plan expenditure, but the government is spending a very high portion of its total revenue on interests and salaries (45.2%, 67.0% and 56.8% in 2001-02, 2002-03, and 2003-04 respectively) according to Prabhat Khabar, July 7, 2005.
F. Often targets for revenue collection are not achieved due to administrative and
other problems
Table 9:Targets & Actual Revenue Collection ( Rs. Crore) of Ranchi District, 2004-05
Department Transport Registration Municipal Tax Commercial Tax
Target 42.46 32.19 8.73 693.04
Collection Collection/Target(%) 3.92 9.0 9.95 30.9 4.13 45.8 328.85 47.5
Source: Prabhat Khabar, June 2005
The above analyses of Jharkhand budgets suggest that the budgetary exercise of Jharkhand has been unrealistic. The need of the hour is to prepare realistic budgets to impart effectiveness and efficiency in government spending. Obtaining realistic revenue forecast for Jharkhand is the first and most important exercise in this direction.
V. Methodology for Forecasting Revenue
Approaches to forecasting revenue can be grouped into two broad categories: Qualitative Quantitative 36
Qualitative approach is either judgmental or consensus. Experts give forecasts on the basis of their judgment. The final forecast may be based on consensus between various groups – politicians, bureaucrats, policy makers, etc. It is not a transparent method. Usually this method is not used. Quantitative approach relies on a variety of numerical data. Forecasts are made based on various assumptions and usually a margin of error is assigned to the forecasts. These are either based on time series approach or causal models. In this study, forecast is made based on time series approach. It uses GSDP based models that facilitate estimating a relationship between GSDP and the relevant tax variables through regression analysis. Various forms of such a relationship are estimated by using OLS technique. The choice between alternative forms is based on the relevant statistical parameters. In this study, forecast of total tax revenue is based on the time series of total tax revenue, commercial tax and GSDP. Commercial tax being an important component of total tax revenue, forecast of commercial tax revenue is also obtained.
VI. Tax Revenue Forecasts
Alternative approaches were tested to forecast revenue using regression analysis based on OLS technique and that approach was used which gave the best fit (Srivastava 2005)1. Forecasting of total tax revenue were made by two approaches: A) By forecasting its major component namely commercial tax B) By directly forecasting total tax revenue Approach – A Forecasting total tax revenue on the basis of forecasts for commercial tax Commercial taxes are the most important component of tax revenue of this state. (Table 10 and the accompanying Bar Diagram). The four successive figures since 2001-02 are 83.89%, 82.10%, 80.92% & 84.26%. Hence, we will use forecast for commercial taxes to forecast total tax revenue for 2005-06 to 2009-10. Commercial taxes in Jharkhand includes the two major Acts namely JST & CST (which together account for over 92% of total tax collected) and five other minor Acts namely Entertainment Tax, Electricity Duties, Hotel Tax, Entry Tax & Advertisement Tax.
1
See, the study submitted under FPAC, Srivastava R (2005), Realistic Revenue Forecasts for Jharkhand, FPAC study, GoJ.
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Table 10: GSDP, Tax Revenue and Commercial Tax (Rs. Crore)
Year
GSDP at factor cost at current prices
Tax revenue
Commercial Tax
Commercial Tax / Tax revenue (%) 81% 80% 73% 74% 67% 71% 84% 82% 81% 84%
1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05
19,741 21,191 27,716 30,554 30,511 28,190 30,513 33,027 35,735 38,665
852 987 1,009 1,110 1,363 1,483 1,585 1,759 2,100 2,402
690 789 736 821 910 1,060 1,330 1,444 1,699 2,024
Source: Commercial Tax Department, Government of Jharkhand
Total Tax Revenue & Comm. Tax Revenue
3000 2500 2000 1500 1000 500 0 199394 199495 199596 199697 199798 199899 199900 200001 200102 200203 200304 200405
Year Total Tax Rev. Comm. Tax Rev
If the entire 10 year period is considered (as has been done for regression equations) there are structural variations in the data. In the period of combined Bihar the relevance and growth rates of tax revenue and commercial taxes were much lower. There has been a sudden jump in the tax revenue/GSDP and commercial tax revenue/GSDP ratios as apparent from Table 11.
