📰 The benefits of a carbon tax
Pricing the carbon content of domestic production and imports will help cut effluents
•With China, the largest carbon dioxide emitter, announcing that it would balance out its carbon emissions with measures to offset them before 2060, the spotlight is now on the U.S. and India, countries that rank second and third in emissions. One way to cut effluents while earning revenues is to price the carbon content of domestic production and imports, be it energy or transport. With the International Monetary Fund endorsing the European Union’s plan to impose carbon levies on imports, India can be among the first movers in the developing world in taxing and switching from carbon-intensive fuels (like coal), the main sources of climate change.
•Record heat waves in Delhi, floods in southwest China, and catastrophic forest fires in California this year are indicative of the existential danger from global warming. India ranks fifth in the Global Climate Risk Index 2020. Between 1998 and 2017, disaster-hit countries reported $2.9 trillion in direct economic losses, with 77% resulting from climate change, according to a United Nations report. The U.S. faced the highest losses, followed by China, Japan, and India.
•Air pollution has fallen worldwide after the COVID-19 outbreak, including in India. But with resumption of polluting activities, emissions in India are set to rise sharply unless strong action is taken. Carbon dioxide, the chief culprit in global warming, was 414 parts per million in August 2020 because of past accumulation. As one half comes from the three top carbon emitters, they need to drive de-carbonisation.
Stronger action
•India has committed to 40% of electricity capacity being from non-fossil fuels by 2030, and lowering the ratio of emissions to GDP by one-third from 2005 levels. It is in the country’s interest to take stronger action before 2030, leading to no net carbon increase by 2050. A smart approach is pricing carbon, building on the small steps taken thus far, such as plans by some 40 large companies to price carbon, government incentives for electric vehicles, and an environmental tax in the 2020-21 budget.
•One way to price carbon is through emission trading, i.e., setting a maximum amount of allowable effluents from industries, and permitting those with low emissions to sell their extra space. Pilot projects on carbon trading in China have shown success. There is valuable experience in the EU, and some American states — for example, the regional greenhouse gas initiative in the U.S. northeast. Another way is to put a carbon tax on economic activities — for example, on the use of fossil fuels like coal, as done in Canada and Sweden. Canada imposed a carbon tax at $20 per tonne of CO2 emissions in 2019, eventually rising to $50 per tonne. This is estimated to reduce greenhouse gas pollution by between 80 and 90 million tonnes by 2022. The fiscal gains from pricing carbon can be sizeable. A carbon tax at $35 per tonne of CO2 emissions in India is estimated to be capable of generating some 2% of GDP through 2030. An internally recommended carbon price of $40 per metric tonne in China could generate 14% additional revenues.
Imposing a carbon tariff
•Big economies like India should also use their global monopsony, or the power of a large buyer in international trade, to impose a carbon tariff as envisaged by the EU. Focusing on trade is vital because reducing the domestic carbon content of production alone would not avert the harm if imports remain carbon-intensive. Therefore, leading emitters should use their monopsony, diplomacy and financial capabilities to forge a climate coalition with partners.
•India is among the nations that are hardest hit by climate impacts. There is growing public support for climate action, but we need solutions that are seen to be in India’s interest. A market-oriented approach to tax and trade carbon domestically and to induce similar action by others through international trade and diplomacy offers a way forward.
Confusion over policy for human resource development and economic policy is affecting quality, equity and integrity
•The new National Education Policy (NEP) 2020 (https://bit.ly/2S1dpJs) aims to provide “universal access to quality education…” and bridge the “gap between the current state of learning outcomes and what is required… through undertaking major reforms that bring the highest quality, equity and integrity into the system, from early childhood care and education through higher education”. It suggests that where it differs from previous policies is that in addition to the issues of access and equity, the present policy lays an emphasis on quality and holistic learning.
•The outcome sought in higher education is “… more than the creation of greater opportunities for individual employment. It represents the key to more vibrant, socially engaged, cooperative communities and a happier, cohesive, cultured, productive, innovative, progressive, and prosperous nation”. In a brief paragraph on medical education, it states that the aim is to train health care professionals “primarily required for working in primary care and secondary hospitals.”
On private entities
•Successive governments have been faced with the quandary of how to quickly expand educational opportunities while simultaneously addressing the issues of quality and equity. In the field of health care, there is a continuing shortage of health-care personnel. The infrastructure required for high-quality modern medical education is expensive.
