Calcutta Notebook


The challenge for the Finance Minister in 2017 is to improve the quality of government expenditures. The present drive of demonetisation and towards cashless economy will lead to more transactions coming into the tax net. This will lead to a higher tax burden on the people. Lesser money will remain in the hands of the people and more money will come in the hands of the government. A person with an income of Rs 10,000 per month was, say, paying tax of Rs 2,000 earlier. He will now pay taxes of Rs 2,500 because more of his purchases will be of tax-paid goods. He will be poorer by Rs 500. The reduction of money in hands of the people will lead to a reduction in demand for goods in the market. This will have a negative impact on the economy. However, the final impact will depend upon how the government uses the additional revenue that is collected. This money can be used by the government in two ways : for increasing government investments in infrastructure such as railways and highways, or for increasing government consumption such as by providing higher salaries to government servants. The implementation of the recommendations of the Seventh Pay Commission and One Rank One Pension has led to increased consumption by government servants. This will lead the economy into the dumps because government servants are well paid and will not spend their incomes in buying goods from the market. They will buy gold from part of this income. The money will go to South Africa or Russia from where India imports Gold. Indian economy will deflate like air being leaked from a balloon. There will be less demand in the economy. The Finance Minister must instead use this additional revenue for the development of roads, sewage, electricity supply and net connectivity in villages and small towns. These investments will help the people earn more and neutralise the impact of the higher tax burden. A person with an income of Rs 10,000 per month previously will now earn Rs 12000. He will still be richer after paying higher taxes due to demonetisation. The increased income in hands of the people will lead to an increase in demand for goods in the market. They will also generate demand for cement and steel because people will pay higher toll tax for the use of highways. This demand will neutralise the negative impact of bringing more transactions in the tax net.

The small industries were undertaking most transactions in cash until now. They will come under the tax net. Their cost of production will increase. They will find it difficult to compete with large industries. The small industries generate most employment in the country. Therefore, there is a need to neutralise the additional tax burden imposed upon them.

The increase in the price of crude oil will lead to higher outflow of monies from India and dampen the economy. The way out is to move towards less energy intensive modes of earning and living. Investment in public transport like Metros must be increased substantially. The import tax on crude oil must be increased so as to reduce consumption. Let petrol be priced at Rs 125 per litre. Those using bikes and scooters should pay more. India must develop the services sector, which consumes less energy, as the main engine of economic growth. India must go slow on manufacturing, which consumes about ten times the energy as compared to the services sector. This approach will help contain oil import bill. Therefore, the government must reduce the rates of service tax and increase the rates of excise duty. The GST seeks to move in the opposite direction. The rates of excise duty are high at present. They are set to be lowered. The rates of service tax are low at present. They are set to be increased. There is a need to provide a lower rate of tax for services under the GST. No that is not going to happen.

The Indian economy has been driven by foreign investment in the last 25 years since Manmohan Singh unleashed the economic reforms. However, the globalisation juggernaut is slowing down now. Brexit and Trump are the flag bearers of the anti-globalisation movement. Therefore, India must go into reverse gear proactively. The government must scrap or modify all double tax avoidance agreements as New Delhi has done with Mauritius, Cyprus and Singapore. Also, the government must also re-impose restrictions on outward flows of money from the country that have been liberalised in the last two years. The Finance Minister must take Indian businessmen into confidence and try to keep Indian capital within the country. Running after foreign capital will not do when Indian businessmen are trying to exit India and invest abroad. Foreign investment will come only if domestic investment is strong.

The Non-Performing Assets of the public sector banks are a drag on the economy, as are a host of other public sector undertakings. Only PSUs in sensitive areas must be kept under government control.

Vol. 49, No.33, Feb 19 - 25, 2017