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Updated: January 18, 2011 12:08 IST

Essays on public economics

C. T. Kurien
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Amaresh Bagchi, who passed away in 2008, was one of the foremost contributors to academic discussions on public finance as well as to the formulation of fiscal policy in our country. Among other things, he played a prominent role in the introduction of Value Added Tax (VAT). Through his published papers and as a member of the 12th Finance Commission, he also enriched our understanding of the issues involved in federal finance.

This book is a collection of essays by eminent scholars, who were closely associated with Bagchi, as a tribute to his memory. The general objective has been to take forward some of Bagchi's initiatives in the realm of public economics. Advanced students of economics will find the essays challenging and rewarding, although the general reader will have difficulty following them.

If taxation is the main element of public finance, discussions and debates about it — and even written material on it — preceded the emergence of political economy as a special branch of enquiry. Adam Smith, whom latter-day enthusiasts project as the champion of the ‘free market', devoted a substantial part of his Wealth of Nations to discussions on the role of the state (‘the sovereign' in his words), its expenses, revenues, and even debt. However, while public finance always occupied the central part of applied economics, there were serious doubts and questions about its theoretical underpinnings, particularly after ‘theory' became merely an explication of how the market works. With the spread of Keynesian economics, it became impossible to neglect the role of the state in the economy, and considerations of surplus/deficit in the (state's) budget entered as an important aspect of public finance.

Public goods

Another major input to the theoretical rationale was Paul Samuelson's 1954 paper on ‘public goods' that didn't quite follow the laws of the market because the consumption of them (take street lighting, for example, at the local level and defence at the national level) by some does not diminish their availability for others. This is to say that such goods do not come under the principle of ‘exclusion', on which the logic of the market is based. It means also that their cost will have to be met by an ‘external' agency, the state, which also has the power to impose taxes.

In recent years, the notion of publicness has come to occupy a prominent place in the literature on public finance, now more appropriately designated ‘Public Economics'. In a sense, this volume is concerned with the publicness of public goods. In a review of the literature, U. Sankar features the attempts to refurbish the concept of publicness and to emphasise its multidimensionality. Goods can be put in the public domain by public choice and it can be done at different levels.

If dumping waste on the road side is a public ‘bad', arrangements made to clear it can be thought of as a public ‘good'. Defence can be viewed as a public good at the national level. By the same token, there are global public goods (GPGs) as well. Says Sankar, “Examples of pure GPGs are knowledge, ozone restoration, reduction of greenhouse gases, biological diversity, sound trading regime, stable financial markets, and peace. All persons benefit in varying degrees…” The U.N. Millennium Development Goals of 2000 can be treated as one of the most comprehensive GPGs of our times.

Relying on this approach, Ehtisham Ahmad and Nicholas Stern examine effective carbon taxes (part of environmental taxes) and public policy options. It involves designing appropriate instruments in terms of the carbon content of different goods and activities and evaluating the effects on people in different circumstances.

Treating primary education as a public good by public choice, Arnab Mukherji and Anjan Mukherji discuss whether allocation of public funds results in more days of instruction.

Fiscal systems

Another major area in public economics now is fiscal federalism. Federalism here denotes not only the formal constitutional relationship between governments at different levels (the Centre and the State, for instance) but all patterns of multilevel fiscal systems, including fiscal relationships between the government and state enterprises in planned economies.

Such relationships have different nuances in planned economies, transitional economies, and mixed economies because the institutional mechanisms for the allocation of finances and resources are different. Govinda Rao makes a comparative study of such situations by examining the budgetary systems, controls over prices, and a host of other related factors.

Mihir Rakshit's critical study of the Fiscal Responsibility and Budget Management Act (FRBMA), 2003, merits special attention. Rakshit insists that static targets for deficits are inappropriate when the economy is faced with business or agricultural cycles. On the whole, the essays open up many new areas for study and research and constitute a fitting tribute to one of the pioneers in studies on public economics in India.

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