Fiscal Space For Achieving The Millennium Development Goals and Implementing The Tenth

Fiscal Space for Achieving the Millennium Development Goals and Implementing the Tenth
Plan in Bhutan
Author(s): M GOVINDA RAO and ANURADHA SETH
Source: Economic and Political Weekly, Vol. 44, No. 35 (AUGUST 29-SEPTEMBER 4, 2009), pp.
51-59
Published by: Economic and Political Weekly
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[SPECIALARTICLE
^^^^^^^^^^^^^^^^
???
the Millennium
Fiscal Space for Achieving
the
Goals and Implementing
Development
Tenth Plan in Bhutan
M GOVINDA RAO, ANURADHA
SETH
__
The paperaddresses the issueof financingthe
a small Himalayan kingdom with just over

6,40,000 people has been making rapid strides in eco
Bhutan,
achievementof theMillenniumDevelopmentGoals ina

sustainable manner
ina small, low income and
theexamplebeing Bhutan.The
landlocked
country,
analysis shows that although mdg financing isnested
will be needed
withintheplanoutlay,significant
efforts
to ensure adequate
resources for financing the plan and
smoothening thewide year-to-year fluctuations in

revenues and expenditure flows. The paper explores
theavailability
ofadditionalfiscalspace usingthe
to identify
fiscaldiamondframework
policyand
institutional reforms needed
for raising revenues from
tax and non-tax sources, improving productivity

from public spending through reprioritisation,
accessing external grants and borrowing from
domestic and foreign sources.
nomic
recorded
and human
progress
growth
impressive
The
development.
country has
over 7% per annum
to average
rates
during the last two decades and during the Ninth Plan period
over
rate was
the growth
(2002-07),
has
This
9%.
transformed
the economy frombeing one of the leastdeveloped, toonewith a

per
of $1,200.
income
capita
ment
in human
There
has
development
been
a steady
as well.
indicators
improve
From being
a low
human development countrywith a human development Index

(hdi) value of0.550 in 1998, the countryprogressed toa medium
countrywith a value of 0.600 in 2006. Among the southAsian
countries, only India and Sri Lanka have marginally higher
values
of hdi.
1 Introduction
In this small, landlocked countrywith limitedmarket penetra
tion, economic
of natural
The
hydropower.
sive and
has mainly
growth
more
resources,
narrow
basis
led to uneven
has
been
based
on the exploitation
and export
generation
particularly,
of growth
has been
distribution.
capital
However,
of
inten
the govern
ment has used the resources generated throughtheseactivities to

spend
on
social
to make
infrastructure
impressive
in
progress
human development. The government is fully committed to

achieving
the Millennium
Development
streaming
it into the Tenth
Plan
the mdg
Mainstreaming
cost estimate
detailed
outlays
with
mdg
resources.
exercise
to quantify
with
the Plan
for achieving
needs
required
The
by main
(mdgs)
requires
the mdgs,
out
and working
government
the resource
Goals
(2008-13).
a
making
alignment
of Plan
to raise the
strategies
a detailed
costing
undertook
requirements
for achieving
seven
of the eightmdgs, namely, reducingpovertyand hunger,securing
universal primary education, promoting gender equality and

women's
empowerment,
child
reducing
improving
mortality,
maternal health, combating the spread of communicablediseases

and ensuring
environmental
(rgob
sustainability
2007a).
This study attempts to quantify the fiscal space needed to

achieve themdgs and identifythemeasures to finance themdgs
in a sustainablemanner. Section 2 brieflyoutlines the analytical
M Govinda Rao
{jngr@nipfp.org.in) iswith the National Institute

of Public Finance and Policy, New Delhi. Anuradha Seth
iswith the Regional Centre forAsia and
(anuradha.seth@undp.org)
the Pacific, United Nations Development
Economic& Politicalweekly
DDES
august
Programme.
29, 2009
frameworkemployed to determine the potential for expanding

the fiscal
space.
Section
quirements
for achieving
lay. Section
4 explores
3 summarises
mdgs
and
the overall
compares
the role of domestic
vol xliv no 35 51

itwith
financing
re
the Plan out
revenue mobilisation.
SPECIALARTICLE
Section
5 analyses
cost estimates,
and
, ? _r-=
the scope
explores
assistance
official development
capita
6 considers
the role of
Report,
7 examines
the
scope forborrowings (both external and domestic). Section 8

deals with the possibility of enhancing fiscal space through
private
sources
Section
9 presents
direct
(foreign
investment
households).
(fdi),
remarks.
concluding
to participate
in a productive
in the market
manner.
As
argued byAmartya Sen (1999:86), "povertymust be seen as the

deprivationofbasic capabilities ratherthanmerely as lowness of
incomes".
Capabilities
and poverty,
freedom
Bhutan
avocations.
cratic
and
society
provide
freedoms
to work,
freedom
has
been
ensuring
freedom
from hunger
from increased
investment
will
freedoms
choice
Investment
21.9%.
(16.6%).
Analysis
that the country
shows
Bhutan's
economy
and
generation
to broaden
is narrowly
export
has made
impressive
base
and
the mdgs
to the population
depends
resources
on
Development
(rgob
(2006-2015)
Nevertheless,
of the government
as
in sectors
Needs
Goals:
has
on education,
reflected
mapping
sources
Costing
from both
to countries
available
finance"
(Seth
2007; Chambas et al 2006; World Bank 2007). The four sides of

the diamond represent differentmechanisms by which fiscal
can be enhanced.
space
nues
These
from tax and non-tax
opment
assistance
are
(ii)
grants,
reve
domestic
(i) enhancing
sources;
including
increasing
official
loans
concessional
devel
and
debt
relief; (iii) reprioritising

expenditures, includingenhancing their
allocative and technical efficiency,and (iv) financing public
by borrowing
expenditures
domestic
from
and
international
forMDGs and Investments in
3 Financing Requirements
the Tenth Plan
MDGs
2006
between
Needs
and
2015,
Report
the country will
estimated
(2007)
need
that
to invest approxi
mately Ngultrums (Nu) 113.110billion ($ 2.5 billion) in 2005

prices
to
the mdgs
implement
(Table
interventions
1). These
estimates
identified
represent
for
on
account
for
shows
also
analysis
investment
capital
1Agriculture
2 Education
requirements
18,748.03
4,507.59
14,240.44
16.58
27,600.33
2,807.26
24,793.07
24.40
Gender
3
21.92
24,794.42
9,910.41
14,884.01
458.17
183.23
274.94
0.41
7,366.27
4,017.78
3,348.49
6.51
8Waterand sanitation
Cross-cutting
sectors
1,343.98 1.19
1,343.98
Health
4,5,6
Energy
10,820.04
5,332.75
5,48/.29
9.57
Transport
19,162.69
16,641.82
2,520.87
16.94
2,816.25
Capacity
Grand total
100
to Bhutan's
According
1,260.76
100
67,104.60
40%
60%
Five-Year
Tenth
2.49
1,555.49
113,110.19 46,005.58
Percentage
Source:RGoB?00/a.
or 43.8%
billion
tures and
Plan,
of the total esti
of the two estimates
indicates
rable
sectors
in general,
that
Of
achieving
average
course,
even
are considered,
outlay
can more
outlay
162%
for the compa
on
includes
expenditures
are not a part of the mdg costing.
outlay
which
if only
sectors
2 (p 53)
is almost
for mdg
requirements
plan
and programmes
Nevertheless,
for in
allocation
in Table
presented
Plan
the Tenth
than the investment

period.
The
transport.
of the
26%
another
22%.
is about
A comparison
that over 26%
and
and
the remain
constitute
up shows
such as energy
sectors
sectors
to social
break
administration
is for general
for current expendi
allocated
investments
sector-wise
The
frastructure
higher
has been
on capital
spending
ing (56.2 %).
in social
investments
the proposed
and
investments
plan
economic
are higher
by 93%. This is trueofboth currentand capital components the

formerby 39% and the latterby 177%. Thus, the overall plan
achieve
As
than
cover
adequately
the
requirements
to
within
the
the mdgs.
the mdg
Plan
financing
investment,
are
requirements
the mdg
financing
nested
issues
are
subsumed
under broader issues surroundingthe financingof the TenthPlan

itself. The
pattern
that the domestic
Assessment
The
Table 1:Total Resource Needs Estimates for InterventionstoAchieveM DGs

