An autonomous research institute under the Ministry of Finance

 

Working papers

Tax challenges arising form digitalisation

  • Jul, 2018
  • Authors Suranjali Tandon
  • Details NIPFP Working Paper No. 235
  • Abstract
    As MNCs increasingly digitalise their operations, taxing their incomes is proving to be a challenge. Since economic activity no longer hinges on physical presence. As a result, the existing tax rules are proving insufficient. In this context, policy experts around the world are now deliberating the basis for assigning the right to tax such incomes. The alternative measures, being considered, if adopted may result in a re-allocation of taxing rights and therefore there is now a crisis of consensus. This paper discusses the issues in taxing digitalised businesses and evaluates the tax measures being adopted. The paper illustrates that the interests of developing countries such as India are now evidently not aligned with that of the OECD countries. The solution however begs consensus until which the impasse will result in under or over taxation of MNCs.
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Has Fiscal Rule changed the Fiscal Marksmanship of Union Government?: Anatomy of Budgetary Forecast Errors in India

  • Jun, 2018
  • Authors Lekha Chakraborty and Darshy Sinha
  • Details NIPFP Working Paper No. 234
  • Abstract

    We analyse the fiscal marksmanship of the macro-fiscal variables of Union Government ex-ante and ex-post to the formulation of fiscal rules in India. The fiscal marksmanship is the accuracy of budgetary forecasting. The fiscal rules have been legally mandated in India in the form of fiscal responsibility and budget management Act (FRBM Act) in 2003, with a criteria of fiscal-deficit to GDP threshold ratio of 3 per cent and gradual phasing out of revenue deficit. Using Theil’s inequality coefficient (U) based on the mean square prediction error, the paper estimates the magnitude of errors in the budgetary forecasts in India during the period ex-ante and ex-post to fiscal rules, and also decomposed the errors into biasedness, unequal variation and random components. The decomposition of errors is to analyze the source of error in both the regimes. Our results found that in both regimes, the proportion of error due to random variation has been significantly higher, which is beyond the control of the forecaster. In other words, the error due to bias of the policy maker in preparing the Union Budget has been negligible in the period ex-ante and ex-post to fiscal responsibility and budget management (FRBM) Act in India. This result has significant policy implications especially in the context of repeal of 2003 FRBM Act in India and the Union Government has announced clauses for a ‘New FRBM Act’ in India in the Finance Bill 2018.

    *This paper has been accepted for publication in Journal of Financial Research.

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Financial Globalisation and Economic Growth in South Asia

  • Jun, 2018
  • Authors N R Bhanumurthy and Lokendra Kumawat
  • Details NIPFP Working Paper 233
  • Abstract
    The paper examines the relationship between financial globalization and growth. While the existing literature suggests divergent conclusions and mostly in the case of developed countries, there is a dearth of such studies in the case of developing countries, and South Asia is not an exception. Here, an attempt has been made to study the relationship between financial globalization and growth in seven South Asian countries namely Bhutan, Bangladesh, India, Maldives, Nepal, Pakistan and Sri Lanka.  
     
    Following the framework suggested by Bekaert et al. (2005) and with the help of Panel VAR and Panel causality (in GMM framework) models, the study concludes that the causation from financial globalization to growth in the region appears to be weak. Rather there appears a reverse causation running from growth to financial globalization. This suggests that it is the domestic macroeconomic policies (fiscal prudence, strong domestic financial sector and better growth policies) that act as pull factors for foreign capital. At the individual country level, the results are found to be divergent. The study finds that output growth appears to cause financial globalization in countries such as India, Pakistan, Maldives, and Nepal. However, in countries such as Sri Lanka and Bhutan, it clearly suggests that foreign capital has a significant positive impact on output growth. In Bangladesh, the impact seems to be through indirect channel, where foreign capital seems to have a disciplining impact on domestic financial markets, which in turn causes output growth. Similar indirect channel is found in the case of Sri Lanka and this is in addition to the direct channel of financial globalization causing growth.  
     
    Keywords: Financial Globalisation, Economic Growth, Capital Flows, South Asia, Panel VAR
    JEL Classification codes: C33, F21, F36, F65
     
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Federalism, Fiscal Asymmetries and Economic Convergence: Evidence from Indian States

  • May, 2018
  • Authors Lekha Chakraborty and Pinaki Chakraborty
  • Details NIPFP Working Paper No. 232
  • Abstract
    This paper tests economic convergence across States in India by incorporating federal fiscal asymmetries and differentials in gross fixed capital formation at the state level. Using dynamic panel models, it is observed that there is no unconditional convergence of economic growth. Controlling for state-wise asymmetries in fiscal policy variables, financial parameters, capital formation and human development outcomes using Arenallo and Bond (1991) panel data methodology, no strong evidence for conditional convergence is observed. It is observed from the GMM estimations that public capital spending has positive and significant relationship with economic growth. It is also observed that the quality of human capital formation is a pre-requisite for economic growth, both for club and (aggregate) conditional convergence. 
     
