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29th January 2021 – Editorials/Opinions Analyses

Content

  1. Fiscal policy will likely play a bigger role in shaping the growth recovery in 2021
  2. Remembering the Holocaust

Editorial: Fiscal policy will likely play a bigger role in shaping the growth recovery in 2021

Context:

  •  As fiscal spending falls gently in the rest of the world, we expect it to remain unchanged and at elevated levels in India.

Relevance:

  • GS Paper 3: Fiscal Policy

Mains Questions:

  1. The central bank may have been the main game in town in 2020. But fiscal policy will likely play a bigger role in shaping the growth recovery in 2021. Discuss. 15 Marks
  2. What is Fiscal Policy? Assess the role of fiscal policy to revive the economic growth during the recession period. 15 Marks
  3. Slashing public expenditure amid a recession is a recipe for serious economic disaster. Critically comment. 15 Marks

Dimensions of the Article:

  • What is Fiscal Policy?
  • Main objectives of Fiscal Policy in India
  • Issues related to fiscal management in India
  • Importance of Fiscal Discipline in India
  • Role of Fiscal Policy to revive the growth in 2021
  • Way Forward

What is Fiscal Policy?

Fiscal policy deals with the government policy concerning changes in the taxation and expenditure overheads and components, while Monetary policy, deals with the changes in the factors and instruments that affect the supply of money in the economy and the rate of interest.

  • Fiscal policy is result of several component policies or mix of policy instruments. These include, policy on taxation, subsidy, welfare expenditure, etc; investment or disinvestment strategies; and debt or surplus management.
  • Fiscal policy is an important constituent of the overall economic framework of a country and is therefore intimately linked with its general economic policy strategy.’

Types of Fiscal Policy

  • Neutral Fiscal Policy:  This implies a balanced budget where (Government spending = Tax revenue). It further means that government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity.
  • Contractionary (restrictive) Fiscal policy: This policy involves raising taxes or cutting government spending, so that (Government spending < Tax revenue) it cuts up on the aggregate demand (thus, economic growth) and to reduce the  inflationary pressures in the economy.
  • Expansionary Fiscal Policy: It is generally used for giving stimulus to the economy ,i.e., to speed up the rate of GDP growth or during a recession when growth in national income is not sufficient enough to maintain the present standards of living. A tax cut and/or an increase in government spending would be implemented to stimulate economic growth and lower unemployment rates.  This is not a sustainable policy, as it leads to budget deficits and thus, should be used with caution.

Main objectives of Fiscal Policy in India:

  • Reallocation of Resources– It helps to distribute resources keeping in view the social and economic conditions of the country.
  • Reducing Inequalities in Income and Wealth– Government aims to bring economic equality by imposing taxes on the elite class and spending the collected money on the welfare of the poor.
  • Contributing to Economic Growth– A country’s economic growth is based on the rate of investment and savings. Therefore, the budgetary plan focuses on preparing adequate resources for investing in the public sector and raise the overall rate of investments and savings.
  • Bringing Economic Stability– The Budget focuses on avoiding business fluctuations so as to accomplish the aim of financial stability. Policies such as Deficit Budget (during deflation) and Surplus Budget (during inflation) assist in balancing the prices in the economy.
  • Managing Public Enterprises– Many public sector industries are built for the social welfare of the people. The Budget is planned to deliver different provisions for operating such business and imparting financial help.
  • Reducing Regional Differences– It aims to reduce regional inequalities by promoting the installation of production units in the underdeveloped regions.