(2006 15,Numillion)
MDG
RecurrentPerCentof
Total
ThematicClusters
Capital
Total
Tenth
sources.
Bhutan's
and
expenditures
allocation
20073:103).
of "public
needs.
Nu 62.06
constitutes
public and private
a predominant
on sectors
impacting on mdgs.
part of spending
the
is a diagnostic
tool that assesses
The fiscal space diamond
major
four sectors
these
Collectively,
investment
mated development outlay of Nu 141.692 billion (rgob 2008b),
and
sources
of finance
of potential
sources - though, public spending
and
to release
The financingstrategyforachieving themdgs entails a com
prehensive
it is
(transport
achieving
in the Bhutan
Assessment
constitute
for health,
will be 40%.
the
to disseminate
rural development
the ability
for investment
Millennium
the government
by spending
as a whole.
on
mainly
(dependant
of hydroelectricity),
and agriculture
the benefits
Report
based
the developmental
healthcare
infrastructure
7Environment
strides inhuman development and it iswell on track to achieve

most of themdgs (rgob and undp 2005). Even as the growthof
and
needs
that almost 60% of the total investmentwill be required for

recurrent
Bhutan has tried to align the national planning process with

the mdgs.
for
needs
of total mdg
89.4%
even more meaningful.
formation
sector
for the education
investment
to the
sectors.
for the social
the highest
energy) are estimated at 26.5% followedby agricultureand rural
of
this trans
make
of total
to 2015. According
from 2006
are
needs
requirements
a quarter
almost
into a demo
itself
transforming
these
investment
development
2 Mobilising Resources: Analytical Framework

It isverywell recognised that inclusivegrowth requiresbuilding
capabilities of the poor and disadvantaged sections to empower
them
The
10 years
for the next
efficiency
and Section
(oda)
Nu 17,815($394) per capita annually or Nu 178,146 ($3,937) per
for improving
Section
reprioritisation.
expenditure
mdg
with
its consistency
trends,
expenditure
and
total requirements
the Tenth
of financing
can
resources
of Nu
65.6
finance
billion,
Plan,
however,
just about
external
46.3%
assistance
shows
of the
grants
of around Nu 56 billion to help meet itscapital expenditures in

theTenth Plan (ibid: 63). The pattern of plan financingshown in
Table 3 (p 53) shows that total plan outlay during theTenth Plan
is estimated
52august
at over
28%
29, 2009
of gross
domestic
vol xliv no 35

GEES
product
(gdp)
and
:^^êeee?ee^^
ARTICLE
domestic revenues are expected to contributejust 46% and the

are supposed
resources
remaining
to accrue
from external
the Plan
outlay
in the case
26%
ing net
relative
in the case
of recurrent
to gdp will
on social
to 19.6%
from internal
to increase
continue
in 2012-13.
The
have
to come
at about
will
which
borrowing
in 2008-09
is estimated
finance
remaining
and external
revenue
external
from 18.2%
4.5% ofgdp fortheplan period.
the sectors.
in both
expenditures
For the
in 2012-13.
In contrast,
by the government.
lending
of educa
tion and about 35% in the case of health and it is particularly

marked
to 22%
in 2008-09
period as a whole, the ratio is estimated at 22.4% which will be

required to financeabout a half of the total expenditure includ
(19% ofgdp) and borrowings.

While the Tenth Plan investmentoutlays in infrastructure,
higher than
agricultureand rural development are significantly
mdg cost estimates,
the corresponding
sectors are lower. The shortfall is over
from 25% of gdp
decelerate
grants
4 Domestic
Revenue
Mobilisation
Table 2: Cost of FinancingMDGs Compared with TenthPlan Outlay (Numillion)
MDG
Thematic
Clusters
ofTenth Domestic
resource mobilisation
for
PlanOutlay
Excess
Tenth
is the most stable and
Expenditure
Requirements
Proposed
Current Capital
Total
Current Capital
Total PlanOutlay
rev
reliable method
of financing
the mdgs. Domestic
over
MDG
can be mobilised
enues
either from tax or non-tax
Costing
Agriculture
6,533.6
2,024.7
8,558.4
6,193.6
7,947.3
14,140.9
65.2
sources.
Education
In general,
11,690.7
1,102.2
12,792.9
1,945.8
7,452.0
9,397.7
-2.6.5
tax-gdp
ratios
Gender
612.4
7,113.4
Health_
Environment
Water and sanitation
0.0
612.4
5,220.6
12,334.0
254.8
,175.0
429.8
1,978.2
1,617.9
3,596.2
Transport
57.9
67.9
-88.9
4,469.7
*
Na
*
*
Na
8,040.1
-34.8
transactions.
profit
3,748.4
4,809.8
8,558.2
69.4
1,193.7
7,958.1
9,151.8
12,747.2
16,356.4
29,103.6
218.0
understanding
794.1
*
734.2
*
1,528.3
*
1,210.3
5,015.6
6,225.8
307.4
and non-tax
16,203.9
20,791.9
36,995.8
Na
Gen administration
This is a matter forconcern and calls for reprioritisationinplan

to achieve
the mdgs.
on edu
Specifically,
expenditures
on general
administration,
cation and health in the Plan will have to be significantlyen

hanced
the outlay
by reducing
to some
port and
across
extent,
capacity
of the mdgs
component
several
sectors
building.
is concerned,
and adequate
trans
far as the gender
As
the Plan
is spread
outlay
incurred
expenditures
mates.
The
comparison
in 2006-07
with
inTable
presented
the mdg
3 shows
cost esti
that total expen
diture in 2006-07 was almost double what was required to spend

for mdgs.
mdg
Both
recurrent
cost estimates
sectors,
except
and
by a significant margin.
in the case
exceeded
expenditures
capital
of recurrent
the
In terms of individual
in the health
expenditures
sector, actual
the required
exceeded
level. Of course,
expenditures
in the case of energy, a significant volume of investment ismade
by
the corporation
The Tenth
and
therefore, actual
outlays are estimated

to the mdg investment needs
compared
is lower.
expenditure
at Nu
Plan
billion
1,41,692
for the Tenth
Plan
as
period
of Nu 54,056 million. Thus, the plan outlay is higher than the

mdg
investment
needs
by
162%.
The
financing
of mdg
needs
clearly fallwithin the resource envelope of theTenth Plan. The

shortfallin the outlay fromthemdg costing seen in the case of
education
and health
reprioritisation.
This,
fiscal challenges.
developing
present
too can be overcome
however,
Raising
landlocked
significant
sectors
does
resources
country based
not mean
through proper
that there are no
for development
on natural
in a small
mainly
resources
challenges.
Table 4 (p 54) presents some importantfeatures in thepattern

of financing
the Tenth
Plan.
First, domestic
GQQ3 august
be very
strong
an
from both
tax
on
of the tax system depends
as
extent
the
and structure
such
structure
level and
As
income
to increase.
in many
part of the growth
levels
in many
the
the informa
increase,
tax revenues
countries
of these
is outside
of tax rates and
including
this relationship
However,
Asia-Pacific
sector which
informal
mobili
entails
hence
comes
economies
of the formal
may
not
a sizeable
because
tax net.
from the
It is possi
ble to increase the fiscal space formdgs by reformingthe tax