    Key words: economic convergence, asymmetric federalism, dynamic panel estimation, GMM, fiscal policy
     
    JEL Classification codes: C33, E62, H77, R11, R58
     
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The rise of government-funded health insurance in India

  • May, 2018
  • Authors Ila Patnaik, Shubho Roy and Ajay Shah
  • Details NIPFP Working Paper No. 231
  • Abstract
    India has experienced a remarkable proliferation of 48 Government Funded Health Insurance Schemes (GFHIS) from 1997 to 2018. We place the rise of this policy pathway in historical perspective. Under colonial rule, there was considerable importance placed upon public health as a local public good. After independence, the Bhore Committee build a paradigm of public sector health care, and the public health system degraded. In this environment, the political process faced a high disease burden coupled with a weak public health care system. This pressure led to the adoption of GFHIS as a convenient way forward. We identify four areas of concern in this new paradigm of Indian health policy: inefficient lack of focus upon public health, regulatory problems with private health care, weak regulation of health insurance companies, and fiscal risk.
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Regulating infrastructure development in India

  • May, 2018
  • Authors Sanhita Sapatnekar, Ila Patnaik and Kamal Kishore
  • Details NIPFP Working Paper No. 230
  • Abstract
    India has been rapidly urbanising. Much of this has been unplanned, with regulation left to catch up to what has already been implemented. This leaves room for improving the legal framework in terms of what role is played by each level of government, as well as the process for setting standards for each type of infrastructure. Regulation of the professionals involved (including town planners and engineers) is missing, resulting in implementation issues. Further, this regulatory framework is still evolving in India. There are systemic issues to consider, such as the level of prescription a standard should have, identifying critical infrastructure, and whether to retrofit existing infrastructure. This paper reviews the existing framework for infrastructure development and the associated standards in India, and identifies areas for concern. Rather than deeply anlaysing any one standard, this paper analyses the ecosystem for standard setting in India's infrastructure development from a risk perspective.
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Fair play in Indian Health Insurance

  • May, 2018
  • Authors Shefali Malhotra, Ila Patnaik, Shubho Roy and Ajay Shah
  • Details NIPFP Working Paper No. 228
  • Abstract
    In recent years there has been an increased role for health insurance in Indian health care, through government funded health insurance programs and privately purchased health insurance. Our analysis of the claims ratio and the complaints rate in the health insurance industry, suggests that there are important difficulties with the working of health insurance. The lack of fair play in this industry is derived from deficiencies in regulations, weak enforcement of regulations and faulty institutional design of consumer redress. The solutions lie in laws and regulatory processes for consumer protection. Examination of health policy and financial policy, together would formulate a strategy for change.
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Utilisation, Fund Flows and Public Financial Management under the National Health Mission

  • May, 2018
  • Authors Mita Choudhury and Ranjan Kumar Mohanty
  • Details NIPFP Working Paper No. 227
  • Abstract
    This study provides insights on how institutional architecture for public fund flows affects budget execution. Using the case of the National Health Mission (NHM) in India, it highlights how the rules and procedures that govern release of public funds affect utilisation of budgeted resources. It analyses the utilisation of NHM funds in 29 States, and documents the processes for fund releases from State treasuries to implementing agencies in Bihar, Maharashtra and Odisha. The study finds that on average, only about 55 per cent of funds allocated for NHM were utilised in 2015-16 and 2016-17. In Bihar and Maharashtra, this was partly due to significant delays in release of funds from State treasuries to implementing agencies. The delays were a result of complex administrative procedures associated with the release of NHM funds from State treasuries. The existence of implementing agencies outside the States’ administrative setup, and the rigid fragmented financial design of NHM has contributed to the complicated architecture of release processes.
     