Issues related to fiscal management in India

  • Poor Budgetary Forecasting: Budgets often overstate revenue projections (15 out of 20 years since fiscal 1998) and understate expenditures (12 out of 20 years since fiscal 1998). According to CAG Report in 2017, the over-ambitious revenue targets combined with the lack of transparency in tax administration lead overzealous taxmen resorting to ‘irregular’ and ‘unwarranted’ methods to meet targets.
  • Limited Tax Buoyancy: Faster growth in nominal gross domestic product (GDP) usually leads to faster growth in tax collections. However, in India, tax buoyancy shows no stable pattern and hence, forecasting tax revenues is difficult.
  • Creative Accounting: Moreover, fiscal deficits are also understated by the use of ‘creative accounting’ such as ‘rolling over’ a part of the overall subsidy bill & dues to the states to the next financial year; using PSEs like LIC to purchase divested stakes in the disinvestment process.
    • Such “creative” accounting has led to a decline in the headline fiscal deficit number but failed to reduce India’s public debt to GDP ratio, adversely impacting India’s macroeconomic stability.
  • Use of Extra Budgetary Resources (EBR): Over the years, the Govt’s reliance on EBRs- such as funds of state-owned enterprises like LIC, SBI etc – to fund Govt. programmes has increased, but it doesn’t appear in real time fiscal deficit numbers. E.g. 61.4% of all capital expenditure outlined in the 2018-19 Budget is to be financed through EBR, up from 54% in 2016-17.
  • Absence of uniform fiscal consolidation rules for centre & states:
    • Various cesses and surcharges, in which States’ have no share, are becoming a disproportionate portion of overall divisible revenue. This is against the spirit of fiscal federalism and financial devolution process.
    • For State Govt., Art 293(3) provides a constitutional check over market borrowings while no such restriction is there for the centre.
    • States have constraints in managing their finances as the RBI controls their deficit and cannot float a bond on a state’s behalf without the Centre’s approval.
  • Non-adherence to Fiscal Responsibility and Budget Management (FRBM) Act targets: Since 2003 FRBM law came into effect, there have been four pauses in the deficit targets enshrined in it and many occasions where the targets have been flouted.
  • Fiscal Populism: Political class has the tendency to make fiscal policy over-expansive, which increases burden on future government and thus, has detrimental long-run impacts e.g. loan waivers to farmers, tax waiver to MSMEs etc.
  • Poor institutional infrastructure for monitoring: CAG has presented its audit report on Compliance of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 but the assessment is only post-facto.
  • Fiscal Populism: Political class has the tendency to make fiscal policy over-expansive, which increases burden on future government and thus, has detrimental long-run impacts e.g. loan waivers to farmers, tax waiver to MSMEs etc.
  • Poor institutional infrastructure for monitoring: CAG has presented its audit report on Compliance of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 but the assessment is only post-facto.

Importance of Fiscal Discipline in India

  • To improve investment: Pile-up of past domestic debt severely restricts the ability to finance new investment. If debt becomes unsustainable, there is an increased risk of default & hence, downgrading of sovereign credit ratings.
  • Increasing credit availability to private sector: As more money is lent to government rather than invested in the market, corporate sector is crowded out leading to slower industrial and capital asset growth and potential loss of employment.
  • Control inflation: Too much of government debt can lead to inflation and reduction in real interest rates. It might prompt people to invest more in gold and real estate, thereby accentuating the problem of poor economic liquidity and black money.
  • Intergenerational parity will be hurt as future generations will have to pay increased taxes to settle the government debt.
  • Constitutional Requirement: Article 292 of the Constitution envisages fiscal responsibility in the form of legislation that obliges the government to have a ceiling on debt.

Role of Fiscal Policy to revive the growth in 2021

  • One, while demand for goods is back to healthy levels, demand for services is still 30 per cent below normal and needs to catch up. A successful roll-out of the government’s vaccination drive will be necessary for this important shift to take place.
  • Two, as more activity restarts, there is likely to be a shift from rural spending to urban spending. The labourers who went back to their village homes during the lockdown may want to return to their city jobs, but some may find those jobs do not exist anymore. As a result, welfare benefits may need to be extended for a longer period.
  • Three, large firms and high-earners have fared much better than small companies through the pandemic, but it’s these tiny and informal enterprises that make up 85 per cent of the labour force, and whose health will be instrumental for a sustainable recovery. Again, a continuation of social welfare spending, particularly to support those at the bottom of the pyramid, will be important.
  • Four, a move from consumption to capital spending is important to raise the economy’s capacity to create jobs. But it may not come easily at a time when many private factories are idle. Public capex and structural reforms may need to take the lead here.

Conclusion

According to International Monetary Fund (IMF), Independent Fiscal Council are now an indispensable part in the design of fiscal frameworks aimed at guiding fiscal policymakers’ discretion. An independent fiscal council can bring about much needed transparency and accountability in fiscal processes across the federal polity.


Editorial: Remembering the Holocaust

Context:

  • Every year on January 27, the United Nations honours the victims of the Holocaust by reaffirming its unwavering commitment to counter anti-Semitism, racism, and other forms of intolerance.

Relevance:

  • GS Paper 1: World History

Mains questions:

  1. Empowering people to reflect on the root causes and repercussions of hate crimes is essential. In this context, discuss the holocaust during 2nd world war. 15 Marks

Dimensions of the Article:

  • What is Holocaust during 2nd World War?
  • Backgrounds related to Holocaust:
  • Holocaust and Hate speech:
  • Way Forward:

What is Holocaust during 2nd World War?

