THE new monetary policy measures announced by the Reserve Bank of India (RBI) are widely being seen as an effort to contain the growing inflation in the country, led by galloping rise in the prices of all essential commodities at a rate of nearly 20 per cent. The RBI has revised upwards its projection for inflation in this year to 8.5 per cent from its earlier 6.5 per cent.
Short of all technical details involving interest rates and the rates at which banks can borrow or lend, in common terms, the measures announced by the RBI will reduce the amount of money available for lending in the banking system by Rs 36,000 crores. It is being suggested that since the money supply in the economy will be reduced by this amount, the pressure on inflation will likewise reduce in a corresponding manner. This is under the presumption that inflation is being caused by more money in the hands of the people. In other words, people are demanding more while the supply of the products is not matching this demand and, therefore, prices are rising. This presumption, itself, is fallacious.
It is universally acknowledged that inflation is being fuelled by high food prices. Prices have risen partly due to the deficit in foodgrain production due to the damage caused by both drought and the flood. But the rate of the rise in prices is much higher than can be explained by a deficit in the availability of foodgrains. Much of the current inflation in essential commodities is due to the wrong policies followed by this UPA government based on a wrong diagnosis of what is causing such inflation.
A classic case of wrong policies is the manner in which export of sugar was encouraged through incentives earlier when the government should have built up a sugar buffer stock when all indications of shortfall in sugar production were available with the government. Now, this very sugar is being imported at much higher prices to meet the domestic demand. It is no wonder that sugar now costs over Rs 50 a kilo in many parts of the country. Corporates trading through exports and imports, however, have reaped a bonanza at the expense of common people’s misery.
Another such instance is the decision to offer release from the buffer stocks of foodgrains to the state governments at the current market prices. This works out to Rs 17 for a kilo of rice for Kerala. Earlier, the centre was releasing 1.13 lakh tonnes of rice to Kerala at the APL price of Rs 8.90 a kilo. This quantity was drastically cut by the centre to just 17,000 tonnes. Instead of restoring the earlier quantum of release of central food stocks, the UPA government is now offering to give rice at Rs 17 a kilo. Far from containing the rise in the prices of foodgrains, such policies only compound the matter making the situation worse.
One of the main reasons for this run away inflation in the prices of essential commodities has been speculative trading in the commodity exchanges in the country. The central government must immediately ban futures/forward trading in all essential commodities. This, however, has not been done. Making matters worse, the UPA government has now withdrawn the ban on futures trading in wheat that was imposed by the UPA-1 government under pressure from Left parties. The net result of not banning such speculative trading has been that major trading corporates have reported profits ranging from 150 to 300 per cent this year while food prices are rising at an annual rate of 20 per cent.
Clearly, therefore, the monetary policy measures announced by the RBI will not be able to contain this inflation primarily because the diagnosis of the causes for this run away inflation is faulty. If the central government is serious about containing this inflation, then it must immediately ban all speculative trading in essential commodities. Secondly, it must immediately release central buffer stocks, at APL prices, restoring the previous quantities in allocations to the states, for distribution through the public distribution system (PDS). Additionally, all essential commodities must be distributed through PDS. Unless these measures are immediately implemented, there is no hope of containing this relentless price rise.
Therefore, far from containing inflation, the RBI monetary policy measures may well lead to a contraction of the economic stimulus that was put in place to tackle the impact of the global recession on India. A disturbing trend that is observed during the course of the last year is the sharp rise in the gross non-performing assets of the banks. These are, in common language, loans that have been taken but are neither being serviced or returned. Such bad debts of the Indian banks rose by 27 per cent between 2008 and December 2009. Apart from the gross misuse of bank loans to launder black money, the growth of bad debts also means that the investments made by the borrowers have not given the expected returns. This is an ominous sign of the economy not picking up at the expected rate, notwithstanding the official rhetoric hailing our economy’s “turn around”.
Under these circumstances, a monetary policy that contracts the availability of borrowable funds to the tune of Rs 36,000 crores may well dampen the rate of recovery of the economy. Much of this, surely, will be known by the time the union budget will be presented three weeks from now.
In the meanwhile, however, the vast majority of the Indian people will continue to suffer from the burdens imposed by this relentless rise in the prices of all essential commodities.
Tuesday, February 02, 2010
GST will it come
1990s marked the beginning of new era in the Indian economy. The period was marked by deregulation, de-licensing and decontrol. This era of liberalization formally eschewed the Nehruvian socialistic pattern of economy and policy of liberalization, globalization and privatization (LPG) became new mantras of development. The formulation of new economic and industrial policy spurred the growth and India could shed its stereotype image of Hindu growth rate.