Table 11: Ratio of Tax Revenue & Commercial Tax Revenue to GSDP
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Year 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05
Tax Revenue / GSDP (%) 4.31 4.66 3.64 3.63 4.47 5.26 5.20 5.33 5.88 6.21
Commercial Tax / GSDP (%) 3.49 3.72 2.65 2.68 2.98 3.76 4.36 4.37 4.76 5.23
Source: Table 7 , Table10 and Finance Dept. , Govt. of Jharkhand
Increased importance assumed by commercial tax after the formation of the State (Table 11) justifies the use of the method of forecasting total tax revenue by forecasting commercial tax. Two methods were tested for forecasting total tax revenue by approach A. Method (i) Forecasting Commercial Tax from the regression equation of Commercial Tax (Y1) on GSDP (X). Three forms of regression equation namely linear, parabolic and exponential forms were tested. Direct Forecast for Commercial Tax from its Trend Equation over Time
Method (ii)
Approach – B Forecasting of total tax revenue directly In this approach also two models were developed for forecasts. Method (i) Method (ii) Forecasting total tax revenue by regressing total tax revenue (Y2) on GSDP (X) overtime Forecasting total tax revenue on the basis of its trend equation overtime
Of the various models used, the statistics generated by the parabolic form of method (i) of approach A gives the best fit and hence has been used for forecasts (Table 12)
Table 12: Results of Regression of Commercial Taxes on GSDP
Form Linear Parabolic
Regression equation Y1= - 812.14 + 0.0663 X
R2 0.72
_ R2 0.68
F 20.94
Y1= 2995.49 – 0.2063X + 0.88 0.82 24.67 2 0.0000048 X Exponential Y1= 0.2188 X1.0494 0.55 0.51 9.97 Forecasts for commercial tax have been obtained from the parabolic form of the regression equation of commercial tax (Y1) on GSDP (X) using Table 10. A prediction of GSDP overtime is required for forecasting commercial tax revenue for different years. The linear form of trend equation of GSDP using Table 10 gives the 39
best fit considering the significance of the statistics generated by these form of fit (Table 13).
Table 13: Result of Trend Equation of GSDP Over Time
Form Linear
Trend Equation X = 15078.66+1912.1569T
R2 0.92
t 10.86
Finally, on the basis of forecasts for GSDP from the trend equation, forecasts for commercial tax have been made for different years. It was observed (Table 10) that commercial tax maintained a ratio of around 85% to total tax revenue since the inception of the state hence this ratio was used as the basis of forecasting total tax revenue. The forecast for GSDP, commercial taxes and total tax revenue for the next five years by the above method are as given in Table 14.
Table 14: Forecasts for GSDP, Commercial Tax and Total Tax Revenue (in Rs. Crores) (Approach A, method 1)
Year
2005-06 2006-07 2007-08 2008-09 2009-2010
GSDP at factor cost at current prices 39,942 41,855 43,767 45,680 47,592
Commercial Tax
Total Tax
2,413 2,770 3,161 3,588 4,004
2,839 3,258 3,718 4,221 4,711
Commercial taxes in this state are associated mainly with mining, quarrying and manufactures. Among the long list, 5 major items, namely, coal, other minerals, iron, petroleum products and motor vehicles contribute a major share of commercial taxes (Table 15). If the whole manufacturing sector is considered, the ratio will be much higher.
Table 15 Contribution of Five Major Items to Commercial Tax
Year 2000-01 2001-02 2002-03
Com. Taxes (in Contribution of 5 major crores) items (%) 1060.41 52.68 1330.13 76.82 1444.49 59.15
Source: Commercial Tax Department, Government of Jharkhand
Though the relative contribution of mining, quarrying and manufacturing to GSDP is less than 40% (table16), these are the major contributors to tax revenue in the State. What is more disturbing is that the share is declining (giving way to tertiary sector) indicating a decline in commercial tax base (Table 17). It can safely be concluded that commercial taxes will increase if this sector expands.
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Table 16: Contribution of Mining, Quarrying & Manufacturing to GSDP
Year
GSDP at factor cost at Market Prices (Rs. Cr.)
