Costing an Alternate Social

Security Provisioning
Jawed Alam Khan Subrat Das
Centre for Budget and Governance Accountability

(www.cbgaindia.org) September 8, 2012

Limited Fiscal Policy Space in India

The fiscal policy space for making public expenditure depends to a significant extent on the magnitude of tax revenue collected by the government Total magnitude of tax revenue collected in India has been lower than that in several developed countries as well as some of the developing countries

Tax-GDP Ratio (in %) for Selected Countries (for 2010 / 2011)

Developed Countries SwedenDenmarkFrance50.1 49.1 44.7 Developing Countries BrazilTurkeyRussia34.2 32.5 32.3

Netherlands- 39.5 UKUSA-

South Africa- 31.2 GhanaIndia-

37.4
27.3

22.4
16.5

Note: Tax revenue figures (used for computing the tax-GDP ratios) include social security contributions (if any) in each of the countries selected Source: IMF, Revenue Mobilization in Developing Countries, 2011; and Indian Public Finance Statistics 2011-12, GoI.

Limited Fiscal Policy Space in India

Thus, the overall public resources available to the government in India for making investments towards socio-economic development appears inadequate in comparison to several other countries
Consequently, the magnitude of Total Public Expenditure in India has been lower than that in several developed countries as well as some of the developing countries

Contd..
Total Government Expenditure as % of GDP
Countries
Sweden Denmark Belgium U.K. Brazil South Africa U.S. Argentina India
For various years between 1997 and 2002

54.2 53.7 48.6 39.2 39.8 33.8 32.7 29.6 26.5

Contd..
Total Public Expenditure in India as % of GDP
Year 1990-91 1998-99 1999-2000 Total Expenditure from Central and State Budgets as % of GDP 27.2 25.5 26.5

2001-02
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

26.9
27.0 27.7 25.4 25.3 25.3 24.9 27.2

2009-10 (RE)
2010-11 (BE)

28.0
25.7

OECD Countries Budgetary Spending on Social Sectors (as of 2010 / 2011)

Expenditure as % of Total Budget Housing and Social Security Total Social Sectors communities Payments / Social (including social amenities Health Education Protection security payments) 2.4 18.1 14.1 30.8 67.6 1.2 15.9 10.9 40.9 71.0 0.7 14.7 11.9 35.6 65.4 23.4 65.0 2.3 18.7 18.3 2.6 16.8 10.9 30.0 63.2 1.1 14.9 13.4 43.3 75.8 1.6 13.1 16.9 29.4 66.8 0.9 14.3 12.0 41.3 70.8 3.6 14.8 11.1 41.4 73.8 1.7 14.3 9.3 45.1 71.8 0.7 11.4 8.3 36.5 58.1 1.8 10.0 10.7 36.2 61.6 0.9 13.7 14.5 15.5 51.2 4.7 18.3 12.6 32.3 70.0 1.2 12.4 16.7 25.5 59.6 1.5 14.6 9.3 38.5 65.6 1.6 20.1 10.5 35.0 67.5

Country Australia Austria Belgium Canada Czech Rep. Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Israel Italy Japan

OECD Countries Budgetary Spending on Social Sectors [as of 2010 / 2011]

Expenditure as % of Total Budget
Housing and Social Security communities Payments / Social amenities Health Education Protection Country 12.4 3.6 13.0 16.3 Korea 42.1 Luxembourg 1.7 12.0 11.8 35.2 2.1 12.7 11.6 Netherlands 25.8 1.8 16.6 18.6 New Zealand 38.2 1.6 16.9 13.0 Norway 36.1 2.7 11.7 13.3 Poland 35.9 1.6 14.4 14.3 Portugal 29.0 Slovak Rep. 1.9 19.7 9.9 35.9 1.9 13.8 13.8 Slovenia 33.9 2.6 14.7 11.2 Spain 40.7 1.5 13.3 13.2 Sweden 40.7 0.6 5.4 17.1 Switzerland 33.5 2.5 15.8 13.5 UK 19.4 US 1.8 20.5 16.6 33.5 1.9 14.7 13.1 OECD 31 (Avg.) Total Social Sectors (excluding social security payments) 47.8 72.2 64.5 65.6 72.5 66.8 68.6 63.1 69.1 66.5 70.9 66.1 67.6 59.1 65.9