We brought in reforms in almost all sectors of Economy; this led to rapid growth in sectors like service, manufacturing, capital market and finance. The late 1990s witnessed spectacular growth in IT-BPO sector and gradually the culture of corporate governance as well as finance capitalism ushered in our country’s economic arena also. But tax regime is one area where minimum amount of reform have been done and in fact it represents the grotesque of the erstwhile economy fettered with obstinate regulations. With the economic growth registering around 7-9%, over a decade, India needs to bring about a massive overhauling of existing tax regime.
At present, this regime is marked by a plethora of taxes collected both by States and the Centre. This system of taxation is cumbersome, complicated and taxing as well as unfriendly to honest tax payers also. Sometimes, the amounts spent on collection of taxes are more than that of collected tax itself. The taxation across states is also, many a times, non-rational, impractical and unscientific.
India is now all set to introduce a new tax regime from 2010 fiscal. The 13th Finance Commission under Vijay Kelkar has been working on this issue for quite some time. It has proposed a new taxation regime called goods and service tax (GST) and is being finalized by Empowered Committee of State Finance Ministers (ECSFM). If all goes well, this new system would subsume the older one. Kelkar is optimistic on the basis of his meticulous calculation about the encouraging outcome of this proposed tax regime in terms of amount of collection. He said that the values of GST reform will be about 500 billion Dollars i.e. half trillion dollar. If it proves true, it is going to bring about a silent revolution in the history of economic development of India. It is worth mentioning that India’s GDP in 2007-08 fiscal is about 57 lac crores, which is equivalent to about 1 trillion Dollars at current rupees value. It is being estimated that the GST will add 1.4% additional growth to the GDP.
The present pattern of contribution of different sectors to the GDP in terms of percentage is vastly different from what it was in pre 1990s. for instance, the Service sector’s contribution has swelled up to 50% and that of manufacturing sector stands at about 25%, whereas ; the contribution of agriculture has been drastically reduced to 24-25% in the GDP. This changing pattern is suggestive of the fact that we ought to evolve a new and modern but unified tax regime which should be in commensurate with the changing times. It is in this perspective the tax regime is urgently required to be overhauled, simplified and unified.
HOW WILL THE GST HELP IN SPUR IN GROWTH AND INCREASE THE VOLUME OF COLLECTION.
There is a saying in Kautilaya’s Arthshastra, the first book on Economics in the world, that the best taxation regime is that which is based on principle of “Liberal in assessment and ruthless in collection”. The proposed GST seems to be based on this very principle.
Firstly, at present, due to multiplicity of taxes being collected through an inefficient and non transparent system, many areas are either under-taxed or non-taxed or over-taxed. The introduction of GST is likely to rationalize it and thereby plug the loop holes in this system. It will help stop pilferage and at the same time will off load the over loaded tax burden from some organizations.
Secondly, the multiple taxations due to existence of a number of taxes imposed by centre and states have led to birth of a somewhat repressive and lethargic system of tax collection and are doing more harm than good to the growth of the economy. The red tapism in this area is loathing and no progressive country can afford it. The GST would hopefully do away with many, if not all, such anomalies in the system and metamorphose it into an efficient agency based on scientific and rational system of assessment. The removal of multiple taxes on goods at different levels would in a long run help increase the overall amount of tax collection.
Thirdly, the present system of refunding of taxes is a horrible experience. It encourages corruption as well as creates unnecessary secretarial works. The un-refunded tax on capital goods is a bane for capital accumulation. This in a way hinders the savings also, which is a pre-requisite to the growth. If this over-taxation is done away with, it will come as a boon for the honest tax payers. It will also lessen the chances of corruption by minimizing the discretionary powers.
Fourthly, At present indirect taxes are collected at various points, right from manufacturing to retailer’s outlet. It involves cumbersome process of assessment and primitive ways of collection. Such systems ultimately encourage tax evasion and also increase cost of commodities. GST proposes that the indirect taxes would be levied at the destination point. It is supposed to be less distorting and non-complicated. It would help remove imposition of taxes at different levels. This would help enhancement in revenue and lessening of hardships. Experiences across the world suggest that a more friendly tax environment helps increase in the collection without imposition of newer taxes or increasing the rate of it.
