Govt likely to consider Tobin-type tax structure

INDIA ECONOMIC SUMMIT, 2007

The government may be debating the imposition of a Tobin-like tax as a measure to reduce exchange rate volatility and stem short-term capital inflows.

The Tobin tax, first proposed by Nobel laureate James Tobin in 1972, is a sales tax on cross-border currency trades, aimed at discouraging speculation by making currency trading more costly.

The possible introduction of such a tax was hinted at by industrialist and Rajya Sabha Member of Parliament Rahul Bajaj who claimed that Finance Minister P Chidambaram had told him last week that the government was in the process of "doing something" about the exchange rate.

Speaking at the India Economic Summit, Bajaj said that during discussions on the Appropriation Bill (which gives the government the authority to incur expenditure from the Consolidated Fund of India), some MPs had suggested the imposition of a Tobin Tax to reduce exchange rate volatility.

"Chidambaram had to sit there even as 19 people spoke. Even though I am not part of the government, I also spoke. Among other things, the issue of the exchange rate of the rupee was also raised", Bajaj said.

"When a Tobin-like tax was suggested, the finance minister did not answer. He answered every question, but he did not talk about the exchange rate," Bajaj said.

Later when Bajaj asked Chidambaram why he did not respond to the question on the exchange rate, the finance minister reportedly told him, "You know what happened in Thailand when something similar was announced? The market fell. I could not have answered anything regarding this on the floor of the House. We are in the process of doing something."

Huge capital inflows have seen the rupee appreciate 15 per cent the dollar since October 2006 and caused significant job losses in export-oriented industries such as textiles and handicrafts.

The government has already announced three relief packages for exporters as a result, but experts predicted a further strengthening of the rupee if capital inflows do not abate.

Net capital inflows between April and June 2007-08 stood at $ 15.26 billion, a 44.5 per cent growth over $ 10.56 million in the same period last year.

For full year 2006-07, net capital inflows stood at $ 44.94 billion, according to the RBI. The rupee currently hovers at Rs 39.50 to a dollar from Rs 45 just six months ago.

Prime Minister Manmohan Singh is also believed to be concerned over the strengthening rupee. Various views have been discussed within government on the imposition of a forex-stabilising tax but a consensus is yet to emerge.