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Economic Highlights
Budget Tackles Larger Issues:Focus Shifts to Farm & Social Sectors, by Dr. Vinod Mehta, 2 March 200 |
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Economic Highlights
New Delhi, 2 March 2007
Budget Tackles Larger Issues
Focus Shifts to Farm & Social
Sectors
By Dr. Vinod Mehta
The Finance Minister through the
medium of annual budget has tried to shift the focus for good reasons to the
long neglected agricultural and social sectors like education and health;
allocations for these sectors have been increased that will have salutary
effect on the economy as a whole in the coming years. The message
which he has tried to convey is that the high growth rate can be sustained only
if we take along with us the agricultural sector, as 65% of the population is
still dependent on it for livelihood and by improving the skills of the
population and providing them a measure of good health.
This shift was not anticipated by
financial writers and advisers who filled pages after pages of financial
dailies with speculative stories about Finance Minister doing away with tax
exemptions, raising the tax slabs, redefining the age of senior citizens for
taxation purposes and so on. The tax
regime has more or less stabilized
and the time had come to move from “tax exemptions” to more serious concerns
which affect the average citizen like health, education and steady supply of
items of daily consumption like foodgrain, edible oil, pulses etc. This is what the Finance Minister has done
and it will be difficult for the subsequent budgets to ignore these concerns.
There has been only marginal
increase in direct taxes; education cess
has been raised from 2% to 3%, direct distribution tax (DDT) on dividends by
2.5% from 12.5% to 15%, and tax on dividends from investments in money market
mutual funds to 25%. This was not necessary; may be it has been done to please some of the
UPA partners. However, the stock market
did not appreciate this. The Finance
Minister can ignore this for the reason that investors in the stock market are
like moneylenders who are solely interested in counting the pennies they earn and
not in the larger issues that
concern the economy and the people. The
current high growth rate will ensure that the stock market will bounce back
eventually.
The reason for focusing on the
agricultural sector is that this is the only sector and very important one
which is lagging behind. The higher
growth rate of the manufacturing and the services sector cannot be sustained
without raising the growth rate of the agricultural sector. By making large allocations for the
agricultural sector the Finance Minister has tried to achieve two things over a
period of time. One, it will help put
more money in the hands of the farmers which in turn will boost the demand for
industrial products and services and, two, it will help increase the production
and productivity of essential
commodities and thus enable the country to control inflation.
The production and productivity
of various essential commodities are
known to have been falling for the past few years and the inflationary pressures building as a consequence of that. And the current inflationary situation is
partly due to our neglect. Agricultural
land cannot be increased; on the contrary there is a pressure
on the agricultural land to be diverted to industrial use and in such a
scenario we have no option but to increase production and productivity of
agricultural products and this is possible
when we provide high quality seeds to the farmers, timely credit, better
irrigation facilities, better extension services to the farmers, better prices
for their produce and so on.
This is how the Finance Minister
has tried to tackle the situation by increasing the availability of credit to
farmers, by allocating funds for drip irrigation and for recharging ground
water, by reestablishing extension services, by providing funds for the
development of high quality seeds, direct fertilizer subsidy to farmers,
insurance cover for landless
labourers, guaranteed employment in rural areas and so on.
The result of these measures,
provided they continue in the subsequent budgets, will be visible after two to
three years. For instance, India is the
largest consumer of pulses and the production of pulses is much less compared to demand. The other two countries that produce pulses
are Myanmar and Turkey. If we were to import all their production
even then we shall not be able to fully meet the domestic demand for
pulses. Either we cut down our
consumption of pulses or we increase the production, which is possible only in the medium term when we can bring
more land under cultivation of pulses and provide the farmers with high quality
seeds. This is the only way to check the
rising prices of pulses on a long term basis.
This holds true for other agricultural commodities like food grain, oilseeds,
fruit and vegetables.
Again if the income of the farmers increases they
will naturally spend a relatively larger part of it on goods produced in the
manufacturing sector be it tooth paste or soap, bicycle or scooter and so
on. The total demand for industrial
products, which is still limited to urban population will further get enlarged
leading to better utilization of the production capacities and bringing in more
profits. The companies understand this
better than investors in the stock market.