  • The Holocaust, also known as the Shoah, was the World War II genocide of the European Jews. Between 1941 and 1945, across German-occupied Europe, Nazi Germany and its collaborators systematically murdered some six million Jews, around two-thirds of Europe’s Jewish population.

Backgrounds related to Holocaust:

  • The Auschwitz concentration camp was a network of concentration and extermination camps set up by the Nazi regime in Germany during the Second World War period in Germany and other German-occupied areas.
  • Initially, political prisoners were brought to these camps and the first extermination took place in 1941.
  • These camps went on to become the site of the “Final solution to the Jewish Question” as propagated by the Nazi regime. Jews were brought from Germany and other German-occupied states to these camps. Starting with discrimination in society and government, the Jews forced to give up their homes and were segregated in ghettos. They had to relinquish their jobs and businesses. Later, they were forced to settle at these camps. Auschwitz held the largest such camp.
  • Life at these concentration camps was brutal. The inmates were subject to forced labour under inhuman conditions. They also had to suffer horrible atrocities. Many died of diseases. Even children were not spared. Any inmate suspected of suffering from some form of ailment was killed.
  • The “Final Solution” involved killing the inmates of the camp in gas chambers. The pesticide Zyklon B was used to kill many people en masse.
  • It is estimated that out of the 1.3 million people sent to the camp at Auschwitz, at least 1.1 million perished.
  • 90% of the people killed there were Jewish. The rest were Romani, Polish, Soviet POWs, other people of various nationalities and homosexuals.
  • This mass brutality and killing of millions of people during the Second World War by the Nazi regime is known as the Holocaust.
  • Many of the inmates were subjected to medical experimentation (without consent and anaesthesia) that resulted in death, mutilation or painful agonies for the subjects. Even children were subject of such medical torture.
  • The Red Army liberated the Auschwitz concentration camp on 27 January 1945.
  • The State of Israel initiated this observance, which was started in 2005.
  • The UN urges member countries to mark this day in honour of the millions of Holocaust victims. An estimated 6 million Jews; 250,000 mentally and physically challenged people; 200,000 Romani; 9000 homosexuals died at the hands of the Nazi regime.
  • The Holocaust remains a powerful symbol of anti-war sentiments and is also a reminder for people to stop discrimination and end the targeting of people on the basis of religion, ethnicity, political or personal beliefs. It is a reminder that every individual should enjoy human rights and live life to the fullest of his capabilities and desire without causing harm to the environment or fellow creatures.

Holocaust and Hate speech:

  • Currently, the anonymity of the Internet and increased screen time during the pandemic have intensified hate speech. Greater exposure to hateful discourses online has allowed anti-Semitism and other variants of racism to fester in our societies.
  • According to researchers at Tel Aviv University, the feelings of uncertainty, alienation and dejection brought on by the COVID-19 pandemic have aggravated anti-Semitism worldwide by attributing blame to the Jewish people and using them as a scapegoat.
  • In this crucial time that requires unity, the proliferation of anti-Semitic sentiments on social media has revived prejudices and stereotypes, further dividing society.
  • The Holocaust was a watershed moment in history as it illuminates the many manifestations of hate and its impact.
  • Therefore, whilst urging member states to strengthen the resilience of people against hateful ideologies, the UN emphasizes the use of education as a potent tool to inculcate a culture of peace.
  • Within the framework of its programmes on the prevention of violent extremism and Global Citizenship Education, UNESCO continually works towards advancing activities to prevent and address tacit and overt forms of anti-Semitism.
  • Holocaust denial and distortion is flourishing online. This is defined by the International Holocaust Remembrance Alliance as a virulent expression of contemporary anti-Semitism.
  • According to a previously launched report by the World Jewish Congress, more than 100 posts per day on average denied the Holocaust. This brings to light the increasingly growing dangers of online platforms in distorting reality and stoking hatred.

Way Forward:

  • UNESCO’s recently launched campaign called #ProtectTheFacts, developed by the International Holocaust Remembrance Alliance, the UN, and the European Commission, provides a unique opportunity this year to commemorate the victims of the Holocaust by promoting sound policies and practices that raise awareness about Holocaust denial and distortion.
  • In today’s polarized world, empowering people to question and engage in critical reflections about the root causes and repercussions of hate crimes is essential. Individuals always have more power than they realize, for better or for worse. Consequently, equipping them to make the rational choice of acting as active bystanders rather than perpetrators is the only way to create peaceful and sustainable societies.
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