Fiscal Policy and the Poor: Miles to Go

In order that fiscal policy can be of help in dealing with the problem of poverty, it must be such that (a) it induces higher levels of growth, (b) it creates conditions such that the poor are able to significantly contribute to growth, and (c) it ensures that growth equitably reaches the poor. This suggests reforms in four areas. The first relates to nominal tax rates. As things stand today, the nominal tax rates in India are generally on the high side. Some of the signals which high nominal tax rates give are such that they cannot be regarded as good for the growth of the Indian economy. The second area in which reform is required relates to fiscal provisions which have an influence on the employment of labour in the modern factory sector in India. The link between the growth of this sector and employment appears to be quite weak. Fiscal policy is partly responsible for this. There are number of fiscal provisions which have a prima facie bias in favour of capital and which encourage the use of capital in capital – intensive ways. Spread of industrialisation can be of much help in the growth of employment if the present bias of fiscal policy in favour of capital is removed. The next area in which reform is required relates to fiscal measures taken by the central, state and union territory governments to promote employment. There is a strong case for a good look at these measures. One is not sure if all that is required has been done. One is also not sure if all that has been done has been along the right lines. Finally there is a strong case for reform in government expenditures. Indeed, the case for government expenditure reform is much stronger than the case for tax reform.