Therefore, it is not surprising
that almost all the companies and industrial houses have welcomed the budget;
some of them might have expected some reduction in corporate taxes but now they
see more sales and more profits in the coming years in the current budgetary
proposals. There are 115 million farm
families whose demand for industrial products will make all the difference.
The proposed higher allocation
for education and health care is also going to have salutary effect on the
quality of life of a large number of people, especially the ones who are almost
at the bottom of social ladder. The allocation for education is still nowhere
near 6% of the GDP but the important thing is that that Finance Minister has
taken note of the need for educated workforce.
Extension of mid day meal schemes to post primary school students and scholarships
to students of higher classes will
go a long way in checking school dropouts. Similarly, provision of health care
facilities especially for children, reduction in the prices of drugs by way of
reduction in indirect taxes, relief in taxes on contribution to medical
insurance is one important step in improving the health of the people.
In most countries expenditure on
education and health is development expenditure; it is not a strain on the
country’s finances but necessary
expenditure to maintain a relatively stable and higher growth rate. This is what the Finance Minister has
attempted to do.
It may not be the “dream budget”
in the sense of reduction of taxes but it is a budget which redefines the
priorities of the country in the context of a higher growth rate which is going
on for the last three years. It is an
attempt to bring in the sections of society which have not yet benefited from
the higher growth rate. The stock market
advisers are fond of talking of “market correction” (fall in share market) when
the stock market goes up unusually very high; in the same parlance one can say
that the current Budgetary proposals are nothing but long needed “budget
correction”.---INFA
(Copyright,
India News and Feature Alliance)
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Growth or Inflation?:PRICE RISE CAN’T BE CHECKED OVERNIGHT, by Dr. Vinod Mehta,22 February 2007 |
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Economic
Highlights
New Delhi, 22 February 2007
Growth or
Inflation?
PRICE RISE
CAN’T BE CHECKED OVERNIGHT
By Dr. Vinod
Mehta
If the choice is between growth and inflation, it
makes sense to choose growth and ignore inflation, for inflation can be tackled
through short-term measures like imports in weeks or months but if we lose
growth momentum it will take years to get back that momentum. It has taken almost fifty years to raise the
growth rate by almost three times from almost three per cent to nine per cent
today.
Inflation strains the budgets of the families with
more or less fixed incomes and
erodes their real incomes, while higher growth impacts the whole economy
bringing in more revenues to the Government, leading to creation of more
productive assets and more
jobs. An ideal situation is one where
the growth rate is higher and the rate of inflation is modest. In real life we seldom get such ideal
situations. The Governments of the day has no option but to manage the
situations with the options available to them at that particular point of time.
The rate of inflation which was about 5.5 per cent a
month back is today 6.5 per cent and may go up to seven or 7.5 per cent. But
the growth rate is more than nine per cent as of today and may even go up
further. There is no magic wand to
control or bring down the rate of inflation overnight as the people would like
it to be. There is always a time lag;
steps taken now will have the desired effect a month or two months or even
three months later. And even if the
Government does not take any corrective measure, inflation will slow down when
the supply situation improves.
Inflation is apolitical phenomenon but loaded with
serious political implications for the government in power and that too when
the elections are due. The trouble,
however, is that the Government either tends to find scapegoats where none
exist or takes inane measures which it knows fully well that it will not control
inflation overnight. The banning of
future trading in certain agricultural products is one such example; there is
no statistical evidence to show that the spurt in the prices of agricultural
products is due to future trading in commodities.
Similarly, banning of export of milk powder or allowing
freer import of certain agricultural products will show its impact after a few
months and by that time the arrival of rabi crop in the market would have
started dousing the inflationary pressures.
The international prices of essential
commodities are higher than the domestic prices as of today; therefore, does it
make an economic sense to import them to fight inflation with such measures?
In most of the developed countries inflation is
generally due to money expansion and the Central Banks try to control it by
raising interest rates and restricting credit growth; for a central banker
inflation occurs when too much money is chasing too few goods. By restricting growth of money supply
inflation can be brought under control.