system
the structure
both
administration.
is available.
outlay
The feasibility
of financingthemdgs is reinforced
by comparing
actual
expected
impor
enterprise
of resource
mobilisation
of tax administration
tion system.
are also
public
sources.
of factors
of gdp growth,
quality
low
productivity
a number
Grandtotal
162.1
32,805.2 21,251.1 54,056.3 62,060.2
79,632.0 1,41,692.2
*denotes thatthe
are includedunderotherheads.
expenditures
Na notavailable.
GNHCommission,
Sources: (1)TenthFiveYearPlan (Draft)
2008.
February
Millennium
Goals:Needs,Assessment
andCosting
November2007.
(2)Bhutan
Development
Report(P006-15),
is an
sector
activities,
of revenue
have
of non-formal
of fiscal space
revenue
Revenue
countries
instrument
important
the generation
5,052.5
Capacity building
priorities
in commercial
is an
sation,
income
as the public
Further,
tant player
2,418.3
2,634.1
Energy
10.0
3,5/0.4
M
low
to the dominance
due
29, 2009
revenues
are
likely to
4.1
Sources
In Bhutan,
and non-tax
nues,
of Domestic
the government
sources
37% was
tax sources
(Box
collected
(Table
Revenue
mobilises
i, p 54).
domestic
In 2006
from tax revenues
5, p 55). Direct
taxes
revenues
from tax
of total domestic
and
63%
contributed
reve
from non
23%
of total
Table 3: Actual Expenditure Compared toMDG Costing 2006-07 (Numillion)

Public
MDG
Cost _
Fxpenditure
Current Capital
Total
Current Capital
Total
Social Sector
Education
814.77
2,468.74
1,502.37
297.27
1,799.64
922.35
768.326
1,690.68
1,130.68
221.21
1,351.89
819.76
development
Transportand communication
271.95
(road and bridges)
668.89
303.89
1,154.75
Health
1,653.97
Agricultureand rural
Energy
Good governance and
capacity building
Water and sanitation
Environment
48.71
1,488.65 850.864
2,031.67 2,303.62_
392.89
441.6
1.98
393.08
1156
628.50
1,354
1,021.5/
na
na
Na
123.20
98.47
221.67
na
na
Na
3/.65
3/3.85
611 5
na
na
Na
01.56
1.56
General administration3,609.75
2,185.44 5,795.19
Total expenditure
7,636.23 7,529.88 15,166.11 4,041.39 3,0/9.18 7,516.59
*
Notseparately
given.
Na notavailableseparately.
Sources:(1) Bhutan
Millennium
Goals:Needs,Assessment
andCosting
Development
Report
(?006 IS),PlanningCommission,
ofBhutan,2007.
RoyalGovernment
(2)BudgetDocuments,RoyalGovernment
ofBhutan.
vol xliv no 35
53

=-,~
ARTICLE =^==êe^~eê=t=e^:z_
SPECIAL
revenues
domestic
and
the contribution
of
^-
,_--r =r_
taxes was
indirect
Customs
14.3%-Over 67% of direct tax collections or more than 15% of

revenues
domestic
from corporation
accrued
income
tant
as
business
(bit)
and
(pit)
in domestic
3.7%
and
1.7%,
far as
indirect
cerned,
sales
are
duty
excise
two most
impor
In 2006,
Export tax
Excise duty
The modern tax system in

is of recent vintage.
Bhutan
the taxes were
to i960,
mainly in kind due to the pre

of an
dominance
informal
the absence
and
economy
orchestratedrevenuemobilisation policy.With the launch of the

in 1961, taxes were
Five Year Plan
levied on land, business
income
was in 1989which
and consumption.The first
major tax reform
was
revisited
Act was
In 2000,
in 1992.
In 2001,
enacted.
the Sales
the Income
Tax, Customs
Tax Act was
and Excise
External
2330
revenue__2l-99_
18.24
revenue_
India
21.19
revenues
48.59
20.72_19.93
27.75
26.81_27.30_
48.50
48.02
47.69
Netjending^_-3.48
Total exp + net lending
45.11
45.61
-2.89
Overall fiscal
position_-178_-3.45
Financi
ng_178_3.45
-071
Project tied loans_
Project tied ext borrow
-2.75
-2.55
45.27
45.13
-4.22
-0.48
4.22_5J
-0.60
3.65
3.07
Resource
gap_2.49
Fiscal deficit
(%GDP)_1.5
Resource gap (%
GDP)_2.09
Source:EstimatedfromRGoB2008a.
-5.19
3.83
19.13
27.80
49.11
-2.37
46.74
_2719_
48.39
-2.77
45.62
-5.15_-4.10
-0.30_-O06_-0.40
3.62
3.58
3.35
3.17
3.23
3.28
3.29
3.22
3.93
4.82
5.49
5.21
4.50
2.78
3.30
3.93
375
3.05
3.17
378
4.16
3.79
3.40
Corporate incometax (cit) is leviedat 30% on thenet profitsof

the companies
incorporated
under
the Companies
Act, 2000
and reg
with theMinistryofTrade and Industry(mti).There are 65

istered
of themare in
unitsregistered
under thecit and themost important
thepublic sector.The bit is leviedon all unincorporatedbusinesses
mti
with
registered
with
collection
is small. Only
an
investment
exceeding
Nu
10,000.
Although thereare 10,088 units registeredunder bit, the revenue

10% of the bit payers
are assessed
on their
actual business incomesand the remaining90% pay a presumptive

tax based
on the factors such as tax paid during
the past
three years,
import-export
figures,tax paid by similarunits in similarlocations
and
third party
information.
come from various
Personal
sources. The
income
exemption
tax is collected
limit for pit isNu
and thetax is leviedat fourratesrangingfrom 10% to 25%.
of the tax remains

the poor
and
narrow.
adminis
Excise
non-tax
contribution
is
duty
revenues
almost
two-thirds
to revenue
comes
constituting
A major
cov
nar
information
limited
countries,
developing
predominant
on
in
10,000
the
including
is a major
Power
Hydroelectric
In fact, sharp
contributor.
in certain
of
from
Corporation.
years
in non-tax
increases
to the commissioning
correspond
of
major hydroelectricprojects.
4.2
Level, Growth and Composition of Revenues
Table
The
in Bhutan
during
a sharp
from
1995-96
16% during
from
from different
to 2006-07.
in the annual
deceleration
revenues
rate of aggregate
revenues
of
the period
shows
analysis
rate
the growth
5 presents
sources
5_ __4/10_
9_5j
other
revenue.
companies
21.31
25.92
services
to the tax. The
subject
the base
rendered
selected
Almost 60% of the domestic revenues are generated by the

dividends and profitsof government companies and theHydro
electric Corporationwhich generates and exports electricityto
41.52
Capital exp_
Total exp_
are
domestic
22.39
43.33
Repayment of debt_3.77
are
have
in many
Unlike
in Bhutan
ex
and
levied on alcoholic beverages ranging from20% to 60%.
22.03
Total revenue_
Recurrent
exp_22.67_21.69
duty.
been
In addition,
goods
system
19.52_19.56
39.94
41.59
21.85_20.42
18.86_19.20
42.16
41.06
has
the transferof profitsand dividends fromvarious government
enacted.
Table 4: Pattern of Financing the TenthPlan (%of

GDP)_ _
2010-11 2011-12 2012-13 2008-13
_2008-09 2009-10
Domestic
countries.
domestic
row and
capacity
this
tended to imports from all
revenue_
trative
Initially,
on
levied mainly
from customs
on,
erage
of a clearly
duty.
it contri
revenue.
exempted
Later
corporations
. Other non-tax revenue
Royalty
Other indirect tax
collected
from
importsfromIndiawhich were
Import duty
Prior
in 2006,
tax was
sales
. Transfer of
profits
Interest on loan from
tax
Sales
impor
customs
from
domestic
departments
Dividends
Indirect Tax
the three
of its imports
buted just about 1.4% of the
fees and charges

