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Succumbing to pressures

March 17, 2012

Union Budget 2012-13 has just been presented to the parliament. This is one budget that pleases non one and addresses few issues, if any. Figures are being thrown around and people are being sucked up by the little details that affect them face on. Things like increasing the personal tax ceiling from 1.8 lakhs to 2 lakhs is much discussed. This means that if a person has an income of less than Rs 2 lakh per annum he does not need to file income tax returns. Similarly the increase in the tax on conditioners, restaurants and hotels is being discussed. People are not looking at the larger picture.

Indian economy is not in the best of health. A fiscal deficit of 5.9% is worrying. Pranab Mukherjee has therefore increased taxes to correct this anomaly. He believes that by the end of this fiscal year the fiscal deficit will come down to 5.1%. That is no solace. His remedy is to increase excise from 10-12 percent and an increase in the service tax. Such blanket increase in taxes is inflationary. Inflation is one big worry for this nation. By such sweeping increases in indirect taxes the situation will only become more precarious. The current account deficit stands at $180billion when the country has reserves of only $300 billion. This is a real cause for concern.

The worrying part is not that taxes have increased across the board. It is where they plan to spend the money that is most disturbing. Such schemes as NAREGA get the bulk of the money – more than Rs 1,00,000 crores.  NAREGA guarantees 100 days of employment to rural poor at the minimum wage. This is at best a dole. This does not contribute to the productivity of the nation, nor is it a solution to problem of unemployment. That this scheme is mired in corruption and money does not reach the rural poor is another matter altogether. The focus should be on job creation and not on doles. This is a temporary plugging in of holes and not a solution as it were. But the government seems to be enamored of this scheme.  Schemes do not help the economy grow and real growth is what the people expect. They want real jobs not synthetic jobs which really are doles. This isn’t politically expeditious either as the ruling party found much to its chagrin in the recently held assembly polls. Those who have propounded NAREGA are the ones who are nowhere in the political horizon and are political illiterates. To heed their advice and spend precious tax payer’s money on this sieve like scheme called NAREGA is being politically imprudent.

The reason why Narendra  Modi was returned to power three times in a row and might win a fourth time too is that he invited investments to Gujarat. He embraced all who wanted to invest in Gujarat. There was job creation aplenty and people not only from within Gujarat but from all over the nation converged to the state as they could find employment there. There were no delays in decision making and all those who wanted to invest in Gujarat were welcome. Phenomenal investments came to Gujarat. The state prospered. Narendra Modi was returned to power again and again. Good economics was good politics.

Pranab Mukherjee’s budget not only spends huge sums on doles which the UPA government believes are populist but has given out a signal that India does not want investments. The imposition of tax on mergers and acquisition deals in retrospect is such a numbing blow to foreign investment to the country that it is more of an embarrassment than anything else – this when the Supreme Court had given a judgment in favor of Vodafone-Essar deal. Not only will this deal come under scrutiny but other such mergers and acquisitions shall be taxed in retrospect. The government may mop up Rs 40,000crores from this ill advised move but the real cost to the Indian economy will be in billions of dollars as the message going out to the world outside is a very negative one. India will not be taken seriously by investors around the world. You don’t frame laws in retrospect – banana republics’ do. Mugabe won’t do anything like what Pranab has done. This was an opportune time to attract investments to the country. Europe is in doldrums and the US is still shaky. India could have been the destination where billions could have come in investment. Industrialization could have taken off in a big way. Investors the world over were looking at India and other emerging markets to park their funds. A huge middle class in India is such a boon. India could havegrabbed this opportunity with both hands. What Pranabda has done is exactly the opposite. He has shut the doors in the face of the investors. This is detrimental to the interests of the nation. The best way to tide over the fiscal deficit and the current account deficit was to ensure that India became an investment destination. I was expecting lowering of corporate tax by some 5 percentage points. I was also expecting a further rationalization of personal income tax. A reduction in excise would have been good too. This would have resulted in more revenues in real terms. The FM has chosen to do just the opposite.

How serious this government is about investments can be seen from the way POSCO project is languishing for the past so many years. A motley group of protesters have taken the state of Odisha and the nation to ransom. There are other locals who want the plant to happen but their voices are not heard. More than 500 proposed power projects are also in abeyance. There are ‘environmental’ issues I am told.

I will not delve into what has become cheap and what has become dear after this budget. Additional custom of 4% on gold belies logic and jewelers are right in shutting down business for three days. Gold will again be smuggled into the country if this tax were to be implemented. Does the FM want that? Tax on jewelry also hits a potential export opportunity. Export of gold jewelry has great potential and we can be world leaders. This sector should have been encouraged.

Service tax on air travel also belies logic when the sector is reeling. After Kingfisher Airlines even Jet Airways is finding it difficult to keep afloat. Does the government not want its citizens to travel by air? In a country as large as ours it is strategically important that people get affordable air travel to move from one place to another. Business will be hit. Service tax on phone bills is also regressive.

On the one hand the government does not want foreign investment, increases taxes across the board which will lead to inflation. And then on the other hand the government increases defense expenditure by a whopping 18.5%! Is this to fructify the MMRCA deal and other defense deals? Maybe the government thinks that with Antony in charge it should go ahead and procure all that is urgently required, as he is above suspicion. That is the only possible explanation to this huge budgetary increase in defense outlay.

I do not for once contest that petrol prices should float freely with the market trends. However, I cannot understand the huge taxes on petrol and diesel levied both by the center and the states. Their retort is that this goes to schemes such as NAREGA. While I have already said what I had to about NAREGA, the government must also realize that an increase in oil prices is hugely inflationary. An increase to $5 to a gallon in parts of the US is such a big issue there. Here we are paying more than 100% on taxes on petrol and diesel. This must be rationalized. Government won’t feel the need for unencumbered taxes on petrol and diesel were the country to encourage investments from within and across the world. The investment climate in India has become so bad that Indian companies prefer investing abroad than in India. They find the Indian system too cumbersome. Shudder to think what price the aam admi may have to pay for fuel if there were a Middle Eastern crisis as is being anticipated.

The proposed removal of subsidy on fertilizers is surely not an idea that the government endorses. This is again being done under pressure from governments which themselves subsidize their agriculture in a big way. I did not find mention any incentive to organic farming. Organic farms are the way forward. Products from such farms command higher prices the world over and their demand is increasing. Should not the government given some incentives to such farmers? Instituting a governmental nodal agency to certify produce from such farms that follow organic farming would have helped such farmers sell their products not only in super markets across India but could have found markets abroad.

The government is not keen to think rationally. This government has lost an opportunity to cash in on the global crisis. I have serious doubts about India achieving a growth of around 7% as promised. Had the government not been bogged down by pressure from forces that have no locus standi and at best are at the periphery of the political discourse, it would have done much better economically. But who will make this government understand that good economics is good politics. It seems the government has learned no lessons from the results of the assembly polls. This government has succumbed to pressures which are a creation of its own. This is not a Pranab-Manmohan budget. This is something else. Pranab-Manmohan would do well to refuse to be stenographers. These men are too well versed not to know what is going on around them. Its time they stood up for what is right. Do a Koodakulam in matters that concern Indian economy, Manmohan! A small pointer as to how the budget was received was the fact that soon after the budget was announced the bourses fell by 1.5% and the rupee breached the Rs 50 mark to a dollar. Stocks will continue to slide and even the tax concessions to small investors may not be enough to check the fall.  Bourses know the meaning of 6-7% ‘growth’ with double digit inflation.

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