The Hindu Business Line : Sustain the pace

With taxes on corporate and personal incomes expected to cross those collected by way of excise, customs and service taxes in fiscal 2007-08, Indian public finance has, without question, crossed an important milestone. In a sense, the development is on expected lines. The initial dominance of indirect taxes and their subsequent loss of supremacy in tax collection is inherent in the development strategy initially adopted for economic growth and the mid-course correction tha t was put in place in the early 1990s.

The regime of controls created in the name of planned economic development grew progressively so pervasive that it stifled individual initiative and capacity for risk-taking to the point of bogging down the economy on a low-growth path. The alternative philosophy of opening up the economy to both internal and external competition meant a sharp downward correction in customs and excise tariffs, with obvious implications for revenues mobilised under these heads. More significantly, the boom in output and consumption that ensued in the years following the early liberalisation moves boosted corporate and personal incomes, leading eventually to corporate and personal income-taxes overtaking indirect levies based on consumption.

Success in securing such an outcome is easier than ensuring that income-based taxes continue to stay ahead of other levies in the years to come. For incomes to remain robust, growth impulses in the economy must be nurtured and allowed to flourish. With many sectors operating at levels closer to their installed capacities or otherwise constrained by the quality of infrastructure supporting them, only fresh investments can sustain the economic momentum at a brisk pace. Already, the economy is showing signs of a growth fatigue. The Government’s growth estimate for the current fiscal is down marginally from what was forecast earlier. The RBI too had, some months ago, highlighted the fact that while fresh investments this year might be ahead of the quantum recorded last year, the rate of growth may be lower.

The Government must remove the policy hurdles in the way of an easier flow of investments in such sectors as power, minerals and roads. The absence of an institutional mechanism that is robust enough to handle the conflicting claims of stakeholders in a new project is, clearly, to blame. The Government cannot take shelter behind the democratic form of governance that the country has adopted or the independent judicial review that new projects are subjected to, for projects failing to take off is nothing short of abdication of executive responsibility.