Capital revenue
. Revenue
from government
Other tax revenue
and
in Bhutan
Administrative
income tax
Personal
revenues.
of domestic
Tax
Corporate income tax

Business income tax
they respec
7.6%
a bulk
Therefore,
Non-Tax Revenue
Direct
con
and
contributed
tively,
5.2%
tax
the
tant ones.
are
Revenues
Tax Revenue
As
respectively.
taxes
Domestic
were
revenues
duty are
excise
sources
Bhutan
exempt
tax
income
personal
taxes.
Boxi
tax
income
tax and
sales
duty,
indirect
India and under a bilateral treaty the imports from India are
tax. Contri
butions of other major taxes

such
:
'^-ryy
growth
to 12%
1995-2001
during 2006-07 mainly due to the deceleration in the domestic

revenues fromabout 20% during the firstsub-period to less than
revenue
12% in the latter. The

grew
at about
steadily
particularly
to gdp
the gdp
the latter period,
during
sources,
by contrast,
rate was
faster
growth
revenue
aggregate
to 26.7%
in 1995-96
from 43.9%
declined
from foreign
12%. As
relative
in 2002-03
be
fore recoveringto 38.8% in 2006-07 (Table 6, p 55). In fact, the

revenue-gdp
average
higher
ratio
Bhutan's
was
significantly
2001-07.
on
dependence
1995-2001
during
than the ratio during
sources
external
and
is high
this
shows large year-to-year fluctuations (Table 6; Figure 1,p 55).

Within
domestic
generation
the share of non-tax
revenues,
of power
and
its export
to India
revenue
from the
is overwhelming
and
thisvaries on thebasis of commissioningofprojects.As a ratioof
gdp,
18.9%
revenue
domestic
in 2005-06
before
declined
from
increasing
23.9%
sharply
in 1999-2000
to 24.3%
to
in 2006-07,
due to the commissioning of the Tala hydropower project. The

decline
in domestic
nues, which
revenues
as a ratio of gdp
54 august
29, 2009
was
due
declined
vol xliv no 35

to deceleration
from 10.8%
in tax reve
in 1999-2000
GDBB Economic& Politicalweekly
to 9.1%
in 2006-07.
enues
too
from
13.1%
showed
but
2005-06,
^Growth
Revenue
Source
decline
steady
to 8.7%
in 1999-2000
Rate of Revenues inBhutan (%perannurrO_

to 3.8%
in
recovering
marginally
PerCentof
to 2000-01to
1995-96
revenue
from
2006-07.
Similarly,
2006-07 Domestic
2000-01
Revenue
tax declined
from 1.4% in
business
11.34
Tax
37.38_
revenue*_2CK67_
to
In the
in 2006-07.
2003-04
0.9%
9.08_23/M_
Diremax*_26j?_?__
case
income
of personal
tax, wide
Corporate income tax_22.63_8.74_J5i54_
are mainly
fluctuations
Business
year-to-year
6.68_?-55.._
incometax_36lL_
Table
rev
non-tax
The
in
of
the commissioning
Tala hydropower project increased

the revenues
to reach
the
During
gdp
by 6.8 percentage
15.2%
ratio
last decade,
to 10.8%
1996-97
in 1999-2000,
fluctuated
in 2003-04
in
7.5%
and
8.3%
in 2001-02
10.5%
(Figure 2). In 2006-07, itdeclined by

three
percentage
to
points
9.2%.
(i) the tax ratio instead of
Thus
with
increasing
one
to
year
(iii) there is considerable untapped
enhance
the revenue
13.33_4.95
11.99_273
13.63_6.22_18.33_
22.32
_
26.57 __
2001-02
(1.4%).
is considerable
976^_0.08_
revenues
of the gdp
4.57%
This
shows
that there
to increase
potential
ifa proper
istrative and
12.01_
TotaI
11.97_
revenue_15.92
*Growth
ratesare from1997-98.
NationalRevenueReport,RGoB(variousyears).
Source:Estimatedfrom
age points.Reforms in the tax system

could
15.19
14.56_2J3_
Foreign grants_12.08
to 3-4 percent
amounting
potential
Royalties_15.76
Dividends fromother companies
62.62
12.13_
almost
was mobilised and reachingthat level

will enhance the revenueby 0.7
itself
percentage points. Similarly,there is
considerable untapped potential in
business tax as theprevailing0.9% of
gdp iswell below the level reached in
Capital revenue_-0.07_32.54_174
Total domestic
revenue_19.79_11.91_1J?_0_?_0_?
and
another,
21.JI0_5.15_
12.66
fromCHPC_
Transferof
profits_-0.16
Other non-tax
revenue_-7.66_
shown a decline, (ii) the tax ratiohas

shown a veryhigh degree ofvolatility
from
tax itself, even
of corporation
in 2000-01,
14.94_759_
Exciseduty_5_14_
Non-tax
revenue_119.15
Administrative fees and charges
Dividend
has
development
the case
[mportduty_34_14_13.54_1.44
but
between
due to administrative efficiency.In
13.78_173_
PersonaJ incometax_44.94
Indirect
tax_13.28_-15.15_14.26
Sales
tax_18.65
tax
the
from
increased
thereafter
points
in 2006-07.
structure, admin
information
systems
are
in place.
put
It is not just
the non-tax
revenues
that show a high degree of variation

from one year
produc
in indirect
the fluctuations
to another.
Among
the
from excise
tivityconsiderably.
High dependence on external sources and large in domestic
dutyhas been very high.While in 2005-06, this source contrib
revenues
uted
pose
serious
in planning
problems
and
implementing
expenditure programmes including the financing ofmdgs. The

revenues
ratio of domestic
in 1995-96
20.2%
to gdp,
to 23.9%
after
steadily
increasing
in 1999-2000,
Direct
62%
were
taxes
often more
than five percentage
to 23%
contributed
of total tax revenues
in Bhutan.
Among
points
revenues
of domestic
the direct
to gdp.
of gdp
declined
revenue
The
corporations.
in 2000-01
from 4.6%
to 3.2%
in 2004-05
before
4.3
8.6
11.6
20.2
23.7
43.9
7.5
12.6
20.1
19.6
39.8
9.2
13.2
22.4
13.4
35.9
1999-00
6.1
3.2
8.0
14.4
22.4
20.6
4.7
10.8
13.1
23.9
2000- 01
6.5
3.0
9.5
2001- 02
6.5
4.0
10.5
2002- 03
5.7
4.6
10.3
7.8
2003- 04
5.7
27
8.3
8.9
2004- 0^
_5.2
2005- 06
5.5
4.0
4.2
9.4
9.3
4.7
10.2
8.7
2006- 07
15.2
56
3.5
9.1
Source:NationalRevenueReport,RGoB(variousyears).
EXES august
46.0
50.6
43.0
62.6_
52.1
17.9
41.7
57.2
18.5
41.7
16.4
38.6
18.1
8.6
26.7
67.8
17.2
18.3
35.5
48.5
18.8
32.3
_13.5
18.9
_17^6_36.4_51.8
24.3
14.5
38.8
58.1
137_23.2
11.7
22.3
29, 2009
was
just
Figure 1:Trends inDomestic and ForeignRevenue inBhutan (%toGDP)
557_
57.6
_
62.7
35,0 "Domestic Revenue

\
25.0
.^
?1-??-^
15.0-\-
* *
*U-^^W'^""
ForeignRevenue
5.0 .-;-,-;-r-r-r-1-i-;
1999-2000
2001-02
2003-04
1997-98
1995-96
"
.?'
20.0
2005-06 7006-07
_Domestic
*mwi.
l..
Non-TaxRevenue
Revenue
L'''a,?..'l?Ai
'""^mm^
10.0LL"^-l'
50
Table 6: Trends inRevenues inBhutan

