Economic Highlights

New Delhi, 16 January 2010

 Difficult Year Ahead

REDUCE PERSONAL INCOME-TAX

By Shivaji Sarkar

Rising prices, growing Central Government deficit and fall in personal income-tax collection are grim indicators of the difficult days ahead. The UPA government is also under pressure to have a re-look at the personal income tax rates. The stimulus has boosted corporate profits. The individual has suffered erosion in terms of job losses, wage cuts and by contributing far less to the government kitty. Now it is their turn to get a stimulus through a cut in income-tax rates.

It has been an effort on the part of the government to project each of these as unrelated events. The recent Union Cabinet meeting has not taken any concrete step to bring down the prices. Rhetoric of requesting the States would not reduce these. It requires a political will and a firm action plan. The government has merely tweaked the ears of a minister, who is promoting the interests of the sugar and food grain lobby he represents. It is not easy to understand why such a person is not thrown out. Such an action would help reinforce the faith of the people in the system.

There is little effort at managing the supply side problems. No proposal has come up from the Cabinet for reinforcing the distribution of food items. Apathy is evident in creating a parallel intervening system to keep the market in check. The government can claim that a system exists for those below the poverty line. But as per government statistics not more than one-third of the poor are covered by it. If discrepancies in poverty estimates are taken into account it would include about 60 per cent of the population.

The way the prices continue to rise, the salaried middle-class is too getting closer to the poverty line. This apart, even industry leaders have impressed upon the government to take steps to reduce food prices. High prices affect disposal income – spare money – of the people and leads to reduction in demand for manufactured goods. It affects the health of the industry on various counts – higher wages, higher costs, consequent higher prices of products and lower profit margins. Sadly, the Cabinet has not taken note of the precarious situation.

This despite that it also affects government finances. A review of the April-September 2009 finances of Central government indicates that all the key deficit indicators widened significantly over the corresponding period of the previous year, Division of Central Finances (DCF) of Reserve Bank says. Growth in receipt declined due to decline in tax revenue. Excise duty collection alone reduced by 22.9 per cent as against an increase of 6.6 per cent the previous year.

The DCF has expressed a grim view about the way the government is financing its expenses. These are coming from the dividend and public transfers from the government-owned finance institutions. It means the dividend that should have gone to create infrastructure and strengthen the public sector enterprises is being utilized to meet government expenses. Public transfers are borrowings. The government has raised Rs 58,802 crore from these two sources.

Notably, the government’s expenditure has risen to Rs 448,848 crore-- a growth of 23.6 per cent. Most of it has come from market borrowings, says the DCF. As on November 23, the government had borrowed Rs 406,369 crore – 82.8 per cent of budget estimates (BE) as against Rs 163,904 core in (47.8 per cent of BE) in 2008-09. It simply means that the entire corporate stimulus package, which has not benefited the common man, is funded by raising debt.

Another concern is the deceleration in plan expenditure. It rose by only 15 per cent against 31 per cent a year back. If inflation figures are taken into account actual raise in allocation is far lower. It is certain to impact the developmental aspects and affect the people at large.

That the common man is losing is testified by the personal income-tax figures, which have come down by 19.7 per cent to Rs 13,117 crore from 16,345 in the same period last year. The government has yet not come out with a strategy to help the individual tax payer. High inflation is eroding his earning and high taxes are leaving little with him for spending. Unless he spends there would not be a real revival of the economy. Panacea suggested by corporate leaders to the government to borrow more and disinvest public sector companies is clearly not the solution.

Government expenditure is maintaining a rising momentum. This puts it in a catch 22 situation. If it does not spend then progress is hit. If it does not give relief to the individual tax payer – rate cut of income-tax rates - there would be no boost to the market spending. In addition, it can not raise other taxes because these too would have detrimental effect.

The growth of loans by banks has been slow despite the huge liquidity with the banks. Non-food credit – borrowings by industry and others for productive purposes - grew by 11 per cent year on year as on December 4 as against 26.3 per cent in the same period in 2008. According to the Reserve Bank of India weekly statistical supplement the total bank credit year-on-year as on December 4, 2009, was Rs 2,77,479 crore compared to Rs 6,27,529 crore on Dec. 4, 2009. Against this the deposits increased to Rs 6, 61,064 crore in 2009 over Rs 6, 27,529 crore in 2008. This indicates that the stimulus is not benefiting the economy, but is boosting individual corporate profits. The government needs to reconsider its decision.

It also has to take stern steps, just not cosmetic rhetoric, to control the prices. High prices again benefit some corporates but the economy is suffering. It has to act with short-term and long-term strategies. In the former it has to rejuvenate the PDS, so that the market knows that the people have an alternative to meet their needs. In the long-run, the government has to have a pragmatic agriculture policy, where both the market and government would have a role to play. So far all strategies are half-hearted and that the government appears to be on “daily wages”.

The government’s dilly-dallying attitude does not suggest there would be any relief either from high prices or other malaise. Growth is not real. It is more propaganda. The nation is in abyss and must be prepared for far more difficult days. ---INFA

(Copyright, India News and Feature Alliance)