Paul Krugman & Vijay Kelkar

The Economic Messiahs

Paul Krugman

IntroductionPaul Robin Krugman is an American economist and professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics and an op-ed columnist for the New York Times. Krugman is known for his work in international economics including trade theory, economic geography and international finance, liquidity traps and currency crisis. He is the 20th most widely cited economist in the world and is ranked among the most influential academic thinkers in the US. He writes about topics

The following document is an attempt to focus on major work in

the field of Economics done bywell known economists Paul

Krugman and Vijay Kelkar

ranging from income distribution to international economics. Krugman has won the Nobel memorial prize in economic sciences for his contributions to New Trade Theory and New Economic Geography.

Krugman was born and grew up in New York. He earned his B.A. in economics from Yale University in 1974 and his PhD from the Massachusetts Institute of Technology (MIT) in 1977.

Krugman is known for his work on the New Trade theory. Earlier trade theories focussed on trade as a result of comparative advantage of countries with different characteristics. In his research paper The Journal of International Economics, 1979, he described a simple, general equilibrium model of non-comparative advantage trade. He mentioned that the two main important factors driving trade are consumer’s preference for a diverse choice of brands and production economies of scale. Economies of scale lead to imperfectly competitive markets, thus the trade can also occur between countries with similar characteristics of taste, technology and factor endowments. This model of trade was called the New trade Theory

An extension to this theory came in the form of The New economic geography, in the Journal of Political Economy, 1991.  It states that in order to realize scale economies while minimizing transport costs, manufacturing firms tend to locate in the region with larger demand, but the location of demand itself depends on the distribution of manufacturing. Emergence of a core-periphery pattern depends on transportation costs, economies of scale, and the share of manufacturing in national income. Thus the economic regions with most production will be more profitable and will therefore attract even more production. Production will tend to concentrate in a few regions, which will become densely populated and also have higher levels of income.

Krugman’s contribution in the field of International Finance has also been significant. He developed a model of payment equilibriums (Journal of Money Credit and Banking, 1980) with transactional costs to show how single currency can emerge as an international medium of exchange. He studied the portfolio approach in terms of finance theory (1981, NBER Working Papers 0651), arguing that differences in the portfolios of different countries explain why changes in the world distribution of wealth affect exchange rates.

Krugman identifies as a Keynesian. He has done much to revive discussion of the liquidity trap as a topic in economics. He recommended pursuing aggressive fiscal policy and unconventional monetary policy to counter Japan's lost decade in the 1990s, arguing that the country was stuck in a Keynesian liquidity trap. Krugman argued in The Return of Depression Economics that Japan was in a liquidity trap in the late 1990s, since the central bank could not drop interest rates any lower to escape economic stagnation. The core of Krugman's policy proposal for addressing Japan's liquidity trap was inflation targeting, which, he argued most nearly approaches the usual goal of modern stabilization policy, which is to provide adequate demand in a clean, unobtrusive way that does not distort the allocation of resources. Krugman has since drawn parallels between Japan's 'lost decade' and the late 2000s recession, arguing that expansionary fiscal policy is necessary as the major industrialized economies are mired in a liquidity trap. In response to economists who point

out that the Japanese economy recovered despite not pursuing his policy prescriptions, Krugman maintains that it was an export-led boom that pulled Japan out of its economic slump in the late-90s, rather than reforms of the financial system.

In the early 2000s, Krugman repeatedly criticized the Bush tax cuts. He argued that the tax cuts enlarged the budget deficit and worsened the income distribution in the US. He advocated lower interest rates (to promote investment and spending on housing and other durable goods), and increased government spending on infrastructure, military, and unemployment benefits, arguing that these policies would have a larger stimulus effect, and unlike permanent tax cuts, would only temporarily increase the budget deficit. Krugman has repeatedly expressed his view that Alan Greenspan and Phil Gramm are the two individuals most responsible for causing the subprime crisis. Krugman points to them for the key roles they played in keeping derivatives, financial markets, and investment banks unregulated.