(1995-2007)_
Years
% ofTaxRevenue
toGDP
%of
%of
Total
%of
%of
Direct Indirect Total Non-TaxDomestic ForeignRevenue Domestic
Tax
Tax
Revto Revto
Revenue
Tax
Revto
Total
GDP_in
_GDP
GDP_
199596_4.3
199697_44_3.1
19975.2
98_
1998-99
4.8
the contribution
year,
25.0-?
taxes, over
the tax as a ratio
from
particularly
Figure2: Trends inDomestic Revenue inBhutan (% toGDP)
or about
whelming contributionis fromcorporationtaxwhich ismainly by

the state-owned
in the next
of gdp,
in
2002-03. It remained broadly at that level until 2005-06 when it

increased sharply to 24.3% following the commissioning of the
Tala hydroelectricproject. Similarly,foreignrevenues relative to
gdp declined steadily from23% in 1995-96 to 8.6% in 2002-03
before recoveringto 14.5% in 2006-07 (Table 6). In fact,year to
year changes
2.4%
taxes,
from
to 18%
declined
taxes,
^Tax Revenue _
1995-96
1997-98
1999-2000
2001-02
2003-04
2005-06 2006-07
1.25% (Table 7, p 56). The reason forwide variation fromyear to

year has to be found in the fact that a substantial portion of ex
cise duty isfrom refundsfromIndia and these are very irregular.
In 2006, for example, these contributed to 38% of excise duty
collections and this is because, the refunds for2002 and 2003
were paid in 2005 and 2006.
One possible source of additional revenue is tobroad-base the
sales tax.At present, the sales tax is leviedmainly on importsand
very few domestically produced goods and services.The levyof
goods and services tax on both domestic production and imports
at a flatrateof 5% could enhance the revenue substantially.
When
supportedby a good informationsystem, this could help in the
better
compliance
of pit, bit as well
as excise
duty. However,
the
levyof a comprehensive goods and services tax should be well

planned before it is implemented.
vol xliv no 35 55

SPECIAL
ARTICLE
=.~
_?-
j^ff^^-^
Thus, suggested reformsin the tax system both indirect and

-
taxes
indirect
of gdp.
4%-5%
can
an
create
cannot
these
Indeed,
additional
fiscal
by about
space
be achieved
and,
overnight
tobe successful, theyhave to be well planned and implemented.

Yet, expanding the base of sales taxes through the gst and
the administration
strengthening
and
information
system
200320042005-
04_1^69_0.52
0.21_
0.02
06_1.81_0.43
20060.35
07_1_85_
Source:BudgetDocuments,RGoB,variousyears.
effective exchange
of information
can be a highly
ments
from state-owned
accrues
the dividend
from hydro
power
4.23
tax depart
from
profits
commissioned
of dividends
of profits. A bulk
of
trans
The
corporations.
tax and
for example,
2006-07,
the profits
Sometimes,
are
which
enterprises
income
corporate
lotteries.
are
dividends
segregated
included
under
of the newly
profits
from newly
to be
yet
into
this.
In
Tala
commissioned
Hydro Power Authority (thpa) amounting toNu 737 million or

1.8% of gdp was
about
included
under
this head.
5 Efficiency and Pro-Poor Expenditure Switching

The scope forenhancing fiscal space throughpro-poor expendi
ture switchinggenerally appears to be considerable. However, it
is difficultto specifyex ante the size of the potential gains from
reallocation
expenditure
Gupta
et al (1997)
efits of education
and health
improved.
the sectors where
and
demonstrate
spending
can be
efficiency
that the marginal

decrease
rapidly
ben
in situa
tionswhere the initial level of spending ishigh. This impliesthat

governments
ment
exercise
should
expenditure
caution
on education
before
expanding
and health when
govern
the initial
level
of spending isalready high.
Expenditure switchingand efficiency-enhancingreformscan

create fiscalspace througha reallocation of resources fromlower
prioritytohigher priority(sub) sectorsor throughproductive ef
ficiencygains. The potential for additional fiscal space varies
with development forthree related reasons: (i) the scope forex
penditure switching is determined by the size of the public sec
tor; (ii) production inefficiencycan be addressed through long
term capacity development programmes that limit low income
countries'
ability
to secure
fiscal
space
through
active
expendi
ture switchingpolicy over the short run; and (iii) addressing

political
economy
constraints
to reforms
is critical
to improve
distributiveinefficiency(undp 2007).
Improvementin the effectivenessof public expenditure calls
forreformsinboth policies and institutions.Policy reformshelp
to direct
expenditures
according
to
the
was
much
in the case
sharper
envisaged
priorities.
to improve
attempts
ment
system
ment
of the government
in the country.
This
management.
ferof profitsismainly fromtheRoyal Monetary Authority (rma)

and
rate of expenditures
growth
from 20%
of the latter, from almost
23% during the firstsub-period to 8.3% in the second. The sharp

decline in capital expenditures is a matter of concern though in
part, this is due to the corporatisation of hydroelectricprojects
which are financedoutside thebudget.
strategy.
mainly
transfer
in the annual
The Public Finance Act (pfa) approved by theNational Assem
the various
comprise
and
5.1 Trends inPublic Expenditures

In keepingwith the trends in revenues, therehas been a sharp
bly in June 2007
revenue mobilisation
in Bhutan
enterprises
0.02
3.47
between
successful
revenues
Non-tax
1.25
program
accountability.
decline
4.00
greater
3.02
_0.44_0.01_2.66
0.01
4.66
They
of expenditure
to ensure
4.31
0.01
4.59
2.40
and monitoring
are also necessary
during 1995-2000 to 10% during 2001-06 (Table 8). Although the

growthofboth currentand capital expenditures decelerated, the
Indirect
Tax
036
05_176_0.72_175__0.01
in the implementation
mes.
deceleration
Table 7: Trends in IndirectTax Revenue (%ofGDP)

Tax Excise
Taxes
_ Salestax Import/Export
Duty OtherIndirect
_
1995-96_JL42_0.41_2/12
20001.70
0.45
__
01_
_0.65
2001- 02
1.57
_0.47_1.94_
20020.44
2.49
_
03__1.65
and
Reforms in institutionshelp to smoothen the processes and help
The
the public
Act
to sustainable
commitment
finance manage
the commit
demonstrates
and
fiscal
transparent
is further enunciated
in the draft
constitution (to be adopted in 2008), which seeks to provide

additional improvement in public finance management by
furtheringthe fiscaldecentralisation process by devolving fiscal
to district
from the central
powers
level administration.
6 Official Development Assistance

Generally, financingneeds for the mdgs call for a significant
in oda.
increase
to address
is the need
important
Equally
issues
of aid predictability and earmarking of resources by donors.

Indeed, effective implementationof theTenth Plan will require
aid flows tobe stable and predictable and development partners
can assistwith thisbymaking multi-year aid commitments.This
is importantbecause large and unexpected shiftsin thevolume
of aid can disrupt the planning process and macroeconomic
of the economy
management
financed
India has been
Traditionally,
The
programme.
velopment
were
wholly
erode
the effectiveness
development
of aid
augmented
receives
external
organisations,
from
From
19 individual
donor
bilateral
from
from
India.
as many
countries
(since
technical
the Third
other
the support
assistance
and
for the de
donor
principal
financial
of India.
assistance
agencies
Bhutan's
first two five-year plans
with
implemented
the government
from
and
expenditures.
Plan
and
onwards,
multilateral
Currently,
as
1961)
assistance
Bhutan
15 multilateral
(bilateral
assistance),
Table 8: Actual Expenditure Compared toMedium-term Expenditure Framework