•Faced with public demand for high-quality medical care on the one hand and severe constraints on public resources on the other, private entities have been permitted to establish medical educational institutions to supplement government efforts. Though they are supposed to be not-for-profit, taking advantage of the poor regulatory apparatus and the ability to both tweak and create rules, these private entities, with very few exceptions, completely commercialised education.
•None of the three stated objectives of medical education has been achieved by the private sector — that is, providing health-care personnel in all parts of the country, ensuring quality and improving equity. The overwhelming majority of private medical colleges provide poor quality education at extremely high costs.
•Faced with this situation, the public has approached the polity, the executive and the courts to ensure equity, if not quality. The results have been patchy. On and off, there have been attempts to regulate fees, sometimes by governments and sometimes by courts. Faced with the fundamental contradiction that all governments have been complicit in violations of their own policies to ensure quality as well as equity, these efforts have not been fruitful.
•The executive, primarily the Medical Council of India, has proven unequal to the task of ensuring that private institutions comply with regulations. When the courts are approached, which issues are seen as important depends on the Bench. Some judges wish to ensure quality and equity; others give importance to points of law on the rights of private parties, federalism and such issues.
•It was in this situation that the board of governors, which replaced the Medical Council of India, as an interim before the National Medical Commission became operative, introduced the National Eligibility-cum-Entrance Test (Undergraduate), or NEET-UG, as a single all-India gateway for admission to medical colleges. It is well known, though not easy to prove, that entrance examinations being held by almost all private colleges were a farce, and seats were being sold to the highest bidder. Challenged in courts, after an initial setback, the NEET scheme has been upheld.
NEET has worsened equity
•NEET may have improved the quality of candidates admitted to private institutions to some extent, but it seems to have further worsened equity. Under any scheme of admission, the number of students from government schools who are able to get admission to a medical college is very low. With NEET, the number has become lower. The high fees of private medical colleges have always been an impossible hurdle for students from government schools, whatever the method used for admission. Allowing government medical colleges to admit students based on marks in Standard XII and using NEET scores for admission to private colleges will be more equitable right now.
•The basic cause of inequity in admission to higher educational institutions is the absence of a high quality school system accessible to all. In medical education, the situation is made far worse by the rent seeking and profiteering of the majority of private medical colleges.
It’s about political resolve
•The fundamental problem in achieving quality, equity and integrity in education, the stated objectives of the new NEP, is confusion on the part of successive governments between policy-making for human resource development and economic policy. On the one hand, the Ministry of Human Resources Development repeatedly says that quality and equity are the cornerstones of good education. On the other, the economic policies consider education a consumer good which can be sold to the highest bidder. No amount of tweaking the methods of admission can address this contradiction. Only a resolute government, determined to ensure that economic policy facilitates quality and equity in education, can do it.
📰 Growth compulsions, fiscal arithmetic
The economic situation warrants enhanced government expenditure; the policy challenge is to minimise the growth fall
•India’s growth in the first quarter of 2020-21 at (-) 23.9% showed one of the highest contractions globally. Global growth prospects for 2020 have been projected by a number of multilateral institutions and rating agencies including that for India. The 2020-21 real GDP growth for India is forecasted in the range of (-) 5.8% (the Reserve Bank of India’s Survey of Professional Forecasters) to (-) 14.8% (Goldman Sachs). The Organisation for Economic Co-operation and Development (OECD) in its September 2020 Interim Economic Outlook has projected a contraction of (-) 10.2% in FY21 for India.
•The annual projections also indicate a strong likelihood of even the nominal GDP growth showing a contraction for 2020-21. The latest data released by the Ministry of Statistics indicate a Consumer Price Index (CPI) inflation rate of 6.7% for August 2020. The average CPI inflation during the first five months of 2020-21 is estimated at 6.6%. Given the injection of periodic liquidity into the system and the inflation trends, the year as a whole may show a CPI inflation of close to 7%. Since deflator-based inflation tends to be lower than the CPI inflation, it may be about 5% or less. In fact, in the first quarter of 2020-21, the GDP-based deflator was only 1.8%. If we take the OECD’s real GDP growth projection at (-) 10.2% and a deflator-based inflation of about 5%, the implied contraction in nominal GDP is about (-) 5.0% for 2020-21.
