A fast-paced study on India's public finances

In 1776, when Adam Smith laid down his canons of taxation, the idea was simple: How much tax could the state extract without burdening the masses? Moreover, his concept was also an attempt at maximising state revenues. In India, a few millennia before Smith, Kautaliya had laid down his treatise of taxation, highlighting the state’s role in taxation and principles of equity. While discussions on the role of the government have raged ever since, it was only in 1958 that Richard Musgrave formalised a theory of public finance. The work has been the bedrock of theories in public finance. Musgrave’s work assumed more importance during the cold war era, as the two different ideologies collided on the appropriate role of the state. In India, the discussion on taxation has followed a similar trajectory. Moreover, governments have tried to balance taxation and fiscal federalism. One example of this is the goods and services tax (GST) regime, which has recently completed five years.

In that regard, M Govinda Rao’s work is one of the few that tries to formalise the route Indian public finance has taken since independence and its current trajectory. Dr Rao, a notable personality in the Indian public finance space, has served as a member of many important government committees and is currently serving as councillor of The Takshashila Institution, Bengaluru. The book Studies in Indian Public Finance is divided into nine chapters starting with an overview of the public finance field and the evolution of public finance in India.

The author uses the first two chapters as base building to explain the state’s intervention, its role, market failures. It is from the third chapter that the author focuses on public expenditure in India, taxation, fiscal federalism, intergovernmental transfers, deficit and debts. Given Dr Rao’s expertise in taxation and his role as a member of the 14th Finance Commission, taxation and state-centre relations take centre stage in the book. The book follows a set pattern throughout, and if you have been familiar with Dr Rao’s writing over the years, he doesn’t deviate much from his usual style.

Each chapter introduces the issue, some historical context, and the evolution toward the current scenario. Finally, Dr Rao presents his concluding remarks at the end of each topic. The concluding remarks are kept succinct. For instance, in the case of the chapter on GST, Dr Rao starts with the evolution of India’s indirect tax system towards GST from value added tax, and gives examples of its implementation and evolution in other jurisdictions before discussing the salient features of the taxation regime. He then illustrates the revenue collection in the pre-GST period and compares it with the new regime. He also discusses the distortions in the system, for instance, the multiplicity of rates and finally presents his solution. In some cases, the discussion is not as detailed, as Dr Rao brushes past many topics to explain his conclusions.

There are enough tables alongside the text to give the reader a perspective, but not enough charts and diagrams to drive home the point. In places, Dr Rao rushes through the conclusions as well, not giving enough time to explain the rationale behind the conclusion. But another perspective could be to make things as simple as possible for a layperson to understand. However, a clear explanation is still missing. For instance, Dr Rao suggests setting up a fiscal council to improve fiscal federalism, but he doesn’t explain in detail how the structure would evolve, what the composition could be, and how it shall function. He gives one example of its functioning and ends the discussion in a few paragraphs, leaving the reader in flux.

The editing from Oxford University Press is another issue. Figures haven’t been checked in places, and many typographical errors have been ignored. Dr Rao knows his audience. Having run refresher courses for nearly a decade, he knows that the book is focused on professors and students of public finance. It is also worth reading for government job aspirants and people who wish to understand the Indian public finance space.