(MTEF) (2002-03to2006-07)_
PerCentof MTEF
Sectors Actual
PerCentof PerCent
of
Expenditures
MnNu
MnNu
toMTEF
Total
Total Actual
Health and
14,54470
education^_
Debt
services_
services_
87.48
8,135.5_11.62
98.73
_6'360_^9_46.04_
22,844.02_37.45_
19,036_27.19_J_20.00_
1,849.01
48.12
_
_3.03 3,842.29_5.49
Others 1,432.88
6.81
_
_2.35_4,764
J0.08_
Total_6L001_.54
Sources:(DRGoB,2004.
(2)BudgetDocumentsofRGoB,variousyears.
56 august
13.17
2375
7,154^^10.22_7_9_.5_6_
5.83
90.21
4,079
6.03
8,032.11
Energy
j?'927-90___
General
16,627
9.33
Agriculture_5,691.42
Human
settlement_3,679.50
Commu^cations^ndjroads_
23.84
29, 2009
100.00
7_0,000_ 100.00
vol xliv no 35 HSB3

87.15
_ ^_ ^^
four
institutions
financial
International
Bank,
Kuwait
Fund
Fund
for Arab
non-governmental
ance,
of the aid
terms, with
grant
are:
receives
in soft
assist
aid
food
(almost
Budgetbalance incgrants
and
is on
80%)
a
that have
loans
in a sustainable
from
4% to 5% revenue will have to be generated
- tax
in order to finance the plans
and non-tax,
manner
(Figure 3).
Figure 3: Budgetary Balance as ofGDP (%)
technical
in projects,
that Bhutan
the balance
211).
1996,1:
by Bhutan
investment
support,
budgetary
loans. Most
received
sources
domestic
some
and
Development)
(rgob
organisations
and The
Development
Economic
or an additional
World
Bank,
Development
for Agricultural
and
of assistance
Types
(Asian
SPECIALARTICLE
1968
high
1994
199^N^?
1996S///|998ns>s?X)0
2QD7 /ooV
grant element.
The Department ofAid and Debt Management (dadm) under

the Gross
National
external
for managing
Commission
Happiness
the Debt Management
borrowings,
-20 -
is responsible
(gnhc)
m -.-v^-.-v-._.v.
1
Budgetbalanceexc grants
Divi
sion under theDepartment of Public Accounts (dpa) within the

debts.
dpa
of finance,
ministry
is responsible
to the Debt
According
Review
issued
by the dpa,
2007
Report
ability Analysis
external
for managing
Portfolio
Sustain
and Debt
the government
of India isby farthe largestdonor holding a major chunk of debt

at 61%, while
stock
bilateral
hold n%
donors
Generally,
multilateral
Bhutan
agencies
(rgob
receives
2007d:
loans
28%
hold
and
other
29).
for capital
Table
investment.
Project_
93-27Z__
65.504
Basic skilldevelopment
65.504
13.077
ADB total
78.581
Rural telecom network
IFAD
13.077
1.3
171.858
16.8
26.974
2.6
303.273
3_?^273_
Agriculturemarketing development
World
Bank
6.4
93.277_
26.974
Austrian Basochu hydropower project

Danida
29.6
124.225
124.225
53.76
53.76
Decentralised ruraldevelopment
12.1
5.3
Education
30.5
312A75_312.475
Ruralaccess and urban development 30.895
World Bank total
30.895
-
397.13
Grand total
_
Source:(RGoB2008a).
599.936
__
at $820.85
mated
of gdp.
100%
the years,
there has
tute concessional
rgob
The
loans
receives
been
an
3.0
397/13
423.524
increasing
for grants
1023.46
38^8
100.0
to substi
tendency
et al 2007).
(Osmani
international
market
present
is more
terms which
in nominal
of outstanding
value
than
debt
is
assistance
(a)
(grants)
the
is external.
92.6%
remaining
the
Of
total
loans, 66% is from India, other bilateral loans constitute7% and

20%
constitute
ismultilateral
In other words,
loans.
almost
in cash
includingprogramme and project tied grants, and (b) in kind.
euro
and
28%
account
loans
for 11% of out
loans.
standing
Detailed
in Bhutan
of debt
analysis
that an overwhelm
shows
ingproportion of the loans 66% of the present value of debt

has
been
The
contracted
servicing
sector
for the energy
of these
loans
is matched
borrowed
from India.
by revenues
generated
the "enclave
projects,"2
from the export of electricity to India and this does not contri
bute to debt distress.The debt sustainabilityanalysis of themin
istry of finance
that after excluding
shows
Bhutan passes the sustainability testcomfortablyand public debt

remains within
rgob
The
the sustainable
has
over
threshold
a conservative
adopted
the fiscal deficit
restricted
consistently
Over
Borrowings
million
The
and
7.4%
just
loans
91
93i277
Road and urban development

_
Domestic
61% of debt is rupee denominated, special drawing right (sdr)
Tota[ _%
_Cash_Kind_
Rural electrification
and
the remaining
Table 9: Sector-wise ExternalAssistance (Loan) Received during the FY2006-071

(Nuin
million)
Lender^_
External
The outstanding debt of Bhutan at the end of June 2007 is esti
estimated at $993 million. The domestic component of this is
shows the kinds of projects funded by development partners.
ADB
*.
.*
the next decade.
fiscal
at lower
policy
and
has
than 5% of gdp.
The pattern of plan financingfor theTenth Plan shows that the

average financinggap is estimated at 4.5% and fiscaldeficitat
just about 3%. According to theNational Budget Report (2007),
the government's
policy
the maintenance
emphasises
of sound
84% and inkind 16% of the total receipts, respectively.It is also
public financeby adopting a budget thatattempts to: (i) avoid at

least operating deficits; (ii) maintain the overall budget deficit
to a maximum of 5% of gdp; (iii) cap the pay budget at sustain
able ratios of current expenditures; (iv) keep outstanding debt
seen
at sustainable
the
During
financial
the rgob
2006-07,
year
grant amounting
to Nu 6,000
the total revenues
or 14.5% of gdp. The
that the levels
during
million
of foreign
from 2001-02
the period
and
this constituted
total
33%
in cash amounted
grant
are much
to Bhutan
grants
received
to 2006-07
than during
to
to
lower
1995-96
to 2000-01.
From
the socio-economic
the viewpoint
of financing
that at
it is important
mdgs,
least the present level of foreigngrantswill have to continue to

keep the borrowing
years, on average,
whereas,
Plan
the pattern
assumes
ing gap
through
of 4.5%
at a sustainable
foreign
19.1%. The
of gdp
borrowing
grants
of plan
level.
were
financing
plan
table
from domestic
which
and
last five
16%
of gdp
than
envisaged
financing
on an average
During
less
the
for the Tenth
assumes
has
foreign
a financ
to be
sources.
covered
Thus,
either theprevailing level of foreigngrantswill have to continue

Kconomic& Politicalwkkkly EQ33
august
29, 2009
(v) keep
levels;
external
service
debt
ra
to exports
tiosat low levels; (vi)maintain themomentum of investmentin

potential
Given
the nascent
for domestic
debt
financial
Nu
year
1,856.28
paying
(vii)
invest
and
in industries
employment
markets
in Bhutan,
is fairly
limited.
Currently,
as compared
small
June
ending
million.
the cost of one
Of
2007,
this Nu
aircraft
to external
domestic
1,753 million
for Drukair.
the scope
domestic
debt. During
borrowing
was
Domestic
with
generation.
state of financial
borrowing
is relatively
and
revenue
sectors;
for significant
borrowed
lenders
the
was
for
are
theNational Pension and Provident Fund and theBhutanHealth

Trust
Fund.
vol xliv no 35 57

SPECIAL
-?êeeeeee^^
ARTICLE-==
Estimating the contributionof households for financing the
8 Mobilising Finance from Non-Public Sources

So far,the discussion on enhancing fiscal space has focused on
identifyingsources ofpublic finance.However, the roleof thepri
ways thatdo not impose user fees forpoor households. In other
vate
words,
sector
can
be
in financing
important
and
development
should be leveraged since contributionsfrom the private sector

can
lower the investment
burden
of the public
sector.
8.1 Foreign Direct Investment and Other Private Flows