•It is true that some of us felt at one time that the economy might not do too badly because some key sectors such as agriculture and related sectors, public administration, defence services and other services may perform normally or better than normal given the demand for health, relief and revival expenditures. We had even expected that a small positive growth might be possible. The recently released national income figures for Quarter I of 2020-21 hold no such hope.
•What is most surprising in the Q1 data is that the sector ‘Public Administration, Defence and other Services’ contracted at (-) 10.3%. This means that there was no fiscal stimulus. Independent estimates show that States’ capital spending fell by 43.5%. The worsening of the fiscal deficit appears to be because of decline in revenue than increase in expenditure.
Revenue erosion
•The policy challenge for the remaining part of the fiscal year is to minimise this sharp contractionary momentum in real and nominal growth. A sharp contraction in nominal GDP growth has significantly adverse implications for the prospects of central and State tax revenues, which may both contract. In the first quarter of 2020-21, the Centre’s gross tax revenues contracted by (-) 32.6% and the CAG-based data pertaining to 19 States show a contraction of (-) 45% in their own tax revenues. This implies a negative buoyancy of about 1.65 in the combined tax revenues of central and State governments in the first quarter. Given the adverse impact of the lockdown, even the budgeted non-tax revenues are not likely to be realised. The revenue calculations of the Budget were made on the assumption that the nominal income of the country would grow at 10%. With the prospect of a contraction in nominal growth, tax revenues of the Centre would show a considerable shortfall as compared to the budgeted amounts. Some estimates indicate that the tax and non-tax revenue and non-debt capital receipts in the current fiscal may fall well short of the budget estimates by an amount higher than Rs. 5-lakh crore. The combined fiscal deficit of the Centre and the States will have to make up for the shortfall in tax and non-tax revenues, if the level of budgeted expenditures is to be maintained.
Fiscal deficit
•In order for the central government to maintain the level of budgeted expenditure and also provide for additional stimulus, its fiscal deficit may have to be increased to close to an estimated 8.8% of GDP. This consists of an estimated revised budgeted fiscal deficit of about 4% of GDP due to a lower denominator value of GDP-plus 2.5% to make up for the shortfall in tax and non-tax revenues plus 2.3% for the additionality over the budgeted expenditures in the already announced stimulus package (including the recently announced first batch of supplementary demand for grants). If one adds the Centre’s and States’ fiscal deficit, the combined fiscal deficit amounts to 13.8% of GDP. If the nominal GDP actually contracts in 2020-21, the fiscal deficit as the percent of GDP would go up further. This also does not take into account any additionality to borrowing because of the Goods and Services Tax (GST) compensation. It may be noted that the Centre’s fiscal deficit to GDP ratio for the Q1 of 2021 was 17.4%. The Centre’s fiscal during the first four months of 2020-21 as a per cent of annual budgeted target was at 103.1%.
Limits to deficit
•How high can fiscal deficit go? The International Monetary Fund, in its June 2020 update of the World Economic Outlook, estimated the fiscal deficit of India and China at 12.1% of GDP. All the other countries except the United States and a few others have a deficit lower than this. The dollar as a reserve currency has its own advantages and this benefits the U.S. Coming back to India’s fiscal deficit, there are not adequate resources to support a fiscal deficit of nearly 14% of GDP. All this will therefore require substantial support from the Reserve Bank of India which will have to take on itself, either directly or indirectly, a part of the central government debt. In the direct mode, the RBI takes on the debt directly from government at an agreed rate. It took India long to move away from the automatic monetisation of debt. It happened in the early 1990s. Even if the RBI wants to support the borrowing programmes, it should not do so directly. The indirect method is preferable as the market still sends out the signals on interest rate. In both cases, the RBI is the provider of liquidity. The indirect route is not new. The question ultimately relates to the extent of debt monetisation that may be undertaken. The country has also to guard against high inflation.
•This Fisc is caught in a serious dilemma. The economic situation warrants enhanced government expenditure. The fiscal deficit will go well beyond the mandated level — more than twice the mandated level. This has to be accepted. It appears that governments are withholding expenditure. That is not the right approach. At the same time, there is a limit to monetisation of debt. Perhaps the best course of action would be to keep the combined fiscal deficit at around 14% of GDP in the current year and find ways to finance it. This will have to be brought down gradually. It may take several years of normalisation.
