How could Environmental Fiscal Reforms help India?

Economy Jul 20, 2021

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Despite a large decline in tax revenue, the government announced the pandemic-related stimulus package, with the fiscal deficit for FY 2020-21 projected to be 9.5% of the GDP, and is estimated to be 6.8% for 2021-22. Sustained health financing in India remains a challenge in maintaining fiscal discipline. According to data provided by the World Health Organization (WHO), the percentage of the total population where the household expenditure on health is  greater than 10% and 25% of the total household expenditure.  17.33 % of the population in India  made out-of-pocket payments and this percentage was higher in rural areas as compared to urban areas. This gives the importance to look for alternate sources for health financing in India. As climate change is globally concerned, introducing Environment Fiscal Reforms can be of great potential in generating revenue as well as for preserving the Environment.

There are several forms of environmental regulation, such as economic planning, command and control, cap and trade and environmental tax(eco tax). As of now, India  primarily focuses on the command-and-control method to tackle pollution. Eco tax is a tax enforced on activities that cause harm to the environment. Eco tax can be used as an alternative method for health financing, provided it is well planned and designed. Environmental tax reforms generally involve three complementary activities:

i) eliminating existing subsidies and taxes that have a harmful impact on the environment

ii) restructuring existing taxes in an environmentally supportive manner

iii) initiating new environmental taxes.

Taxes can be designed either as revenue neutral or revenue augmenting.In case of revenue augmenting, the additional revenue can be used for the provision of environmental public goods or can be directed towards the overall revenue pool.

The success of Eco tax broadly depends upon credibility, transparency and predictability. The Eco tax rate has to be equal to the marginal social cost that arises from the negative externalities associated with the production, consumption or disposal of goods and services. The implementation of an environmental tax in India will have three broad benefits: fiscal, environmental and poverty reduction. The Eco tax can be implemented in the travel sector by imposing tax on vehicles oriented towards fuel efficiency and GPS-based congestion charges. It can also be imposed on fuels which generate energy and also, on waste generation and use of natural resources. The revenue generated from Eco tax can be used for the health sector and  public services . It can be used to finance research and the development of new technologies.It can also help to reduce other distorting taxes such as fiscal dividends. In the  private sector, Eco tax may result in increased prices of goods and services. The Eco tax will also have a negligible  impact on GDP.

Thus, it is a need for India to adopt Environmental Fiscal Reforms, as it will be beneficial to regulate the Environmental pollution and for generating resources for the finance sector.

This article has been written by Sharon John for The Paradigm

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