Contr. Of Mining Quarrying and Manufacturing to GSDP (Rs. Cr.) 8,469 8,101 13,070 13,569 12,175 10,006 10,595 11,220
Ratio to GSDP (%)
1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03
19,741 21,191 27,716 30,554 30,511 28,190 30,513 33,027
42.87 38.23 47.16 44.41 39.90 39.50 34.72 33.97
Source: Finance Department, Government of Jharkhand Table 17: Jharkhand: GSDP Composition
Sector Primary Secondary Tertiary
1998-99 33% 37% 30%
1999-2000 36% 34% 30%
2000-01 26% 24% 50%
2001-02 26% 24% 50%
2002-03 26% 24% 50%
Source: Finance Department, Government of Jharkhand
In spite of declining tax base in relative terms (Tables 16 and 17), ratio of commercial tax to total tax is increasing in this state indicating its very high buoyancy. By percentage method, for the ten year period, i.e. 1995/96 to 2004/05, growth in Commercial Taxes was 193.12% compared to 95.85% growth in GSDP for the same period. This gives a buoyancy of 2.015 which is very encouraging so far as enhancing tax revenues is concerned. VII. Limitations of the forecasts
1. The analysis is based on the standard model that presumes a strong relationship between commercial taxes & GSDP. It seems that in the state of Jharkhand this relationship is weak & insignificant. However as a pilot study and also keeping in mind the nascent nature of data, the model has been used for forecast. Keeping in mind the fact that all of GSDP does not contribute to state share of tax, in subsequent studies one should consider other types of predictors also and specify the model accordingly to make realistic forecast. 2. It may be worthwhile to also try other approaches to forecasting which are not based on regression analysis. 3. Time Series Data available on Jharkhand finances are only for 5 years which is statistically insufficient for revenue forecasts. For using regression analysis to forecast revenue, data for 10-12 years have been used. This includes the period of combined Bihar also. The corresponding figures like GSDP, tax revenue, etc. have been segregated for Jharkhand using standard statistical techniques. Use of interpolated figures may have affected forecasts. 4. The period of 10-12 year considered for forecasts is marked by structural 41
variations in data. For example tax / GSDP and commercial tax / total tax revenue ratio have shown a marked improvement after the formation of the state (Table 11). The regression technique used to forecast tax revenue for Jharkhand is based on relevant variables for the period of combined Bihar also. Therefore forecasts are underestimates. The predictive power of the model will be higher if 10 to 12 years figures on relevant variables for Jharkhand are explicitly available. 5. The problem of autocorrelation has not been considered under the standard assumption of OLS models. However, in future studies it will be useful to test and correct for autocorrelation. 6. The analysis is based on data available mainly from official sources of the state government. It is assumed that the standard accounting methods used will continue. 7. Regression forecasts assume only one–way relationship 8. Lack of an integrated database is the biggest hurdle in any statistical analysis. Figures have been made available from various sources; hence there may be discrepancies in some values. 9. Forecasts for revenue are expected to be realistic only if the tax administration and tax compliance rate do not change. Weak tax administration leading to evasion, under–reporting, malpractices, etc. affects the actual tax collection, which may vary considerably from the forecasts. 10. Forecasts assume that there are no changes in tax laws, tax rates etc. and no further exemptions are given. 