Economic Highlights

New Delhi, 25 January 2013

UN, WB Advice

INDIA MUST CHANGE TACK

By Shivaji Sarkar

India needs to steer a different course. Even the UN’s latest World Economic Situation 2013 wants it to take a path that would ensure not only its own growth but also help the South Asia region come out of the blues. The report does not exude much optimism. The slowdown, it predicts due to poorer consumption and investment demand as a result of persistent inflation, high interest rates, large fiscal deficits and political gridlock is likely to continue for the next two years.

Growth can accelerate to 6.1 per cent from the present 5.5 per cent “if there is a rebound in exports and capital investment”. However, its prospects aren’t too bright in view of the western recession. Nor does the latest evaluation of the World Bank exude much confidence. It says global growth would fall and along with WES predicts the slowing of investment even in China.

Developing countries, says the WB in its Global Economic Prospects (GEP), need to focus on raising the growth potential of their economies, while strengthening buffers to deal with risks from the Euro Area and fiscal policy in the US. The key to higher investment in India, says the UN rests in a more accommodative monetary policy stance and business confidence. Clearly, emulating the US, which is in a quagmire while still being a dominant economy, is not a solution. The UN does not want India to usher in a higher tax regime, something America is pining for, as it is against the accommodative monetary policy.

In their pre-Budget meeting with Finance Minister P Chidambaram, business leaders too have echoed similar views. “Higher tax on high income group taxpayers is uncalled for as this would discourage entrepreneurship”, explains FICCI President Naina Lal Kidwai. She warns it could lead to professionals relocating to low-tax domiciles and has opposed the proposal to introduce Inheritance Tax, abolished in 1986 for its low-yields, complicated calculations and harassment of the taxpayer. Some others like Anand Mahindra, CMD, Mahindra & Mahindra, Presidents, Rajkumar Dhoot, Assocham and Adi Godrej, Confederation of Indian Industry (CII), agree and have gone a step further by warning it would create a negative perception of investment.

During the past two years, investment is coming down almost in every sector and some such as roads and transport are gasping. Power, manufacturing, al are starved of industry. Many prospective investors are gradually trying to move out or have become tight-fisted. The GEP also notes that though output in developing countries has accelerated, it is being held back by weak investment and industrial activity in advanced economies.

Additionally, India must be cautious on foreign direct investment flow. Domestic corporate savings are surging but are not being invested to boost economic activity. Therefore, the Government finds itself mulling on levying more taxes on the rich, which would ring in well in socialistic terms. It thinks if the US can consider levying higher tax on the rich why cannot India do the same? However, it fails to realize a stark difference. In the US, the number of rich is over one per cent of the population, whereas in India they are not even one per cent of the total number of about 3 per cent taxpayers. Further, Indians do not want to pay taxes because they simply don’t have the income to do so.

The Government apparently is using it to divert the attention of the industry from demanding stimulus. If in its wisdom, the Government decides to levy yet another complicated tax, it is bound to help, what the industry has warned, flight of capital! Clearly, a nation in slowdown is likely to lose more funds dashing UN’s hope of a rebound in two years.  

According to Senior Vice President and chief  economist at World Bank Kaushik Basu, with governments in high-income countries struggling to make fiscal policies more sustainable, developing nations should resist trying to anticipate every fluctuation in developed countries and, instead, ensure that their “fiscal and monetary policies are robust and responsive to domestic conditions.” This is a clear advice against additional taxes.

Instead, the Government should be concerned about the fiscal deficit. The question it should ask is whether the people are responsible for it? The answer is no. It spends least on governance, health and social sector and more on its administration mechanism. In fact, the people in a way have helped the Government by allowing it to forcibly give up its so-called subsides.  

Farm subsidies are non-existent and the Government’s ‘agriculture subsidy’ is a misnomer. Its investment in the purchase of food grains for creating a buffer stock and giving it the public distribution system cannot be seen as a subsidy to the farmer. The reality is that the Government machinery overstocks food grains, large quantities of which simply rot in its warehouses. This increases costs, raising doubts about its wisdom.

Why then cannot the Government function with a business sense, by simply releasing excess stocks to check prices? Well, it doesn’t do so because its policy helps the unscrupulous businesses. Food inflation as per its own statistics hovers above 10 per cent – a cumulative about 33 per cent in three years. The decision to allow a constant raise of diesel, petrol and LPG is yet another choice that is hitting the economy. The only rationale being that each raise adds to the taxes in its kitty.

India, the international organizations agree, is one of the highest-taxed countries. Its people pay more taxes than the income they earn. Additionally, every facility-- power, travel, transportation, food etc is overpriced. This apart, it impinges on administrative cost. During the past 20 years of liberalization, the Government has only made its bills hefty. Every department is overstaffed, has extra cars, other facilities and assets, which are unnecessary. If it complains of a fiscal deficit, it is because of imprudent spending on non-essentials. All these factors have resulted in depreciation of the rupee, which has further reduced people’s purchasing power.

Unless India has higher employment, more sales of manufactured goods and other commodities, it is unlikely to come out of the slowdown. The 14^th report on employment published by the Government’s Labour Bureau indicates that employment growth in the manufacturing sector has been coming down consistently during the past two years. The International Labour Organisation even notes that the average unemployment rate is much higher than official figures of 3.8 per cent, particularly among the youth.

Undeniably, India needs less of Government and more of governance. Till it happens, the Government must desist from increasing rates of taxes. Rather, it should consider cutting many rates, including income tax and make a note that the WES is concerned, particularly the way administered energy prices are being increased.

Moderation in the tax regime is now advocated for the growth of the region as it would be an indirect stimulus to the entire economy. If it gets a boost, tax revenue too would increase. Else everything may go in the reverse direction. It is time for change in policy regime for an India that wants to lead the world. ---INFA

(Copyright, India News and Feature Alliance)