Economic Highlights

New Delhi, 11 December 2008

Govt’s New Economic Sop

WILL BOOST  MANIFESTO, NOT MARKET

By Shivaji Sarkar

The Government’s recent Rs 35,000-crore economic package is more a political move to help it sail through the impending election. Sadly, the package would have little impact on the consumer prices, which still remain at over 10 per cent though wholesale price index (WPI) is stated to have “fallen” below 10 per cent. Thus, the step like some others may only give bright touches to the manifesto and not the economy.

A closer look at the recent steps taken by the Government and the Reserve Bank of India reveal that these are  is misdirected at whetting demand and is not aimed at benefiting the common man. The decision to impose four per cent Central value added tax (Cenvat) itself was a misdirected move and by withdrawing it, the Government has sought to correct a political mistake.

The big question is--Would it raise demand? As such, Cenvat is levied on various stages of the manufacturing process and is primarily levied on high-end products, like automobiles. Clearly, a small cut in car prices is unlikely to shore up demand. Yet again, the Government’s decision to extend guarantee on loans up to Rs 1 crore for small and medium enterprises (SME) looks good on paper. It is doubtful if it would create confidence among the banks, apprehensive of rising NPA, to ease the lending process.

Let us understand that the slackness in demand is not due to taxes alone. Almost over half a million job losses and lack of spare money with the citizen is the cause. Worse, the inflationary situation has further accentuated the process. The “fall” in WPI has not pepped up demand. The prices of essential commodities – food grains and other necessities – have only been soaring. And so, car manufacturing should not be considered the barometer of manufacturing activity. Lowering of prices and ensuring cash availability to people should be the real concern of a people’s Government.

Mere Cenvat cut is not a step towards this direction. It certainly is no sacrifice. The fact is that during a crisis, Cenvat and excise duty accrual come down even otherwise. The Government can now well exhibit itself as more ‘pro-people’ while presenting the budget and justifying its tax losses – a euphemism for higher budgetary deficit. As Lok Sabha elections are to be held a month after presentation of the Union budget, any decision to levy new taxes would be a post-poll phenomenon, provided the same political formation comes back to power. So we have the Planning Commission Deputy Chairman Montek Singh Ahluwalia saying: “To what extent the fiscal deficit will be higher, we do not have the numbers yet”.

In its approach the Government has not hardened its stance towards foodgrain and other commodity dealers. While their profits are soaring with higher prices, no political will is being exhibited to curb it. Perhaps, it is difficult in an election year, when funding comes from these very market sources. So, the common man needs to wait patiently for political expediency.

However, some can put across a political argument i.e. the Government’s Rs 20,000 crore proposed additional plan expenditure in the remaining three-month period would add to the growth process. The argument falls flat instantly as the proposal is yet to be passed by Parliament and even if it is, no Government will have the capacity to spend it in the three remaining months of the fiscal year.

It is a belated realization on the market-friendly policy makers that without government expenditure the economy cannot be lubricated. The swadeshi exponents and leftists have always been criticizing the Government for the lack of this foresight. In an election year, the Government could don socialist attire without adhering to its principle.

Again, the proposed two per cent interest rate subsidy to exporters is a mere eyewash. These measures will not help us to be price competitive and therefore will not boost exports. This apart, the Rs 1400-crore technology upgradation fund is nothing new. It has been pending since 1999. Also, the Rs 4,000-crore refinance facility for the National Housing Bank too would be of no help. The Government’s move to check housing funding is good to an extent that it keeps speculative activity by big builders in check. But it needs to do more to help the poor and the middle class. Unfortunately, it has given no instructions to the banks to check the pricing mechanism of the housing sector, which is a key move that could help the people and not the profiteers.

Moreover, a key step that the Government should take and is not doing is lowering income tax. This is so as the spare money simply goes back to the Government. Unless and until income-tax is brought down to a low of five per cent for an income of up to Rs 10 lakh and 10 per cent for beyond, the market would always be short of demand, activities and funds. Higher market activity is the key to higher realization of taxes. The higher the tax, which is at present, less is the activity and less the realization of revenue for the Government.

Yet again, the Government has not taken any step to delink the economy from the stock market. Rather, on the sly it has allowed Life Insurance Corporation (LIC) to invest Rs 23,190 core in debt funds and now also plans to buy Rs 12,000 crore worth stocks from the share market. Such a move is dangerous as the investment is wrought with the highest risk and would help big stock brokers and not the policy holders. Clearly, the Finance Minister should realize that euphemistic approach to notch a few political points cannot shore up the economy. ---INFA

 (Copyright, India News and Feature Alliance)