    Key Words: Public Fund Flow, Fund Utilisation, Public Financial Management, Budget Execution, National Health Mission
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Stock Market Trading in the Aftermath of an Accounting Scandal

  • Apr, 2018
  • Authors Renuka Sane
  • Details NIPFP Working Paper No. 198
  • Abstract
    In this paper, we study the impact on investor behaviour of fraud revelation. We ask if investors with direct exposure to stock market fraud (treated investors) are more likely to decrease their participation in the stock market than investors with no direct exposure to fraud (control investors)? Using daily investor account holdings data from the National Stock Depository Limited (NSDL), the largest depository in India, we find that treated investors cash out almost 10.6 percentage points of their overall portfolio relative to control investors post the crisis. The cashing out is largely restricted to the bad stock. Over the period of a month, there is no difference in the trading behaviour of the treated and control investors. These results are contrary to those found in mature economies. [An earlier version of this paper was published on June 30, 2017.]
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The Economics of Releasing the V-band and E-band Spectrum in India

  • Apr, 2018
  • Authors Suyash Rai, Dhiraj Muttreja, Sudipto Banerjee and Mayank Mishra
  • Details NIPFP Working Paper No. 226
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Assessing Public Expenditure Efficiency in Indian States

  • Mar, 2018
  • Authors Ranjan Kumar Mohanty & N.R. Bhanumurthy
  • Details NIPFP Working Paper No. 225
  • Abstract
    In recent times, the issue of public expenditure efficiency has drawn the attention of both policymakers and researchers globally. Even in India, with the increased demands for Outcomebased Budgeting, the assessment of public expenditure efficiency becomes much more crucial. Towards this direction, by using outlays-outcome framework, the paper attempts to measure the efficiency of government expenditures on Social Sector, especially health and education, among the Indian States using various DEA approaches. Further, the paper also attempts to understand what drives the public expenditure efficiency among the States. For this, it looks at the role of economic growth as well as quality of governance. The results of input-oriented and outputoriented DEA approach finds a large variation in the efficiency of public spending as well as scope for resource saving among Indian States. The results suggest that States are spending their resources more efficiently on education than on health and overall social sector spending. Further, it also finds that both quality of governance and economic growth affects the efficiency of education, health, and social sector with governance to have larger effect compared to growth. Overall, the study suggests that focus on good governance could yield better outcomes from public spending.
     
    Keywords: Public Expenditure, Education, Health, Data Envelopment Analysis, India.
    JEL codes: H51, H52, I18, I21, C14, O53
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Fiscal Policy Effectiveness and Inequality: Efficacy of Gender Budgeting in Asia Pacific

  • Mar, 2018
  • Authors Lekha Chakraborty, Marian Ingrams, Yadawendra Singh
  • Details NIPFP Working Paper No. 224
  • Abstract
    Gender budgeting is a fiscal approach that seeks to use a country’s national and/or local budget(s) to reduce inequality and promote economic growth and equitable development. While literature has explored the connection between reducing gender inequality and achieving growth and equitable development, more empirical analysis is needed to determine whether gender budgeting really curbs gender inequality. Our study follows the methodology of Stotsky and Zaman (2016) to investigate across Asia Pacific countries the impact of gender budgeting on promoting gender equality, and also increasing fiscal spending on health and education. The study classifies Asia Pacific countries as ‘gender budgeting’ or ‘non-gender budgeting’ according to whether they have formalized gender budgeting initiatives in laws and/or budget call circulars. To measure the effect of gender budgeting on reducing inequality, we measure the correlation between gender budgeting and the Gender Development Index (GDI) and Gender Inequality Index (GII) scores in each country. The data for our gender inequality variables are mainly drawn from the IMF Database on gender indicators and the World Development Indicators (WDI) database, over 1990-2013. Our results show that gender budgeting has significant effect on increasing GDI and small but significant potential to reduce GII. These results strengthen the rationale for employing gender budgeting to promote inclusive development. However, our empirical results show no prioritization for gender budgeting in the fiscal space of health and education sectors in the region. 
     
    Key words: gender budgeting, fiscal policy, gender equality, Asia Pacific
    JEL codes: H00, I3, J1
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Would UDAY Brighten up Rajasthan Finances?

  • Mar, 2018
  • Authors Pinaki Chakraborty, Manish Gupta and Lekha Chakraborty
  • Details NIPFP Working Paper No. 211
  • Abstract
    Ujwal DISCOM Assurance Yojana (UDAY) required a number of State governments to take over debt of power distribution companies in their books of accounts. Though this one time intervention made both debt and deficit measures more comprehensive, this has raised many challenges including comparability of deficit across States and long run fiscal implications of power sector debt on State finances.
     
