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General Studies 2
Structure, organization and functioning of the Executive and the Judiciary Ministries and
Departments of the Government; pressure groups and formal/informal associations and their role in
the Polity.
Government policies and interventions for development in various sectors and issues arising out of
their design and implementation.
General Studies 3
Infrastructure: Railways
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This politicisation of railways was visible even after independence when India adopted parliamentary
democracy.
The rail budget became more of a vote bank building instrument rather than a commercial exercise.
Such a practice and continued attitude has affected the finances in such a way that expansion,
modernisation, development or replacement of worn-out tracks or rolling stock do not have adequate funds.
Indias stand in world
Since Indian independence, the railways have achieved landmarks throughout the world
China had 22,161 km in 1950. Today it has more than one lakh km rail lines.
In India, there were 54,600 km railway lines in 1950. Only 11,000 have been added till now.
China has achieved a 300kmph speed with the Beijing-Guangzhou bullet train service.
India still has Rajdhanis and Shatabdis running at 130-140 kmph. Even the newly introduced Gatiman
Express has attained the maximum speed of 160 kmph.
The technology is not the contention, finances are.
Indian engineers are equally capable of modernising the Indian railways. However, much of the rail budgets
goes into subsidisation and other petty issues, whereas critical development sectors like R&D, expansion etc.
face financial crunch. The support from general budget also remains tight.
The external borrowings through Indian Railway Finance Corporation is also restricted
Thus, separating rail budget from general budget did not actually bore fruits as anticipated as the political
flaws took over the development aspect of rail sector.
Conclusion
Merging two is not the apt solution
If the rail budget comes under general budget, its revenue and expenditure will get tied to general budget
If there is a revenue shortfall in general budget, the finance ministry wont cut out regular expenditure like
staff salaries, fuels, stores and equipment.
Instead, the axe will be on modernisation and expansion only.
The finance minister will face the same constraint as Railway Minister while raising fares
The merger will make Railways more like a government department and will lose its commercial identity
There is contradictory opinion even by the experts: on one hand they want privatisation in railways and on
other hand they suggest merging it into system, thereby subverting its commercial nature which requires
separate financing.
The need is to maintain a status quo on separate budgets and concentrate more on strengthening, modernising and
expanding the railways so as to meet its challenges of increased transportation and passenger travels.
Connecting the dots:
1. Merging the railway budget and general budget will change the character of Indian railways. Critically
analyse.
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2. With plethora of rail reforms taken up by the railway minister, it requires independent finances to plan and
implement. Do you agree? Explain.
Refer:
Rail Budget 2016: A balance between growth, operation efficiency
The Big Picture Railway Budget: Whats on offer?
ECONOMICS
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imperfect system of offsetting credits on taxes paid on inputs, leading to higher costs
cascading of taxes (tax on tax)
inter-state commerce are hampered due to the dead weight burden on Central sales tax and entry taxes,
which have no offset
All this will go once the GST is in place.
Why GST? What are its benefits?
GST will create a unified, un-fragmented national market and pushes competitiveness.
1. GST, by subsuming an array of indirect taxes under one rubric, will simplify tax administration, improve
compliance, and eliminate economic distortions in production, trade, and consumption.
2. GST will widen the tax base and make it identical for both the Centre and States. (Unlike an excise duty
whose base consists of manufacturers, the GST is paid only by the final consumer)
3. By giving credit for taxes paid on inputs at every stage of the supply chain and taxing only the final consumer,
it avoids the cascading of taxes, thereby cuts production costs, and makes exports more competitive.
4. GST will create a single market, enhances ease-of-doing business and make our producers more competitive
against importers.
5. GST will eliminate inter-state taxes and reduces black money, thus will free up some capital. All this will add
to demand and also efficiency.
6. According to the economists, thanks to these efficiencies, the GST will add 2 per cent to the national GDP. (at
least GDP growth can go up by one percentage point on a sustained basis)
Co-operative Federalism:
The adoption of GST is an iconic example of
Cooperative Federalism and
Nationwide, multiparty consensus-building exercise
Concerns (Potential implementation problems) with GST
1. GST will not have a positive impact on : States Fiscal and Political Autonomy; States freedom
2. On question of what is the right rate?
3. Social dimension GST, which is an indirect tax, is considered regressive
4. Shift toward indirect taxation
5. Issue of Tax Litigations
1. States Fiscal and Political Autonomy
Only time will tell whether the GST will have a positive impact on the GDP. But there is one thing the GST will not
have a positive impact on: the States fiscal, and therefore, political autonomy.
When we move to a GST regime, India will have not a single federal GST but a dual GST, levied and managed by
different administrations.
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The Centre will administer the central GST (CGST) and the States will administer the SGST.
Compliance will be monitored independently at the two levels.
All goods and services will be divided into certain categories. The rate will be fixed by category and State
cannot shift a commodity from a lower to a higher rate or put it in exempt category.
The rates for both CGST and SGST will be fixed by the GST Council (whose Chairman will be Union FM and
members will be State Finance Ministers/Revenue Ministers).