Krugman has also been critical of some of the Obama administration's economic policies. He criticized the Obama stimulus plan as being too small and inadequate given the size of the economy and the banking rescue plan as misdirected; Krugman wrote in The New York Times: "an overwhelming majority [of the American public] believes that the government is spending too much to help large financial institutions. This suggests that the administration's money-for-nothing financial policy will eventually deplete its political capital." In particular, he considered the Obama administration's actions to prop up the US financial system in 2009 to be impractical and unduly favorable to Wall Street bankers.

Krugman has recently criticized China's exchange rate policy, which he believes to be a significant drag on global economic recovery from the Late-2000s recession, and he has advocated a "surcharge" on Chinese imports to the US.

In his June 28, 2010 column in The New York Times, in light of the recent G-20 Toronto Summit, Krugman criticized world leaders for agreeing to halve deficits by 2013. Krugman claimed that these efforts could lead the global economy into the early stages of a "third depression" and leave "millions of lives blighted by the absence of jobs." He advocated instead the continued stimulus of economies to foster greater growth.

References:

1. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.

2. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.

3. Krugman, Paul, 1980. "Vehicle Currencies and the Structure of International Exchange," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(3), pages 513-26, August.

4. Paul R. Krugman, 1981. "Consumption Preferences, Asset Demands, and Distribution Effects in International Financial Markets," NBER Working Papers 0651, National Bureau of Economic Research, Inc.

5. http://en.wikipedia.org/wiki/Paul_Krugman 6. http://www.krugmanonline.com/

VIJAY KELKAR

Introduction

Vijay L. Kelkar (born 15 May 1942) is an Indian economist and academic, who is currently the Chairman of the Forum of federations, Ottawa & India Development Foundation, New Delhi.

Kelkar always says that in an open society, ideas matter, so it was important to build good ideas, and to push important messages out in the public domain, even when this makes many people uncomfortable.

He has been involved in carrying forward the tax reform agenda of the 1990s, translating the intent of the FRBM Act into a concrete work plan, leading the transformation of income tax administration through innovative institutional arrangements in the form of the Tax Information Network (where the implementation was contracted out to NSDL), analyzing and championing the Goods and Services Tax (GST) and leading the 13th Finance Commission.

We will analyze his contributions to above mentioned reform programs one by one:

Kelkar Task Force and FRBM

In 1990s various tax reforms were done, but still there were fiscal problems in India. The tax to GDP ratio of India was very low in comparison to many countries all over the world.

To address this problem the government constituted two task forces under Dr. Kelkar to suggest reforms. Fiscal Responsibility and Budget Management Act(FRBM) was enacted by central government in 2004. FRBM Act aims at reduction of revenue deficit by an amount

equivalent of 0.5% of GDP after every year. Soon after enactment of FRBM, a task force was constituted under Dr. Kelkar to suggest policies to achieve FRBM targets.

The Task Force was of the view that fiscal consolidation should be revenue-led i.e. accomplished by raising revenues more than by compressing expenditure. This would also mean more revenue for the states. Apart from this, the Task Force stressed on "front loading" of tax reform i.e. getting the tax reform accomplished earlier than later. This would help us guard against possible deterioration of macroeconomic situation, both globally and nationally.

On-line tax accounting system

Under the chairmanship of Dr Vijay Kelkar the advisory group of tax reform recommended networking of Income Tax Department, Banks, RBI to facilitate the on-line transmission of details regarding tax collection/refunds between banks and Income Tax Department and RBI. The RBI constituted a High Power Committee in February 2003, under the Chairmanship of Shri B. Swarup, Member (Inv.), Central Board of Direct Taxes (CBDT) to recommend suitable measures in this regard. The High Power Committee under RBI constituted a Sub-Group on Business Processess Designing for the OLTAS(On-Line Tax Accounting System).

The Kelkar committee recommended that a single copy challan system should be implemented against the 4 challan system for tax payment which was been introduced from 1st June 2004 for the simplicity of tax payer.