Priority for Social Sector in India's Public Expenditure

Total Budgetary Social Services Total Exp. On Expenditure (by Expenditure by Social Services as Centre and States) Centre and States % of the Total as % of as % of Budget GDP GDP 25.4 25.3 25.3 24.9 27.2 28.0 25.7 5.3 5.5 5.8 5.8 6.6 7.1 6.7 20.9 21.7 22.9 23.3 24.3 25.4 26.1

Year

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 (RE) 2010-11 (BE)

National Social Assistance Programme

Combined Exp. (Centre & States) in NSAP (in Rs. crore) 2006-07 2007-08 2008-09 2009-10 1968.3 3123.1 3961.5 4914.9

Combined Exp. (Centre & States) in IGNOAPS (in Rs. crore)

1726.2 2894.6 3546.9 1651.0*

Costing an Alternate Social Security Provisioning

Total Projected Population in 2011 1 (55-59 years) Total Population 60 years + Age 2 Group 3 Population 55-59 years (20 % less )

4.28 Cr. 9.85 Cr. 3.43 Cr. 7.88 Cr.

Population 60 years + Age Group 4 (20 % less)

Annual Resource Requirement for Old Age Pension Entitlements

Amount Per Beneficiary Per Month (in Rs.) For 55-59 years of age Group, total Amount required (in Rs. Cr.) For 60+ years Age Group Total Amount required (in Rs. Cr.) Total Amount Required for both age groups Resources Required (in Rs. Cr.) as % of GDP

300

12334

28368

40716

0.52

1000

41160

94560

135720

1.72

2000

82320

189120

271440

3.44

Need to Improve the Tax-GDP Ratio and Progressivity of the Tax system

Of the total tax revenue of our country at 16.46 % of GDP (in 2010-11), while indirect taxes account for 10.6 % of GDP direct taxes account for only 5.87 % of GDP Indias tax system, which collects two-third of the revenue from indirect taxes and only one-third from direct taxes, is regressive as compared to the tax system of many other countries (that collect a much higher proportion of tax revenue from direct taxes)

If India is to move towards a more progressive tax system, the government should rely more on direct taxes (such as, corporation tax, personal income tax and wealth tax)

Reducing the Magnitude of Revenue Foregone due to Tax Exemptions

Total magnitude of tax revenue forgone due to exemptions/ deductions/ incentives in the Central Government tax system is estimated (by the Union Ministry of Finance) to be Rs. 5.29 lakh crore in 201112 What it implies is: the estimated amount of additional tax revenue that could have been collected by the Central Government in 2011-12, if all exemptions/ deductions/ incentives (both in direct and indirect taxes in the Central Govt. tax system) had been eliminated, is a staggering 6 % of GDP

Major components in the revenue foregone in different kinds of taxes applicable for private sector businesses
Nature of Tax Exemptions Revenue Forgone (in Rs. Crore) [in 2010-11] 7,432 33,243 49,164 7,839 Projected Revenue Forgone (in Rs. Crore) [in 2011-12] 8,153 36,468 57,063 NIL (The deduction has been phased out after 31.3.2011.) 8,316

Deduction of export profits for Units located in SEZs Accelerated Depreciation Diamond and Gold (precious stones & jewellery) Deduction of Profits of STPI Units Deduction of profits of undertakings engaged in generation, transmission and distribution of power Mineral fuels and Mineral Oils

7,581

41,200

58,190

Contd..

The Union Finance Minister had recognized in his 2009-10 Budget Speech that Indias tax base continues to be low compared to other countries, mainly due to a plethora of exemptions in the Central Government tax system However, the Government has not taken any significant corrective measures in this regard in the last three Union Budgets Tax Exemptions need to be minimised, carefully designed and justified with sound social and economic reasons Even if half of the tax revenue forgone presently because of the plethora of exemptions in the Central Government tax system get collected, it would generate additional tax revenue worth 3 % of GDP