Fifthly, - if we take into account the GDPs of countries like USA, China, Japan, they are significantly much more than that of ours. For instance GDP of G-20 Nations (chart below) suggest that India has miles to go to achieve the level of the developed nations. The ongoing economic down turn and slow down of economy across the world has given India a golden opportunity to stake claim and get a cushioned berth in the world order, but for this we are required to increase our volume of GDP at least twice the present level.
The direct taxation regime has been by and large undergoing annual fine tuning and as a result of it the revenue receipt in this account has considerably increased but reform on such scale in indirect taxes has not been done. Indirect taxes are therefore urgently required to be made rationale and unified. If the GST is introduced in ‘letters and spirit’ would certainly increase the volume of the tax collection, thereby provide a great stimulus to our gently moving economy which has arrived at a level playing field vis-a-vis many major economies of the world.
Country GDP IN TRILLION USD
USA 13.84
JAPAN 4.30
GERMANY 2.81
BRITAIN 2.14
FRANCE 2.05
ITALY 1.79
CANADA 1.27
CHINA 6.99
India 1 trillion dollars
Finally, the time has come to say goodbye to the primitive type of tax structure which is obstructing the growth. The globe is moving towards economic unification. The very concept of European Union (EU) is based on a common European market based on unified and simplified taxation system. They have adopted ‘euro’, a single currency, so much so that even the concept of a European Parliament is being visualized. Steps are being taken to form this Parliament. If two or more nations come close and form economic unified entity (SAFTA,NAFTA,ASEAN etc are examples), why the federating units of India i.e. States do not eschew trivial interests and shun political differences to help establish a modern, unified and efficient tax regime. After all the very concept of distribution of taxes amongst the states were enshrined in the constitution to do away with such contradictions. We do practice this in case a number of direct taxes, this system can be introduced in other indirect taxes also.
PROBLEMS AHEAD- It is politically naïve to think in terms of its success in totality. Ours is a federation and each state has a different type of tax structure. Many states levy octroi, entry tax, stamp duty and municipal tax and plethora of other taxes. It is happy to believe that the states would agree and not levy these taxes in addition to GST.
If the states levy these taxes above GST, it would mar the very purpose of the proposed new tax regime and the very concept of a common Indian market with unified and simplified tax structure would not be visualized and implemented.
A consensus has to be arrived at in the ECSFM so that all states agree to it and help evolve a tax regime which is in congruent with the new global financial order dominated by culture of corporate governance.
We brought in reforms in almost all sectors of Economy; this led to rapid growth in sectors like service, manufacturing, capital market and finance. The late 1990s witnessed spectacular growth in IT-BPO sector and gradually the culture of corporate governance as well as finance capitalism ushered in our country’s economic arena also. But tax regime is one area where minimum amount of reform have been done and in fact it represents the grotesque of the erstwhile economy fettered with obstinate regulations. With the economic growth registering around 7-9%, over a decade, India needs to bring about a massive overhauling of existing tax regime.
At present, this regime is marked by a plethora of taxes collected both by States and the Centre. This system of taxation is cumbersome, complicated and taxing as well as unfriendly to honest tax payers also. Sometimes, the amounts spent on collection of taxes are more than that of collected tax itself. The taxation across states is also, many a times, non-rational, impractical and unscientific.
India is now all set to introduce a new tax regime from 2010 fiscal. The 13th Finance Commission under Vijay Kelkar has been working on this issue for quite some time. It has proposed a new taxation regime called goods and service tax (GST) and is being finalized by Empowered Committee of State Finance Ministers (ECSFM). If all goes well, this new system would subsume the older one. Kelkar is optimistic on the basis of his meticulous calculation about the encouraging outcome of this proposed tax regime in terms of amount of collection. He said that the values of GST reform will be about 500 billion Dollars i.e. half trillion dollar. If it proves true, it is going to bring about a silent revolution in the history of economic development of India. It is worth mentioning that India’s GDP in 2007-08 fiscal is about 57 lac crores, which is equivalent to about 1 trillion Dollars at current rupees value. It is being estimated that the GST will add 1.4% additional growth to the GDP.
The present pattern of contribution of different sectors to the GDP in terms of percentage is vastly different from what it was in pre 1990s. for instance, the Service sector’s contribution has swelled up to 50% and that of manufacturing sector stands at about 25%, whereas ; the contribution of agriculture has been drastically reduced to 24-25% in the GDP. This changing pattern is suggestive of the fact that we ought to evolve a new and modern but unified tax regime which should be in commensurate with the changing times. It is in this perspective the tax regime is urgently required to be overhauled, simplified and unified.