The Reserve Bank of India has done precisely that in
the past one month. It has raised cash
reserve ratio twice within a month. Both
the borrowing and lending interest rates have gone up. As a result credit off take will be less and savings in terms of tenure deposits will increase.
But there has been no let up in the rate of inflation. However, any further increase in interest
rates can adversely affect the growth rate.
It is now for the Government, and not the RBI, to ensure that inflation is brought under
control. The main reason for the
increase in the price level is the mismatch between the demand and supply of essential commodities. This mismatch has not occurred overnight but
has been gradually developing for the past few years. For instance, the acreage under foodcrops has
been shrinking, productivity of agricultural crops is stagnant; there is still
no freer movement of agricultural products within the country.
In short nothing has been done to increase the supply
of essential commodities. And the
supplies cannot be increased over night to control inflation. The Government will have to take certain
decisions now so that the prices of essential
commodities remain relatively stable over a longer period of time.
This calls for large investments in the agricultural sector
and rural infrastructure. This also
calls for raising the agricultural productivity by providing farmers with
improved seeds and other inputs, timely credit, chain of cold storages, market
information and so on. A large number of volumes have been written on this
aspect in the past 50 years but the need is to implement them. Can one ask if
there is any blueprint for this?
Since agriculture requires massive
investment and it may not be possible
for the Government alone to bring all the necessary
investment. In fact, outlays on agriculture have been going down. For instance, the outlay on the agricultural
sector was 16.7% till the Fifth Plan but it came down to 11.3% in the Tenth
Plan. Private sector will have to be roped in if we have to provide a big push
to this sector. To allow private sector
to invest in a big way we may have to change our land laws to facilitate contract
farming on a big scale. It may be a good
idea to give wastelands to the private sector so that they can develop these
lands to produce agricultural products.
Apart from increasing investments in the agricultural
sector and improving rural infrastructure including supply chain, there is an
urgent need to develop techniques to detect impending shortages at least eight
to ten months before they assume
alarming proportions. In other words,
the Government must have a system in place to monitor production and
availability of essential
commodities on daily basis on a regional and national level with an inbuilt
warning system to indicate an impending shortfall in supplies of certain
commodities. This will help the
Government to take timely measures to check sneaking inflation. It should not
be difficult for a country like India
to develop a customized software for this purpose and put the system in place.
The point is that inflation or price rise cannot be
checked overnight; it can be checked by ensuring adequate regular supplies (or
what economists call supply side management).
Therefore, there is no point in sacrificing growth to control
inflation. At this point of time growth
rate should be guarded while making efforts to control the price rise. The past experience shows that inflation
automatically comes down the moment supplies improve. The current inflation will also come down the
moment rabi crops start coming to the mandis.---INFA
(Copyright,
India News and Feature Alliance)
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Stick To Economic Logic:Blind Opposition will Slowdown Growth, Dr. Vinod Mehta,15 February 2007 |
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Economic Highlights
New Delhi, 15 February 2007
Stick To
Economic Logic
Blind Opposition will Slowdown Growth
By Dr. Vinod
Mehta
As of today the economy is booming and foreign
investment firms have raised India’s
investment ratings implying that Indian business
can now raise funds abroad on easier terms.
It is perhaps the best time to take advantage of the situation and give
a big push to the decisions which are holding us back from realizing our full
growth potential. We have already missed
the growth bus once compared to ASEAN countries and China and let us not miss it again.
If Indian companies can take over companies abroad
why can’t they takeover domestic companies, especially the sick ones? Or, why
can’t we allow foreign companies to take over sick Indian companies provided
they bring in latest technology and infuse funds into it? Similarly, why not allow loss-making public sector units to be taken over by
strategic partners either domestic or international? Isn’t it strange that Tatas can take over
steel company abroad and Birlas aluminum company but we do not allow the ailing
Indian Iron and Steel Company to be taken over? Similarly, there are other areas
of concern, like the deployment and management of pension funds, creation of
mega companies, introduction of GM (genetically modified) crops, FDI and so on.
Consensus on these issues
can unleash more forces, which can have salutary effect on the economy as a whole.
