Q.36 “To build fiscal capacity, it is essential for India to create legitimacy in the state”. Comment.

Ans. Tax reform was an integral part of India’s economic reform programme which commenced in 1991. The tax base of India is still not adequate. To build fiscal capacity the government needs to put in place a better tax regime which is only possible once the government is able to enhance its ‘legitimacy’ among the citizens—following steps are advisable in this regard (Economic Survey 2015–16):

• The spending priorities of the government must include essential services which are consumed by all citizens. For that matter, action needs on public infrastructure, law and order, less pollution and congestion, etc.

• Reducing corruption must be a high priority. This is needed not just because of its economic costs but also because it undermines legitimacy of the state. The more citizens believe that public resources are not wasted, the greater they will be willing to pay taxes. Improving transparency through efficient auctioning of public assets will help create legitimacy, and over time strengthen fiscal capacity.

• Subsidies to the well-off need to be scaled back. At present, it is estimated to be around Rs. 1 lakh crore. Phasing down these bounties and targeting subsidies for the poor important in strengthening legitimacy.

• Property taxation needs to be developed. As property taxes are ‘progressive’ they are desirable. It makes more sense because evading this tax is difficult as they are imposed on immovable (non-mobile) assets. This could be good source of funds for the local bodies. Smart cities require smart public finance and for India’s urban future a sound property taxation regime will be vital.

Based on the experience of the developed countries, it has been advised to

the Governments to enhance the level of legitimacy in the state/government to prevent the middle class (the main force behind India’s growth story) from ‘exiting’ the formal economic framework. We see the at least the central government conscious about this concern but India needs to sensitise the state governments also in this regard. (Economic Survey 2016–17 & 2015–16).