Wednesday, August 27, 2008

Issues Before the Thirteenth Finance Commission

NIPFP Working Paper 55

M. Govinda Rao, Tapas Kumar Sen and Pratap R. Jena
August, 2008

The Thirteenth Finance Commission faces challenging times. Despite improvement, the fiscal situation continues to be a matter of concern when off budget liabilities and other fiscal risks are considered. In the changing situation of increasing oil prices on the one hand and surge in capital flows on the other, calibrating the transfer system in tune with counter-cyclical fiscal policy stance is a formidable challenge.

The paper argues that irrespective of the wording of the Terms of Reference (ToR), the Commission would do well to focus on its primary task of recommending transfers to serve the objective of equity and incentives. While it is required to take into account a number of considerations, the focus should be on the transfer system. As an impartial body, the Commission should make a fair assessment of the union as well as state governments, ignoring the asymmetries in the wording of the ToR.

As regards the transfer system itself is concerned, the paper argues that
although it may be difficult to make drastic changes in the relative shares of the states, the Commission should give up the gap filling approach. Instead, after recommending the tax devolution, the Commission should recommend grants to fully equalise expenditures on elementary education and basic healthcare. It is also possible to incentivise the transfer system for even those states that have a better record of providing education and healthcare to improve quality of these services. If necessary, the tax devolution percentage can be appropriately adjusted to ensure equalisation of social services.

Saturday, August 9, 2008

Early warnings of inflation in India

NIPFP Working Paper 54,

Rudrani Bhattacharya, Ila Patnaik and Ajay Shah
August, 2008

In India, year-on-year percentage changes of price indexes are widely used as the measure of inflation. In terms of monthly data, each observation of a one-year change in inflation is the sum of twelve one-month changes. This suggests that better information about inflationary pressures can be obtained using point-on-point monthly changes. This requires seasonal adjustment. We apply standard seasonal adjustment procedures in order to obtain a point-on-point seasonally adjusted monthly time-series of inflation in India. In three interesting high inflation episodes – 1994-95, 2007 and 2008 - we find that this data yields a faster and better understanding of inflationary pressures.

This paper also appeared as Planning Commission Working Paper No. 1/2008- PC

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Download data (including seasonally adjusted data)

Friday, August 8, 2008

Fiscal Policy and Economic Reforms

NIPFP Working Paper 53,

July, 2008

In an lecture at NIPFP, RBI Governor Dr. Y.V Reddy gives a practitioner's perspective of fiscal policy and economic reforms.

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