Economic laws have their own logic and the governments can either
facilitate certain developments in the economic sphere or obstruct certain
developments, but they cannot change the economic logic. For investment to increase, a nation professing any ideology--capitalist, socialist, social
democratic, totalitarian, mixed economy, or religion based---the domestic
savings will have to be increased, and if they are not enough these will need
to be supplemented by foreign savings in any form -- either through borrowing
or direct foreign investment.
The partners in the UPA Government must have a clear
understanding of the issues and not
just blindly oppose any policy of the Government from their ideological
standpoint. What is the harm if the
Government proposes that five per cent of the pension funds may be invested in
equity market? Over a long-term period it will give a higher rate of return
than if all the funds were invested in Government bonds. The General Pension Scheme
for Government employees was discontinued in 2004 and replaced by Contributory Pension
Scheme but because of the opposition from some of the UPA partners these funds
have not yet been properly deployed. The
losers are the prospective pensioners and not the political leaders.
It is to be understood that every political decision
on economic issues involves economic
costs which the individuals as well as
the country as a whole have to pay. It could be less
rate of return to pensioners or non-revival of sick units or less investment or more than necessary subsidies.
Therefore, it is high time that blind opposition to any policy measure
gives way to rational thinking.
Therefore, for the good of the country's economy, it is important that
there is some broad understanding on major policy issues
relating to economy among the coalition partners as well as political
parties. Broadly speaking, there will
have to be some broad understanding in the following areas.
First of all there has to be some broad understanding
in the area of fiscal policy. The trend
in the past four years has been to progressively
bring down the direct and indirect tax rates. This has been an important
departure from the past wherein the excise and customs duty on individual items
were drastically changed in either direction every year. This has been a healthy development. The
direct tax rates have more or less
stabilized but excise duties need to be further streamlined and custom duties
aligned with the ones obtaining in the ASEAN countries
There is also a need for a broad understanding on the
quantum of subsidies which are doled out to various sectors. The old adage that "cut your coat
according to your cloth" holds true for the country as a whole. At a time when there are distortions in the
economy or there are demands on social justice, every country has to provide
subsidies in one form or the other, but this is also true that subsidies cannot
go beyond a certain point and if the economy attempts to go beyond that point
it will lead to various other problems like inflation, distorted price
structure, waste of precious resources and so on.
It is then high time that the coalition partners as
well as political parties agree that the quantum of subsidies will never exceed
a certain proportion of the national income every year and that every case of
subsidy will be thoroughly reviewed every three to five years so as to enable
the policy makers to decide whether there is a case for its continuation or not
and what are the other new areas which need subsidy.
Thirdly, there must be some broad understanding among
the coalition partners as well as political parties on disinvestment policy
towards public sector undertakings. There must be a broad agreement as to the
method of disinvestments, mergers, de-mergers and whether the Government would
hold majority shares or will have minority stakes and a kind of political
understanding that losses of public
sector units would not be made good from budgetary contributions; the public
sector must be allowed to function like commercial organizations and must aim at
earning normal profits for its investor, namely the Government.
Merger of public sector units including banks, if it
leads to reaping the economies of scale, should attract the attention of all
the political parties. If, for instance,
the merger of Air India
and Indian Airlines can help cut operating and maintenance costs of the two
airlines there is no need to keep them separate units. Hopefully, the two airlines would be merged
in the next two months. It will
strengthen the competitive strength of the airlines to compete with the
domestic private and international airlines.
A broad agreement on merger policy towards public sector units among the
various political parties will be in the best interest of not only the public
sector but also of the country as a whole.
The fourth most important area where there is a need
for a broad consensus among the coalition partners and political parties
relates to the area of foreign investments.
Foreign investments are needed for basically two reasons. First, the domestic savings are not enough to
meet the country's investment requirements and second, the technology available
within the country is obsolete and that
there are no resources to undertake such kind of fundamental and applied
research. In an interdependent world, blind opposition to foreign investment
will not make much sense.
If we don't want foreign investment for fear of some
kind of colonization then we should be prepared to raise enough resources to
make the necessary investments in
infrastructure and other industries like steel, cement, computer hardware,
infrastructure etc., and also be prepared to bridge the technological gap
between India
and other countries in the shortest possible
time. The people should be taken into confidence and told that there are the
economic costs which the country will have to pay if foreign investment is disallowed. And if the public were to calculate these
costs it would find that it would run into billions of rupees.