Private capital flows include commercial flows (portfolio invest
ment, bank lending and fdi) and non-commercial flows like

workers'
migrant
remittances.
The
investment
foreign
is looked
upon as providing a beneficial boost to private sector develop
ment
and* industrialisation,
through
easier
access
to capital,
tech
nology and markets. It is also expected to contributeto theGross

National Happiness, through creation of additional economic
benefits,inways, which are consistentwith thekingdom'sgoal of
its environmental
preserving
and
cultural
The
ethos.
mdgs
that cost-recovery
requires
the design
be
programmes
of cost-recovery
should
programmes
in
designed
be based
on the followingtwo principles:

(i) User fees do not contribute to the cost of primary school
adult
education,
ity, basic
programmes,
literacy
nutritional
healthcare,
improving
gender
and
interventions,
equal
transport
infrastructure.
(ii) Richer households bear some of the cost for agricultural

interventions
live-stock),
water
in food
(especially
school
secondary
supply and
security,
and
agro-processing
education,
energy
and
provision,
sanitation.
In Bhutan,health and education services are publicly financed

and free formost households. No policy changes are envisaged
thatwill alter this in themedium term.
broad
objectives of encouraging foreigndirect investmentin the coun

tryare to: (i) supportprivate sector development; (ii) generate
9 Policy Recommendations
and Conclusion
The rgob has adopted themdgs as a development strategyand
has attemptedtoalign the five-year
plans to thiseffect.Ithasmade
employment; (iii) facilitateskill development; (iv) promote capi

tal inflow; (v) fostertransferof technology; (vi) expand market considerable progress in economic conditions and in empowering
access and internationaltrade; (vii) enhance convertibleforeign people throughhuman development and iswell on tracktoachiev
exchange earnings; and (viii) broaden potential comparative ingmost of themdgs. The outlay fortheTenth Plan is significantly
advantages. These will be administered by imposingon foreign higher than the required expenditures formdg as assessed in the
a minimum
investors
and
for cottage
competition
foreign
investment
size,
so
small
enterprises;
that
is no
there
integrat
ing sector policies and priorities and adopting comprehensive
fdi rules and
These
regulations.
rules and
are appli
regulations
cable in the manufacturing and service sectors including

sectors.
financial
In the manufacturing
the minimum
sector,
size of investment
(totalproject cost) is$1million, ofwhich the foreigninvestorcan

hold up to 70% of the equity.The minimum size of investment
(total project
in the services
for activities
cost)
sector
is $500,000,
ofwhich foreigninvestorcan hold up to 70% of the equity.

All foreignexchange transactionsmust be routed throughthe
normal
channels.
banking
will
There
on
be no restrictions
local
borrowingby foreign investorsin Bhutan. The legislations such

as the Sales Tax, Customs and Excise Act of the Kingdom of
2000
Bhutan,
2001
thereto
and amendments
At present,
Tax
Income
and
Act
of the Kingdom
shall apply
on
its policy
fdi and
private capital flows.This isbeing done in the contextof formu

latinga revised trade and industrypolicy.According to the gov
ernment,financingfortheTenth Planwill not be affected inany
meaningful way on account of private capital inflowsor signifi
cant
in fdi in the medium
increases
8.2 Household
Itwas
noted
term.
types
of user
fees paid
by house
holds go directly to the governmentbudget. However, thereare

some
categories
of user
that are not routed
fees
through
(water
charges
serve
charges
that are to be considered
financing
to finance
for the mdgs.
charges,
the government
some
of the mdgs.
electricity
charges)
yet, these
budget
It is these
in the discussion
needs
in plan
financing.
an exercise
is essentially
are nested
in the
The pattern of financingtheTenth Plan shows that there is a
resource
gap of about
of gdp. Realising
4.5%
the revenue
targets
indicated in the Plan financingtable and keeping the uncovered

gap at a sustainable
resource
in mdg
financing
level are
important
faced
challenges
term.
in the medium
Itmust, however, be noted that the Plan outlay isnotmerely

mdg
with
concerned
sectors. However,
by over
160%
includes
several
exceeds
additional
the mdg
costing
considerable
implies
essentially
reprioritisation.
the plan outlay on edu
is necessary
also because
sectors
fall considerably
and health
cation
and
financing
the fact that the outlay
Reprioritisation
short of mdg
costing
estimates.The shortfallis over 26% in the case of education and

about
in the case
35%
and
education
of health.
the shortfall
Furthermore,
is par
latter
on household
sectors.
health
of mdgs
achievement
Therefore,
would call for reprioritisationin plan priorities towards educa

tionand health sectorsby compressingoutlay on general admin
to some
istration and
extent
transport.
One of the major shortcomings of the financing system in

Bhutan is the high degree of volatility in the revenues.High de
on external
of India
government
that some
of mdgs
financing
Tenth Plan outlay and therefore,findingthe fiscalspace formdgs
pendence
Financing
earlier
Thus,
marked in thecase of recurrentexpendituresunderboth

ticularly
to fdi.
is revising
the government
of Bhutan,
estimates.
costing
variations.
revenues
are
However,
and
in the medium
external
revenue
will
be necessary
External
donors
will
have
Government
ance
of Bhutan
at the prevailing
Additional
require
resource
significant
58august
irregular
reasons
the major
to finance
grants
to year
sourcing
the mdg
to support
and
from
refunds
term, continued
to continue
through
excise
for large year
of
needs.
the Royal
concessional
assist
level.
mobilisation
from
the
tax revenues
will
reforms on both the structure and administration
29, 2009
vol xliv no 35

13359 Economic& Politicalweekly
--
^
In the case
of the tax system.
of pit,
in revenue
improvement
col
lectionwill have to be achieved both by reformingthe structure

and by streamlining
administration.
the prevailing
Indeed
tion limitforthe tax isextremelylow (Nu 10,000). There isa case

that limit to Nu
for increasing
of assessees,
large number
This, while
100,000.
tax collection
not reduce
will
much
and
revenue
pro
to 2006-07
2002-03
SPECIAL
ARTICLE
sectors.
ment
from mtef
as well
as
in some
of both
to plan
has helped
shortfall
aggregate
and
social
important
in different
programmes
expenditure
in respect
the attempt
Nevertheless,
a significant
that there was
shows
expenditures
expenditures
out a
leaving
expenditures with actual expenditures for the period from

in actual
exemp
economic
and
imple
season
avoid
sectors,
ductivity is by streamliningadministration including instituting
alityand make the spendingpattern smoother.

Although on thebasis of aggregatevolume ofdebt,Bhutanmay
the information
be considered
The
base
system.
At present,
goods
and
and
broadening
ring in greater
to rev
stability
The
coverage
narrow
is extremely
projects,
rate
as well
produced
food
on
of 5%
as
In
articles.
addition,
added
services,
There
domestically
can
items
be
tax.
and
dealers
up
added
tax (vat)
provision
system with
revenues
by
It is also
dealership.
information
puterised
to voluntarily
other
and
system
tax departments
improving
tax
opt for regular
important
to a
the
exchanging
could
com
information
significantly
The
compliance.
value
to institute
to administer
col
the bit.
The attemptsby thergob to introducetwo-yearrollingbudget

and Medium Term Expenditure Framework (mtef) have helped
to enhance
alise
NOTES
1
but much
efficiency,
the mtef
in different
remains
sectors.
to be done
comparison
The direct disbursement fromGoi for the Tala

hydropower project (THPP), which is a turnkey
project, is excluded from this statement. How
ever, it is included in the statementof outstanding
loans where actual outstanding debt of the
government is ascertained.
Enclave projects arc those projects that are
expected to become self-financingonce brought
on-stream such as the energy sector loans
financedby government of India.
REFERENCES
ADB (2007): "Kingdomof Bhutan: StrengtheningPublic
FinancialManagement",AsianDevelopmentBank: 20.
Chambas, Gerared et al (2006): "Assessing Fiscal
Space in Developing Countries", Concept paper
commissioned by UNDP, CERDI.
Gupta, Sanjeev, K Honjo and M Verhoeven (1997):
"The Efficiencyof Government Expenditure: Ex
periences fromAfrica", IMFWorking Paper 153.
Osmani, S R, B B Bajracharya et al (2.007): TheMacro
economics of Poverty Reduction: Case Study for
Bhutan, UNDP, Thimpu.
RGoB (1996): EighthFive-YearPlan (1997-2002), Plan
ning Commission, Thimphu (Thailand: Keen Pub
lishingCo), I: 211.
(2004): "Poverty Reduction Strategy Paper: A
BSCS
august
29, 2009
scope
careful
a conserva
in adopting
resources
for augmenting
-
investments
for private
in a strategic manner.
resources
for
by charging
Itmay
particularly
foreign
to aug
also be necessary
fees on the households
for consum
-ing some of the public services particularly those thatbenefit

relativelybetter off sections of society and thosewhich are of
non-merit
good
nature.
Although the mdg financingneeds are covered within the

