Effect of tax measures on inflation must be looked into
Will Budget 2013-14 bring relief to the masses from the spiralling inflation? Will it be people-oriented, market-oriented, or both?
Of late, the Government initiated some reform measures, perhaps keeping in mind the general elections in 2014. Also, the threat of possible downgrade by international agencies because of the high current account deficit (exceeding 4.2 per cent of GDP) and fiscal deficit (estimated at 5.3 per cent of GDP) caused largely by fuel, food and fertiliser subsidies must have prompted the Government to act.
Steps such as cap on number of subsidised LPG cylinders, hike in rail fares and partial deregulation of diesel prices have already been effected to augment the resources and make the Budget look impressive when presented on February 28.
However, these are likely to have a cascading effect on the general price level and are bound to hurt the masses. The timing of these revisions in the backdrop of continued inflationary pressures has been debated, but the Government seems to justify the the same on the grounds of having to set right the fiscal imbalance and find resources to support economic growth which has been lagging.
The Finance Minister, therefore, has a tough job on hand formulating this year’s Budget. Being a pre-election year, the Budget has to necessarily be people-oriented with populist measures and, at the same time, market-oriented too given the fiscal pressures. The expectation of another dream Budget by every segment of society cannot be easily overlooked.
The balancing will not be difficult if the Finance Minister distinguishes between revenues which are inflationary and those that are not and, accordingly, initiates measures while formulating the Budget.
More than 80 per cent of the population are middle class and below, and this segment gets badly affected when prices rise. This needs to be factored in while assessing the impact of the tax measures.
Though direct taxes, particularly income-tax, do not generally add to inflation, indirect taxes do, by pushing up production, storage, transportation, distribution and marketing costs of goods and services.
Service tax is a case in point. No doubt it helps the Government fetch good revenues, but the uniformity and wide coverage of this tax need to be looked into to soften the effect on inflation.
While food subsidy for the poor is justifiable, the continuance of fertiliser and fuel subsidies without any relationship to the affordability of those who benefit from these is undesirable.
It should be need based and the Government should ensure that these do not add to inflation.
While diesel for transportation of essential goods needs to be subsidised, for those who use it to run their private, fuel-guzzling vehicles it should not.
Of a population of around 130 crore, less than four crore come under the income-tax net or file tax returns. This is not acceptable as the living conditions of many have improved considerably, thanks to the economic liberalisation of the early 1990s and the information technology revolution.
With the construction and auto boom witnessed in the economy over the last two decades, the self-employed group and the number of well-to-do people both in villages and urban areas have increased manifold and many do not seem to be even aware of the taxation policies of the Government.
Tax the super-rich
The value of land has increased considerably and many have become super-rich overnight. Whether they come under any tax net is doubtful.
More indirect taxes such as the Securities Transaction Tax, and luxury tax on movable and immovable items beyond a cut-off limit need to be identified and introduced for the rich and super-rich. Capturing information and tracking transactions are essential to bring these neo-rich into the tax net.
The Government has to necessarily improve its data collection mechanism to correctly classify people based on income and wealth. It should ensure that the whole population is covered by its policies.
Inflation indexation and the components of inflation also may have to undergo change in such a way that the pattern of consumption of the middle class and below is captured; the consumption pattern of the rich and super-rich need not necessarily figure in there. Also, the present WPI and CPI parameters need a re-look.
The fiscal and current account deficits must be reduced by containing the fertiliser and fuel subsidies and improving the investment and savings climate.
Revisiting the expenditures of the Government and all institutions both in the public and private sectors would help enhance efficiency and avoid wastage.
The Budget can and should emerge as an important tool to bring in efficiency in the areas of administration, production, distribution and marketing of goods and services through improved taxation policies, tracking of information, and cross-checking the same.
The objective should be to improve the standard of living of all categories of people. For this, the Budget should be more people-oriented and less market-oriented.
The market sentiments will definitely improve once the economy is back on the growth path. The economy needs a boost and the Budget can do the trick.
(The author is a Bangalore-based consultant. Views are personal.)