Every political party knows that the country, at the
current stage of development, cannot do without foreign investment. Therefore,
it would be in the interest of the country to have a broad political consensus
on foreign investment in India
and if we wish investment to go into certain areas in preference to other areas
then we will have to make investment in that area more attractive. That is how the other countries in the
Asia-Pacific region have achieved their economic goals.
In other areas like pension funds introduction of GM
seeds etc., the Government must be allowed to move fast. The GM seeds not only make crop resistant to
certain diseases and to that extent reduces the use of pesticides but also
increases the productivity.---INFA
(Copyright,
India News and Feature Alliance)
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Emergence of Indian MNCs:RUSSIAN MARKET REMAINS UNTAPPED, by Dr. Vinod Mehta,8 February 2007 |
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Economic Highlights
New Delhi, 8 February 2007
Emergence of Indian
MNCs
RUSSIAN MARKET
REMAINS UNTAPPED
By Dr. Vinod Mehta
About three years ago, I had stated in this column that the
process of liberalization and the
opening up of the economy in 1990 was now bearing fruits in the form of changed
mindset of our business community. A
large number of them, who rarely looked beyond India,
were now looking outside India
for more profits.
The acquisition of the Anglo-Dutch steel company Corus by
the Tatas recently, is the result of that new mindset and the liberal business atmosphere that is prevailing in the country. The
significance of the acquisition is that the Corus Steel is a much bigger
company than Tata Steel and that Tatas were able to sign the deal despite
competition from a Brazilian company.
Skeptics are doubtful if the Tatas would be able to turn the
Corus around because of the volatility in the international prices of steel.
The Tatas might have factored all these while finalizing the deal; one has to
wait and watch to answer the skeptics.
Incidentally, the skeptics had criticized the Tatas when they had
decided to enter the car manufacturing sector a few years ago. Any way, the
acquisition of Corus by the Tatas, have emboldened other Indian business houses to think of acquisitions abroad on similar
lines. It could be just that we are
witnessing the emergence of Indian
MNCs.
So long as the Indian industry was protected from foreign
competition the Indian industrialist was not willing to look beyond the
domestic market for earning profits. The system of licensing and controls
coupled with high import tariffs assured
them a very high rate of return on their investments, compared to the rate of
return on equivalent investments in other parts of the world. Hence, it was
natural for them to concentrate on the domestic market as it ensured them
monopoly profits.
When the economic reforms were introduced and controlled
regime gradually dismantled, a section of the business
community was apprehensive that it would not be able to face competition from
foreign companies and would be marginalized within their own country. They were
opposed to economic liberalization. These fears were natural as they had been
operating in a protected environment for almost half a century and were not
confident enough to face competition.
Now the Corus acquisition should dispel all those fears once for all.
The trend for acquiring foreign firms was in fact started by
an Indian pharmaceutical firm when it acquired a small pharmaceutical firm in USA. That was
an important achievement for the Indian business
in general and the pharmaceutical industry in particular, which had all along
been dominated by American and European drug firms.
After this initial success
of the pharmaceutical company many other big Indian companies started exploring
opportunities outside. The Tatas acquired Tetley Tea and more recently truck
manufacturing unit in South
Korea. A number of other Indian companies
are quietly acquiring businesses
outside. One could cite many such instances but these are quite indicative
enough to show the change that is occurring in the mindset of business community in India. They are not only venturing
into the countries of South East Asia and China but also in the West Asian
and European countries. Some of the old business
houses which had some presence in Thailand
and the Philippines
prior to 1990 are also expanding their businesses
in these countries.
The only country where Indian business
has not yet ventured is Russia. Before
disintegration the Soviet Union was the largest trading partner of India. At one
point of time Russia
was the biggest buyer of Indian tea, today it is Pakistan. But today Indo-Russian trade is very limited. Though there are many
investment opportunities in Russia somehow the
real investment climate is not conducive.