Once rates are set by GST Council, individual states will lose their right to tax commodities at the rates they
want.
There will be a steady erosion in the States freedom to decide on taxes and tax rates.
According to Constitution of India, States have complete autonomy over levy of sales taxes, which account for 80%
of their revenue. An attempt was made to curtail this autonomy with the introduction of VAT but it did not succeed as
VAT had 4 different rates that States could play with.
But with the GST, which mandates a uniform rate, even this limited authority will be gone. i.e., with GST
virtually no taxing powers to the states.
If a State wants to undertake a special spending programme to respond to a State-specific situation, it cannot raise
taxes on goods. So, innovative programmes and schemes such as Mid-day meal scheme by TN, NREGA scheme
by Maharashtra which was initiated by States by raising their tax would not happen now as States does not have
fiscal autonomy.
Uniform Tax regime could adversely impact States that are more committed to welfare expenditures and
cant initiate their own development philosophies (as they lose control over tax revenue)
Governance within the GST council
GST council is a de-facto council of states along with the representatives from Union Finance Ministry.
One State will get one vote irrespective of its size, which seems unfair.
An economically larger states contributing bigger chunk to GST pie should have greater say. However, this is
not the case.
Special needs of the smaller states should also be heeded.
The GST regime should remain sympathetic to these issues of States fiscal and political autonomy. Still we are
unsure how it may affect the third tier, i.e. local bodies.
2. What is the right rate? How it is determined?
There are issues on question of what is the right uniform GST rate? What factors determine this uniform GST rate?
13th Finance Commissions Task Force, 2010 on GST recommends a rate of 12% (i.e., 7% States GST and
5% Central GST = 12%)
But now an empowered committee of finance ministers mooted a concept called Revenue Neutral Rate or
RNR
Revenue Neutral Rate or RNR:
A panel of State Governments representatives mooted a concept called RNR, where tax will remain same for
Centre and States. (e., 12.77 CGST and 13.91 SGST = 27%)
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In other words, RNR, when applied will leave all states with the same revenues as before. No state loses out
signing up GST.
In trying to assuage the fears of States, the calculation of RNR has been loaded with every possible tax
entry taxes, octroi tax etc. This has caused RNR to escalate the GST rate to high 27%.
However, this is a faulty approach as 27% GST imposes enormous tax burden on wage earning classes. We
wont be able to gauge the buoyancy of the GST.
In other words, if RNR is escalated GST rate will also be escalated this will burden the earning classes (hurting
Indias income inequality) kills the golden egg-laying goose (purpose of GST) therefore, RNR is self-defeating.
Better approach is to keep GST rate low, but doing so will create revenue loss to States.
Therefore, the loss in revenue of the States should be compensated by the Centre at the same time
maintain low GST rate.
3. Indirect taxes are considered regressive and direct taxes are proportional
GST is an indirect tax and could be regressive, because they affect the poor more than the rich.
Indias ratio of indirect to direct tax collection is 65:35, which is exactly the opposite of the norms in most
developed countries.
Indias ratio of direct tax to GDP is one of the lowest in the world. Only 4% of Indians pay income tax.
However, almost all Indians pay indirect taxes.
4. Shift toward indirect taxation
Recently, indirect taxes are increasing whereas direct taxes are decreasing. To meet their fiscal needs, it is always
tempting for governments to tweak indirect taxes higher, since the work of expanding the direct tax net is very much
harder.
For example,
Service Tax was 5% during 1990s, now it is 15%
New indirect taxes such as Swatcch Bharat Cess, Education Cess are being added
Excise duty on petrol and diesel have increased steadily
However, same progress or steady increase has not happened in direct taxes.
Therefore, the temptation of governments to increase indirect taxes can be curbed with a rate cap.
Unless a rate cap is adopted, GST rate could also easily drift higher hurting Indias income inequality .
5. Tax Litigations:
Approx. Rs 1.5 lakh crore is struck in litigation related to Central excise and service taxes. Disputes and cases
involving on Central taxes go through appeals and tribunal processes and can drag on years.
On the other hand the State-level VAT is administered in a way that empowers tax officials to dispose of cases
quickly.
Therefore, GST should deploy same approach as the State-level model which is more efficient.
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Conclusion:
The GST is obviously not a silver bullet for all ills of Indias economy. It is nevertheless a revolutionary and longpending reform. It promises economic growth and jobs, better efficiency and ease of doing business and higher tax
collection. However, its imperfections and potential pitfalls should be sorted out as the government rolls it out.
Connecting the dots:
1. Discuss the potential benefits and implementation problems with adoption of GST.
2. Why GST is seen as one of the biggest taxation reforms often called as big bang reform. How will it help in
economic growth? Explain.
3. Do you think that GST broadens the tax base, sharpen the competitive edge of Indian exports by several tax
distortions and create a unified national market by removing inter-state barriers to trade?
4. The GST can be a big boon if it has right kind of rate and legislation. Explain.
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