HOW WILL THE GST HELP IN SPUR IN GROWTH AND INCREASE THE VOLUME OF COLLECTION.
There is a saying in Kautilaya’s Arthshastra, the first book on Economics in the world, that the best taxation regime is that which is based on principle of “Liberal in assessment and ruthless in collection”. The proposed GST seems to be based on this very principle.
Firstly, at present, due to multiplicity of taxes being collected through an inefficient and non transparent system, many areas are either under-taxed or non-taxed or over-taxed. The introduction of GST is likely to rationalize it and thereby plug the loop holes in this system. It will help stop pilferage and at the same time will off load the over loaded tax burden from some organizations.
Secondly, the multiple taxations due to existence of a number of taxes imposed by centre and states have led to birth of a somewhat repressive and lethargic system of tax collection and are doing more harm than good to the growth of the economy. The red tapism in this area is loathing and no progressive country can afford it. The GST would hopefully do away with many, if not all, such anomalies in the system and metamorphose it into an efficient agency based on scientific and rational system of assessment. The removal of multiple taxes on goods at different levels would in a long run help increase the overall amount of tax collection.
Thirdly, the present system of refunding of taxes is a horrible experience. It encourages corruption as well as creates unnecessary secretarial works. The un-refunded tax on capital goods is a bane for capital accumulation. This in a way hinders the savings also, which is a pre-requisite to the growth. If this over-taxation is done away with, it will come as a boon for the honest tax payers. It will also lessen the chances of corruption by minimizing the discretionary powers.
Fourthly, At present indirect taxes are collected at various points, right from manufacturing to retailer’s outlet. It involves cumbersome process of assessment and primitive ways of collection. Such systems ultimately encourage tax evasion and also increase cost of commodities. GST proposes that the indirect taxes would be levied at the destination point. It is supposed to be less distorting and non-complicated. It would help remove imposition of taxes at different levels. This would help enhancement in revenue and lessening of hardships. Experiences across the world suggest that a more friendly tax environment helps increase in the collection without imposition of newer taxes or increasing the rate of it.
Fifthly, - if we take into account the GDPs of countries like USA, China, Japan, they are significantly much more than that of ours. For instance GDP of G-20 Nations (chart below) suggest that India has miles to go to achieve the level of the developed nations. The ongoing economic down turn and slow down of economy across the world has given India a golden opportunity to stake claim and get a cushioned berth in the world order, but for this we are required to increase our volume of GDP at least twice the present level.
The direct taxation regime has been by and large undergoing annual fine tuning and as a result of it the revenue receipt in this account has considerably increased but reform on such scale in indirect taxes has not been done. Indirect taxes are therefore urgently required to be made rationale and unified. If the GST is introduced in ‘letters and spirit’ would certainly increase the volume of the tax collection, thereby provide a great stimulus to our gently moving economy which has arrived at a level playing field vis-a-vis many major economies of the world.
Country GDP IN TRILLION USD
USA 13.84
JAPAN 4.30
GERMANY 2.81
BRITAIN 2.14
FRANCE 2.05
ITALY 1.79
CANADA 1.27
CHINA 6.99
India 1 trillion dollars
Finally, the time has come to say goodbye to the primitive type of tax structure which is obstructing the growth. The globe is moving towards economic unification. The very concept of European Union (EU) is based on a common European market based on unified and simplified taxation system. They have adopted ‘euro’, a single currency, so much so that even the concept of a European Parliament is being visualized. Steps are being taken to form this Parliament. If two or more nations come close and form economic unified entity (SAFTA,NAFTA,ASEAN etc are examples), why the federating units of India i.e. States do not eschew trivial interests and shun political differences to help establish a modern, unified and efficient tax regime. After all the very concept of distribution of taxes amongst the states were enshrined in the constitution to do away with such contradictions. We do practice this in case a number of direct taxes, this system can be introduced in other indirect taxes also.
PROBLEMS AHEAD- It is politically naïve to think in terms of its success in totality. Ours is a federation and each state has a different type of tax structure. Many states levy octroi, entry tax, stamp duty and municipal tax and plethora of other taxes. It is happy to believe that the states would agree and not levy these taxes in addition to GST.
If the states levy these taxes above GST, it would mar the very purpose of the proposed new tax regime and the very concept of a common Indian market with unified and simplified tax structure would not be visualized and implemented.
A consensus has to be arrived at in the ECSFM so that all states agree to it and help evolve a tax regime which is in congruent with the new global financial order dominated by culture of corporate governance.
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