Apart from corruption, company laws, contract laws and
labour laws are weak in Russia. Banking
system is still primitive by World standard. The financial business in Russia
is dominated by traders and not by industrialists or manufactures. As a result,
interest on loans from banks for investment purposes is very high. At one point
of time these traders were willing to pay a rate of interest ranging from 75%
to 150% to banks for the loans. In such a climate no industrialist would
venture to set up its business.
Lately things have been improving and Indian business should be on the lookout for important business and investment opportunities in Russia.
The Russian market is very big and the
consumers there are familiar with Indian goods. For analytical purposes one can
say that there are two markets in Russia;
one for the super rich who have lot of money and are willing to pay to buy any
product. The top European and American firms are already catering to this
market. The second market is the rapidly growing for middle class. Indian business
can address the Russian middle class
and establish itself in the coming years, provided it makes proper moves.
With the competitiveness
of the Indian economy growing many of the multinational corporations are slowly
shifting their manufacturing base to India. This is not only bringing in
new technology but also a new work culture which is having salutary effect on
the economy as a whole. The job opportunities as a result are also growing.
Besides, the Indian small-scale-sector, both in the consumer
goods segment and non-consumer goods segment, is changing very fast. It is not
only coming out with new products but is also improving its existing products.
One reason for this has been that these small-scale units are now in a position
to import second-hand machinery at very low rates for the production of their
items.
Before the economic reforms they were not in a position to
get new machines as they were not manufactured in India or the cost of importing
machinery was so high that they could not afford it. It is now a thing of the
past. By importing second-hand machines
they have improved their productivity. As a result, there is a sea change in
the attitude of the small-scale-sector and many of them are giving good
competition to even multinational corporations operating in India
especially in the FMCG segment.
In the Tata-Corus deal the only losers have been the Indian
banks, both State-owned and private. First, the Indian banking laws do not
allow financing of foreign acquisitions and secondly, the Indian banks are not
big enough to finance such deals. This
should be one important reason for carrying out financial sector reforms and
for encouraging emergence of mega-banks.---INFA
(Copyright,
India News and Feature Alliance)
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Avoid Fiscal Contradictions:Separate Budget from Policy Measures, by Dr. Vinod Mehta, 1 February 200 |
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Economic Highlights
New Delhi, 1 February 2007
Avoid
Fiscal Contradictions
Separate Budget from Policy Measures
By Dr. Vinod
Mehta
Just on the eve of the budget, the media is full of
speculative news about cut in tax exemptions and subsidies. Yet when the actual budget comes there is
neither reduction in subsidies nor cut in tax exemptions. The old things continue.
For the last five decades it has been observed that
the annual budgets are used to make major policy announcements, which are not
conducive to long-term savings and investment decisions. Many a time these
policy announcements upset the market expectations and lead to volatility in the stock market. The time
has come to think whether we should continue to make policy announcements
during budget presentation or separate policy announcements from budget.
Budgetary exercise is essentially
an exercise to balance the revenues and expenditures of the Government and it
should be treated as such. It is not the place to make economic policy
announcements, which is a much more serious matter than the balancing of
receipts and expenditures. Moreover, latching economic policy announcement to
budget is leading to contradictions in many areas without in any way providing
solutions to serious issues.
One has been hearing about curtailing tax exemptions
and levying taxes on savings at the time of final withdrawal for the past few
years. But when it comes to taking a
final decision the Government develops cold feet. So is the case with
subsidies. For the past several years,
the nation has been discussing the
rationalization of subsidies and every time on the eve of a budget anti-subsidy
feelings are taken to new heights to find that the subsidies instead of being
cut are in fact raised.
The handling of the question of subsidies and cut in
tax exemptions call for a serious holistic approach and cannot be tackled in
the annual budgetary exercises.
Admittedly, there are a large number of tax exemptions especially to the
corporate sector and that savings are tax free at every stage. For instance,
when one puts money in Provident Fund or puts money in specified bonds one gets
a rebate up to Rs. one lakh and when the final amount is withdrawn the
accumulated interest is also not taxed i.e., the final withdrawal with interest
earning is also tax free. So the argument goes why one should get tax exemption
twice for the same saving? Therefore it
is argued that at least the accumulated interest on savings be taxed. The Government
is convinced of this reasoning but saving public is not pleased.