11. Revenue collected by the state very much depends on its economic relations with other states and the centre and to some extent with the rest of the world also. The simple model used in the analysis assumes a closed economy or at most constancy of these relations. VIII. Major Findings and Comments As commercial tax bears a non-linear relationship with GSDP over time, the quadratic form of the regression equation in Method 1 of Approach A is most suitable for forecasting. If the growth rate of GSDP and its sectoral composition are maintained, commercial taxes collected in 2005-06 will be around Rs. 2413 crores and if the composition of commercial tax to total tax revenue is maintained, total tax revenue collected will be Rs. 2839 crores (Table 14). Assuming a linear growth of GSDP, the forecast for 2005-06 is Rs. 39942 crores (Table 13 & 14).R 2 For the four successive years after the formation of the state the estimated values of commercial taxes demonstrate a very high accuracy level of 87.9%, 98.2%, 96.9% and 91.6% respectively. The model has demonstrated an average accuracy level of 93.6% since the formation of the state. Hence the forecast for 2005-06 and beyond are highly reliable under the standard set of assumptions used in the model. The relative tax base of commercial taxes is declining (as the relative share of mining, quarrying, and manufacturing to GSDP is declining giving way to tertiary sector) (Table 17). But the relative importance of commercial Tax in total Tax revenue remains high (Table 10). This points the high buoyancy (2.02) of commercial Tax with respect to GSDP. The state should take all care to efficiently tap this highly potent sector to enhance its Tax revenue and reduce 42
deficits. In making realistic targets for revenue collection, targets for commercial tax (Act-wise) need to be set based on Act-wise forecasts. A detailed division-wise and sector-wise (public, organised & un-organised) study is also essential to measure the fiscal capacity and fiscal effort. Keeping in view the past fiscal performance of the State (Table 1,3,4,8 & 9) and the required average adjustment per year in tax revenue, revenue and fiscal deficits, Jharkhand has to impose greater fiscal discipline compared to all states average (Table 2) Inflation rates affect real tax revenue. Presently such figures are not prepared at the state level. The CSO presents figures on inflations in selected cities only. Recently some of the studies estimated macroeconomic variables in real terms for selected states (Bhattacharya, B.B. et. al., 2004). Such studies are needed for Jharkhand also. Forecasts may be affected by introduction of VAT. As per estimates provided by the Commercial Taxes Department abolition of TOT has lead to a loss of revenue to the tune of over Rs. 110 crores. There is an urgent need to search for fields to enhance commercial tax revenue. Some sectors that have been identified by concerned authorities include increasing: o scope of entry tax to include timber, paper, computer, electronic goods, petroleum products etc, o rates of sales tax on items with low elasticity (excluding necessities and goods consumed by weaker sections) o rates of luxury hotel tax seeing the rising demand in the newly created state. o collection of advertisement tax in the state especially keeping in mind that collection under this head has been negligible. Besides these, each department should seriously consider steps to enhance the revenues.
Little effort has been made in the budget presented in 2005-06 as per the observations in a recent report on Jharkhand budget by RBI, which pins fiscal deficit at Rs. 4221 crores and revenue deficit at Rs. 1119 crores, which works out to be 10.3% and 2.8% of GSDP respectively. Both the indicators are diverging from the required direction of fiscal reforms and calls for change in strategy of the State Government as per the guidelines of the XIIth Finance Commission. Thus curtailing these deficits, mainly by enhancing its tax revenue is the urgent need of the hour. More studies which combine other methods to bring about greater accuracy in the forecasted values of revenues may serve useful purpose and help in better fiscal management of the state. Appendix: A Brief Review of the Indian Economy The Indian economy is at crossroads. The reforms initiated in 1991 has led to an acceleration of economic growth from a trend of 3.5% over the last three decades. However, economic growths slowed down from an annual average of 6.7% over the five years from 1992-93 to 1996-97, to 5.5% for 1997-98 to 200143
02. Growth further slowed down to 4.4% in 2002-03. Growth rates revived to 8.5% in 2003-04 and dropped marginally to 7.2 % in 2004-05. Per capita income rose by 5.2% to Rs. 12,416 during 2004-05 as against Rs. 11,799 in 2002-03. But, unfortunately, the revival in growth rate has been accompanied by alarmingly high fiscal deficits.