The Committee constituted a Technical Sub-Committee, chaired by Shri R.N. Ramanathan, Dy. Managing Director (IT), State Bank of India and with representatives from Income Tax Department, Controller of Accounts, CBDT, RBI and IBA, to address all issues for conducting pilot studies on On-Line Tax Accounting System (OLTAS). The Sub-Committee finalized the record structure and file format for the On-Line Transmission of tax information from the collecting banks to the TIN (Tax Information Network at NSDL) and the Income Tax Department.

Two slab Income tax rate

Dr Kelker suggested drastic steps to end “exemption raj”. He proposed two slab income tax rate of 20 and 30 percent with Rs. 1,00,000 exemption limit and recommended bringing in agricultural income of non agriculturist under tax net. Kelkar recommended exemption limit to Rs 100,000, a 20 per cent tax on income of Rs 100,000-400,000 annually and 30 per cent for beyond Rs 400,000.

Analyzing and championing the Goods and Services Tax (GST)

Dr Kelkar is a very strong proponent of Goods and Services Tax in India. He believes that-

GST will bring about a phase change on the tax firmament by redistributing the burden of taxation equitably between manufacturing and services. It will lower the tax rate by broadening the tax base and minimizing exemptions. It will reduce distortions by completely switching to the destination principle. It will foster a common market across the country and reduce compliance costs. It can provide a fiscal base for local bodies to enable them to fulfill their obligations and will facilitate investment decisions being made on purely economic concerns, independent of tax considerations. It will promote exports. GST will also promote employment. Perhaps, most importantly, it will spur growth.

Pointing to an issue that was raised in the 2003 FRBM Task Force report, he urged to broaden the tax base by including the construction and housing sectors in GST tax base, either immediately or during a subsequent phase which will result in lower tax rate overall. He also recommended the inclusion of rail sector to increase the GST tax base.

He believes that GST will help governments as they are large purchasers in the market for their own consumption and their cost of procurement will come down significantly with the implementation of GST. Also in the medium term it will result in more economically efficient production, improved competition and more importantly greater employment.

13th Finance Commission And Report Of The Committee On Roadmap For Fiscal Consolidation

Before handing over the chairmanship of next (14th) Finance commission to former RBI Governor Y. V. Reddy, Dr Kelkar headed the 13th Finance commission and submitted the report on roadmap for fiscal consolidation.

Kelkar committee emphasized on Fiscal policies, which will promote investments, which will fuel growth and provide employment to the growing young population.

He said that India is facing an alarming situation of twin deficit and to avoid major crisis of the likes of 1991 we should take tough actions and should phase out subsidies in about 3 years. No action would result in fiscal deficit of 6.1% against the budgeted 5.1%.

He recommended review of direct tax code and emphasized on improving tax-GDP ratio.

Kelkar committee also emphasized on innovative divestment processes and investing the generated money on infrastructure and employment generation programs.

References:

1. S. Venkitaramanan(2004). Kelkar report on FRBM — Discussion at various levels a must, Retrieved from: http://www.thehindubusinessline.in/2004/08/09/stories/2004080900310800.htm

2. Ajay Shah(2011). Vijay Kelkar 3. Retrieved from: http://ajayshahblog.blogspot.in/2011/08/vijay-kelkar.html4. Naunidhi Kaur(2002). A pro-rich report5. Retrieved from:

http://www.frontlineonnet.com/fl1924/stories/20021206004902800.htm6. S. Venkitaramanan(2004). Kelkar Task Force on Indirect Taxes — The difficult

challenge of tax reform 7. Retrieved from:

http://www.thehindubusinessline.in/2004/08/02/stories/2004080200260800.htm8. Sanjiv Agarwal(2004). Report Kelkar's Tax Reforms - A critique9. Retrieved from: http://www.manupatrafast.com/articles/PopOpenArticle.aspx?

ID=0f928327-5759-46d6-8a51-761648d2899c&txtsearch=Subject:%20Direct%20Taxation

10. Vijay L Kelkar, Indira Rajaraman, Sanjiv Misra(2012). Report Of The Committee On Roadmap For Fiscal Consolidation

11. Retrieved from: www. finmin.nic.in/reports/Kelkar_Committee_Report.pdf