Again, subsidies are an accepted norm in modern
societies and cannot be wished away. The
important thing, however, is for what purpose the subsidies are being given and
which group(s) stands to benefit from them and whether there are any bad side
effects of these subsidies. The second
aspect of this is that these should be administered in a cost effective manner
and that the continuation of a particular subsidy is reviewed periodically. This is the case in most of the developed
countries. For instance, the public
transport system, school level education, primary health care, etc. are
subsidized in most of the developed countries and the quantum of subsidy
reviewed periodically.
Therefore, there is nothing wrong in giving subsidies
so long as they serve a useful social purpose. Let us take the case of
subsidies on fertilizers. This is one single subsidy which everyone knows is
only harming the nation, but the vested interests are so strong that no Finance Minister has been able to garner
enough of courage and do away with it in one stroke.
It is common knowledge that the use of chemical
fertilizers beyond a certain point is an environmental hazard. Its long term-use not only pollutes the soil
but also spoils the health of the people who eat the produce of such
farms. By keeping the prices of
fertilizers artificially down, we are only encouraging the misuse of fertilizer
on a large scale. One fails to understand that in a country of over one billion
people and the largest number of cattle in the world can't we have sufficient
organic manure to replace the use of fertilizers?
Since fertilizers have been made so cheap that it is
not economically possible to invest
funds in improving the quality of organic manure, which is environment friendly
as well as health friendly. Recently the
Government approved to clear subsidy on fertilizer to the tune of Rs. 34,000 crore by March 31 this year.
Stop the subsidy on fertilizer and let the farmer buy
it at the market prices. Its consumption
will go down and, importantly the farmer will now make an efficient use of it
and many of them would even switch over to organic manure. If the fertilizer
companies find it uneconomical to operate without any subsidy then let them
close down their shop and invest the money in producing organic manure.
Therefore, delink the question of subsidy from the
budget and let the Government state a policy as to what subsidies will continue
and what subsidies will be retained. It
may be better to do away with subsidy on fertilizer in the next few years so
that the farmers are mentally prepared to buy their requirement of fertilizer
at market prices, have time to switch over to use of organic manure as well as
give sufficient time to fertilizer companies to either reduce their production
costs or switch over to the production of organic manure or
bio-fertilizer. At the same time the
Government should come out with an agricultural policy in its totality
including the scientific research so that the country is able to produce more
than what it requires in the coming years.
Similarly, the subsidy on food also needs to be
streamlined. As of today a large part of
this subsidy goes to meet the expenditure on FCI. Firstly, the Government has to borrow heavily
from the bank to buy food grain from the farmers to store in FCI godowns. Secondly, it has to pay the maintenance
expenditure to keep these stocks in silos.
On the top of it, it has the whole machinery of rationing staff all over
the country to implement this scheme. If
the idea is to provide cheap food grains to the poor then the best way would be
to issue them food coupons. The poor can use these coupons to buy their food requirements from the market. The cost of administration would be much
lower than the current food subsidy.
As a principle, the commercial activity should never
be subsidized except in exceptional circumstances. There is no need to subsidize exports. It is
high time the Government comes out with a working policy paper on its idea
about eliminating/cutting tax exemptions and the extent of desirable subsidies
or otherwise for each sector of the economy; let the average citizen and the
experts react to it and then the Government should finalize its overall policy
towards tax exemptions and subsidies.
With interest rates lower than what they were a few
years ago and with the Government pushing the average citizen to equity
market/mutual fund the citizen should be able to take right decisions about his
savings and investment decisions. Since
these are essentially long term
decisions the clear cut policy on tax exemptions will help one to take informed
decisions on savings and investments. So is the case with subsidies. It should come clean on the question of
subsidies and end once for all the speculative stories about tax exemptions and
subsidies. It will also end volatility
in the capital market, which always follows ad hoc announcements in every
budget.
All these are policy issues.
They need to be de-linked from the annual budgetary proposals. There should also be nothing secret about the
budgetary proposals. They should be
discussed the whole year round and
announced at the appropriate time. There
should be only marginal changes in the tax rates with a view to balancing the
receipts and expenditure. ---infa
(Copyright,
India News and Feature Alliance)
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