Table A.1 Macroeconomic Trends over the Past Two Decades
Indicator GDP Growth (% a year) Agriculture Industry Services Inflation General Govt. Fiscal Deficit (%of GDP)
Source: CSO-2002
1980’s
1992/93 – 1997/98 – 2002/03 1996/97 2001/02 5.6 6.7 5.5 4.4 3.4 7.0 6.9 8.0 8.1 4.7 7.6 7.5 8.7 7.2 1.8 4.5 8.1 4.9 9.3 -3.1 6.1 7.1 2.5 10.4
India starts the 21st century with a per capita income about half that of China and Indonesia, countries that were at similar levels in 1970.The deficits in our budgets would be justified if they were directed towards financing development expenditures. But unfortunately development has not taken the desired stride. Economic Growth - Comparable Countries
Source: World Development Indicators, Washington, D.C., 2002
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Source: ∙ RBI, Report on Currency and Finance, 2001-02 ∙ Central Budget Document, Ministry of Finance, 2003-04
Fiscal deficits have largely been financed by borrowings, leading to a shift towards long term rupee debt after the 1991 crisis, from 58% of GDP at the end of March 1986 to 85% of GDP by the end of March 2003. Including the debt of public enterprises, total public debt was 95% of GDP. On surface, these fiscal indicators are worse than those faced in 1991, but the silver lining is that the risk of crisis in India is cushioned by her strong external position. So India is not as vulnerable in the short term to the type of collapse as suffered by Russia and Argentina. Yet the fiscal situation cannot be left untouched and the Tenth Plan has rightly focused on fiscal reforms. What has emerged in effect is a mixture of “Loose Fiscal and Tight Monetary” policy that has helped to keep inflation low and external accounts strong (but this has been at the cost of growth and welfare).The XIIth Finance Commission has further stressed the need for reforms and at the same time entrusted greater fiscal responsibility on the states. Budgets have to be enlarged to meet the challenge of growth. But enhanced expenditure has to be financed largely through revenue generated, i.e. Deficits have to be gradually reduced. Selected targets for the Tenth Five Year Plan To increase annual economic growth to 8% during the 10th Plan and to 9.3% during the 11th plan. To reduce gross fiscal deficit of the centre and states from 10.4% of GDP in 2001-02 to 6.5% by 2006-07 To eliminate Central revenue deficit by the year 2007-08 (but this has already pushed recently by the Finance Minister by two years to 2009-10) To bring down debt-GDP ratio to 56% from current high of 81%. Reducing these deficits will increase aggregate saving ratio as well as capital expenditure. The overall effect will be an increase in aggregate investment, stable growth rates and sustainable fiscal deficits. This will eventually expand the tax base so that even at low rates of taxation, the buoyancy of the tax system will ensure high revenues. 45
Glossary
Autocorrelation Correlation between members of series of observations ordered in time (as in time series data) or space (as in cross sectional data) It measures total response of tax revenues to changes in national income or GDP (or GSDP). It considers the changes made in tax laws also. Cost incurred by the tax payer to comply with the laws. It measures pure response of tax revenues to changes in national income. It measures the potential tax revenue that would be obtained from an economy from a give tax structure. It is the excess of total expenditure including loans net of recovery over revenue receipts (including external grants) and non-debt capital receipts. Since 1999-2000, it excludes States’ share in small savings as per the new system of accounting.
Buoyancy
Compliance cost Elasticity Fiscal capacity Fiscal deficit
Fiscal effort
It is the extent or degree to which government utilizes available revenue bases. Horizontal imbalance It refers to disparity among the same levels of government. Regression analysis The study of the relationship of the dependent variable on one or more explanatory variables with a view to estimating and or predicting the average value of the former in terms of the known values of the latter. Revenue deficit It is Revenue receipt minus revenue expenditure. It gives an indication whether government works with its own current means. Vertical imbalance It refers to disparity across different levels of government.
List of abbreviations BE CST GSDP JST LE OLS QE RE TOT VAT Budget estimates Central sales tax Gross state domestic product Jharkhand sales tax Latest estimates Ordinary least square method of regression analysis Quick estimates Revised estimates Turn-over tax Value added tax
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X. References Aggarwal, Pawan K.(2004), “Centre-State Financial Relations: Revenue and Expenditure Assignment and Vertical Imbalance” Paper presented at workshop on Macroeconomic Issues, Ranchi, September. Bhattacharya, B.B., N.R. Bhanumurthy, Sabyachi Kar and S.Sakthivel(2004), “Forecasting State Domestic Product and Inflation: Macro Econometric Model for Andhra Pradesh, Karnataka, and U.P.”; Economic and Political Weekly, Vol. 39, No. 31. Central Statistical Organisation (2002), National Accounts Statistics, Ministry Of Statistics and Program Implementation, New Delhi. Govt. of India (2003), Central Budget Documents, 2003-04, Ministry of Finance , New Delhi. Govt. of India (2004), Economic Survey 2004-05, Ministry of Finance , New Delhi. Reserve Bank of India (2002), Report on Currency and Finance, 2001-02, Mumbai IMF (2002), India: Selected Issues and Statistical Appendix, IMF country Report, New Delhi. Govt. of India (2004), Report of the Twelfth Finance Commission (2005-10), Ministry of Finance, New Delhi.
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