New issues in Indian macro policy.

Table 4 Sources of fiscal progress

(Percent to GDP)

roughly one percent of GDP. Roughly speaking, these issues imply that the fiscal
deficit in 2006-07 was understated by roughly one percent.

An urgent effort needs to be undertaken to convert all liabilities into transparent,
on-budget liabilities, and to eliminate all off-budget financing.

• The sixth pay commission A key question which will affect the evolution of public
finance in the coming five years is the decisions on wages of civil servants made by
government in response to proposals from the sixth pay commission.

The present structure of wages for government employees involves paying too little at
senior levels and too much at lower levels (Glinskaya and Lokshin, 2005). Matching
wages to market benchmarks requires cutting wages for junior staff, which can free
up resources. Even if this is politically infeasible, it is possible to bring about a
substantial increase in wages for senior staff without a substantial fiscal burden,
because the number of employees at a senior level is very small.

Hence, it is feasible to achieve substantial beneficial reforms of civil service wages
without affecting the fiscal deficit. However, political compulsions could well lead to
an outcome more like that of the fifth pay commission of 1997, where GDP at factor
cost from public administration and defence expressed in constant prices rose by an
unprecedented 14.48%, 10.62% and 13.28% from 1997-98 to 1999-00.¹¹

• Impact of a business cycle downturn on tax collections Table 4 suggests that the
essence of the partial abatement of the fiscal crisis lies in the 3.6 percentage point
increase in the Centre’s gross tax revenue from 1998-99 to 2006-07. This gain is
primarily about a 0.95 percentage point gain with income tax and a 2.4 percentage
point gain with corporation tax.

In the budget estimates for 2007-08, corporation tax was the biggest single source
of tax revenue, accounting for Rs.1.68 trillion out of gross tax revenues of Rs.5.48

¹¹Some of the most harmful effects of the fifth pay commission were concentrated on the states. Between
1997-98 and 1999-2000, the primary deficit of the states went up from 1 per cent to 2.6 per cent of SDP
and the fiscal deficit from 3.2 per cent to 5.1 per cent. As a proportion of their revenue receipts, their
revenue deficit went up from 9.6 per cent to 26 per cent.

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