Tenth Plan outlay,and mdg financingpattern iswell within the
of feasibility,
tions both
lected fromgoods and services tax (gst) should also be usefully

employed
ment
realm
increase
information
has been
is considerable
investment
500,000
rgob
The
environment
turnoverNu 2.5million could pay a simplifiedtax at 1%of their

turnoversand can be asked to keep simplifiedaccountswithout
tax credit and with
and
financingmdg related expenditures by creating an enabling
on unprocessed
exemptions
level of Nu
test comfortably
the sustainability
passes
Tenth Plan also shows that theaverage financinggap is4.5%.
The exemption limitforthepaymentof goods and services tax
can be kept at turnover
Bhutan
next decade.
tax system
of sales
Reform
sumptuary/carbon
extra
sus
tive fiscalpolicy and has consistentlyrestrictedthe fiscaldeficit

at lower than 5% of gdp. The pattern of plan financingfor the
and
goods
debt
at subsequent
and value
imported, with
to a separate
subjected
all
a detailed
country,
public debt ratios remain within the threshold throughoutthe
should proceed by levyinga general goods and services tax at a

uniform
stressed
imports and a few domestic

on domestic
of commodities
in the tax base.
included
to be a debt
tainability analysis shows that after excluding the enclave
it could
the tax is levied on
services.
is not
stages
and
productivity
enues.
production
is narrow
tax
of the sales
revenue
enhance
to enhance
The way
burden.
administrative
reduce
reforms
tomobilise
are necessary
larger volume
in policies
of resources
and
and
institu
to improve
efficiencyinpublic service delivery.Reforms in the tax systemas

indicated in this reportcould help to enhance domestic revenues
significantly.
management
Much
and
remains
control
to be done
systems.
to improve
Further,
there
expenditure
is considerable
to operation
scope fortheparticipationof private sector in supplementingthe

government efforts to provide public servicewith significant
of the mtef
impact on mdgs.
Cover Note to the Ninth Plan Main Document",

D o Planning,MoF: 57.
RGoB (2006): Annual Audit Report 2006, R A Author
ity,RAA.
(2007a): Bhutan Millennium Development Goals:
Needs Assessment and Cost ingReport (2006 -2015):
GNH Commission, GNHC.
(2007b): National Budget: Financial Year
2007-08, MoF, Thimpu.
(2007c): Public Finance Act of Bhutan, Dept of
Public Accounts, MoF, Thimpu.
(2007d): Public Debt ofBhutan for theYear Ended
June 200/: Debt Portfolio Review and Debt Sus
tainabilityAnalysis, Debt Management Division,
Department of Public Accounts, MOF.
(2008a): Annual Financial Statements of theRoyal
GovernmentofBhutan for theFinancial Year ended

30 June 2007, D 0 B a Accounts,MOF.
(2008b): Tenth Five-YearPlan (2008-2013), Draft,
Vol 1,Main Document, GNH Commssion, Bhutan.
RGoB and UNDP (2005): MDG Progress Report for
Bhutan (Thimpu: Ministry of Planning).
Sen, Amartya (1999): Development as Freedom (New
York: Alfred A Knopf).
Seth, Anuradha (2007): "National Financing Strate
gies forAchieving theMillennium Development
Goals", Discussion Paper, Regional Centre for
Asia & Pacific (Colombo: UNDP).
World Bank (2007): Fiscal PolicyforGrowth and Devel
opment: FurtherAnalysis and Lessons from Coun
tryCase Studies, Report of theDevelopment Com
mittee (Washington DC: World Bank).
-
For the Attention of Subscribers and

Subscription Agencies Outside India
Ithas come toour notice thata largenumberof subscriptionsto the /W fromoutside the countrytogether
with
the subscriptionpayments sent to supposed subscriptionagents in Indiahave not been forwardedto us.
We wish to pointout to subscribersand subscriptionagencies outside Indiathatall foreignsubscriptions,
together
with the appropriateremittances,

must be forwardedto us and not to unauthorisedthirdparties in India.
We take no responsibility
whatsoever in respectof subscriptionsnot registeredwith us.
Manager
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Fiscal Space For Achieving The Millennium Development Goals and Implementing The Tenth

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Fiscal Space for Achieving the Millennium Development Goals and Implementing the Tenth

This content downloaded from 121.52.153.182 on Thu, 10 Jul 2014 13:56:59 PM

The paperaddresses the issueof financingthe

a small Himalayan kingdom with just over

achievementof theMillenniumDevelopmentGoals ina

ina small, low income and

resources for financing the plan and

smoothening thewide year-to-year fluctuations in

for raising revenues from

tax and non-tax sources, improving productivity

over 7% per annum

the economy frombeing one of the leastdeveloped, toonewith a

human development countrywith a human development Index

ment has used the resources generated throughtheseactivities to

human development. The government is fully committed to

it into the Tenth

of the eightmdgs, namely, reducingpovertyand hunger,securing

universal primary education, promoting gender equality and

maternal health, combating the spread of communicablediseases

This study attempts to quantify the fiscal space needed to

{jngr@nipfp.org.in) iswith the National Institute

frameworkemployed to determine the potential for expanding

the role of domestic

This content downloaded from 121.52.153.182 on Thu, 10 Jul 2014 13:56:59 PM

the Plan out

scope forborrowings (both external and domestic). Section 8

argued byAmartya Sen (1999:86), "povertymust be seen as the

that the country

2007; Chambas et al 2006; World Bank 2007). The four sides of

from tax and non-tax

relief; (iii) reprioritising

forMDGs and Investments in

the country will

mately Ngultrums (Nu) 113.110billion ($ 2.5 billion) in 2005

of the total esti

of the two estimates

for the compa

than the investment

that over 26%

for current expendi

ing (56.2 %).

by 93%. This is trueofboth currentand capital components the

under broader issues surroundingthe financingof the TenthPlan

that the domestic

Table 1:Total Resource Needs Estimates for InterventionstoAchieveM DGs

mated development outlay of Nu 141.692 billion (rgob 2008b),

The financingstrategyforachieving themdgs entails a com

strides inhuman development and it iswell on track to achieve

that almost 60% of the total investmentwill be required for

Bhutan has tried to align the national planning process with

even more meaningful.

for the education

for the social

energy) are estimated at 26.5% followedby agricultureand rural

2 Mobilising Resources: Analytical Framework

for the next

Nu 17,815($394) per capita annually or Nu 178,146 ($3,937) per

of around Nu 56 billion to help meet itscapital expenditures in

This content downloaded from 121.52.153.182 on Thu, 10 Jul 2014 13:56:59 PM

domestic revenues are expected to contributejust 46% and the

4.5% ofgdp fortheplan period.

tion and about 35% in the case of health and it is particularly

period as a whole, the ratio is estimated at 22.4% which will be