    Keywords: Power distribution companies, debt restructuring, deficits, Rajasthan
    JEL Codes: H72, H74, H77, H81

     

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Fiscal Policy, as the “Employer of Last Resort”: Impact of MGNREGS on Labour Force Participation Rates in India

  • Feb, 2018
  • Authors Lekha Chakraborty and Yadawendra Singh
  • Details NIPFP Working Paper No. 210
  • Abstract
    We examine the impact of conditional fiscal transfers on public employment across gender in India taking the case of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). The MGNREGS, as an “employer of last resort” fiscal policy, is a direct employment transfer, which guarantees to provide 100 days of paid work opportunities at a predetermined wage for public works in India through a self-selection criterion. Using unit record data of the latest 68th round of NSS Employment-Unemployment survey, we examined gender differential impacts of MGNREGS on labour force participation rates across States in India. The unit of analysis in our paper is not ‘household’, but is one step ahead to capture the intra-household level of participating behaviour in the economic activity. The results, based on the survey enumerating 2,80,763 individuals in rural areas, revealed that there is a striking heterogeneity in the gender impacts of job guarantee programme across States of India. The probit estimates showed that MGNREGS job card  holder’s labour force participation rates were higher than the non-card holders and the result was more pronounced for women. The analysis of the time-use patterns and the unpaid care economy statistics of job guarantee card holders obtained from the unit records also shows that augmenting public investment in care economy infrastructure is significant for the job guarantee programme to function at its full potential in India.
     
    JEL classification codes: C15, C67, D33, E24, J48
    Keywords: job guarantee, fiscal policy, gender, care economy, labour force participation rate

     

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Internationalisation of the Rupee

  • Feb, 2018
  • Authors Shekhar Hari Kumar, and Ila Patnaik
  • Details NIPFP Working Paper No. 222
  • Abstract
    The Indian Rupee currently accounts for approximately 1% of global foreign exchange turnover. It has a smaller market size across most trading instruments when compared to the top 8 emerging market currencies. In this paper, we evaluate the current status of the Indian Rupee as an international currency using the Chinn and Frankel (2008) framework, and explore the possibility of future Indian Rupee internationalisation. We find that the Indian Rupee has a negligble role as an official sector currency. It has some use as a reserve currency in its economic sphere of influence, but no role as an anchor or intervention currency. Private actor adoption of the Indian Rupee is much larger and more diverse than the official sector. However, this role is mostly restricted to financial flows and portfolio investment. In terms of trade invoicing and settlements in the private sector, the Indian Rupee plays a limited role due to concerns of convertibility and risk management. Given the current path of exchange control and capital account liberalisation, we anticipate gradual internationalisation of the Indian Rupee due to regional competition from the Renminbi.
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Estimates of air pollution in Delhi from the burning of firecrackers during the festival of Diwali

  • Feb, 2018
  • Authors Dhananjay Ghei and Renuka Sane
  • Details NIPFP Working Paper No. 223
  • Abstract
    Delhi is one of the most polluted cities in the world, especially in the winter months from October - January. These months coincide with the religious festival of Diwali. It is argued that air quality gets worse in the aftermath of Diwali on account of firecrackers that get burned during the festival. We use hourly data on PM 2.5 particulate matter from 2013 to 2017 to estimate the Diwali effect on air quality in Delhi. We improve on existing work by using the event study technique as well as a difference-in-difference regression framework to estimate the Diwali effect on air quality. The results suggest that Diwali leads to a small, but statistically significant increase in air pollution. The effect is different across locations within Delhi. To our knowledge, this is the first causal estimate of the contribution of Diwali firecracker burning to air pollution.
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Business Cycle Measurement in India

  • Jan, 2018
  • Authors Radhika Pandey, Ila Patnaik, and Ajay Shah
  • Details NIPFP Working Paper No. 221
  • Abstract

    This paper presents the business cycle chronology for the Indian economy. Two distinct phases are analysed. The pre-1991 period when the cycles were mainly driven by monsoon shocks. The post 1991 phase where we see the emergence of conventional business cycles driven by investment-inventory fluctuations. The paper sheds light on the economic conditions that shaped the nature of cycles in the two phases. The concluding section of the paper presents an overview of the economic conditions post 2012.

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The Multilateral Legal Instrument: A developing country perspective

  • Jan, 2018
  • Authors Suranjali Tandon
  • Details NIPFP Working Paper No. 220
  • Abstract

    Action point 15 of the BEPS program mandated developing a Multilateral Instrument to modify bilateral tax treaties. A country signing this instrument will be able to modify all treaties, where other contracting parties have also notified the same. This would allow countries to simultaneously and therefore swiftly adopt measures to tackle BEPS in a large number of treaties. Based on the country positions submitted to the OECD as on 30th August 2017, this paper makes an attempt to assess this instrument that has succeeded in bringing about the desired changes. A unique database is constructed on the basis of these country positions. Using this database, the paper shows that the benefit of the MLI may be limited in so far as the application of the optional Articles is concerned. In so far as developing countries are concerned, it is found that the gains to these countries may be limited. The adoption of the minimum standards may be the limited success achieved by the instrument.

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