A month ahead of the Budget proposals, Planning Commission Deputy Chairman Montek Singh Ahluwalia says he wants a widening of the tax base, pushing energy prices to align with global levels and favours denationalising of the coal sector. And, sees nothing wrong in trading of telecom spectrum. He talks on these and other contemporary policy matters with Indivjal Dhasmana & Sanjeeb Mukherjee. Edited excerpts:
In the run-up to the Budget, various ideas are mooted. One of these is the tax on the super-rich.
No comment on tax matters. Making the Budget is a complex exercise which involves careful weighing and balancing of different considerations. However, we do have a progressive income tax and if rich people pay the tax that is due, they will be paying a lot more tax. In my view, the real problem is that not enough people are declaring their income and paying the tax. The number of people filing returns showing (annual) income above Rs 10 lakh is far too small. We need to expand the tax net to catch more of the income.
Are you advocating expanding the tax base or tightening the administration?
We need to expand the base. Some of that is a matter of tax administration devising ways in which upper income persons are effectively covered by the tax net.
Of late, there have been moves to correct the under-pricing of energy. Is the government moving the way the 12th five-year Plan document wanted it to?
If prices do not reflect the real cost of energy, why will anyone invest in energy-saving equipment? Also, if prices don’t reflect the marginal cost of supply, which is imports, why will people invest to produce energy? Our problem is that energy is generally under-priced. Diesel, cooking gas and kerosene are under-priced. Coal is also under-priced, in the sense that the market price when coal is sold in auction is much higher than the normal price, and the price of imported coal is even higher.
We need a complete rethink on energy prices and align close to world prices. We cannot close the gap at one go but phased adjustment is necessary. Nobody likes to pay a higher price but we must recognise that we cannot expect to get on a nine per cent growth path if we don’t align its energy prices with global prices.
Also decontrolling diesel?
That should be our objective. It is not possible immediately and the government has indicated a practical compromise.
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What should be the direction in coal?
We need some difficult decisions there. In the Plan, we have clearly said the nationalisation of coal needs to be reconsidered. There is no economic logic in keeping the private sector out of coal if it is allowed in petroleum and natural gas. Why do we allow the private sector in these areas? Because we want to bring in as much investment as possible into energy production and we want new technology.
So, why not in coal? Such constraints on domestic supply are not justified. I am very aware that these are politically sensitive issues but the country needs to consider the matter objectively. If we are importing coal at high prices, it is odd that we will not allow the private sector to mine Indian coal but will allow people to import from private parties in Indonesia and Australia. That doesn’t make any sense.
There have been diverse views on whether (telecom) spectrum trading be allowed or not.
In my view we should allow it. I don’t think anyone has said we shouldn’t have spectrum trading.
But people have said the time has not come to allow it.
Well, the Planning Commission should be ahead of the times and point the way ahead. There was a reason for not allowing spectrum trading when we were giving it through an administrative mechanism. However, we’re now auctioning the spectrum; it is a market-determined price. If halfway through the process, the buyer wants to sell it to someone else for the rest of the licence period, why not let him? We can impose a capital gains tax on the sale but allowing trading would only increase efficiency.
You have often talked about infrastructure constraints and the government has set up the Cabinet Committee on Investment (CCI). However, GVK and GMR pulled out of road projects. How do you see the development in terms of the effect on infra projects?
These withdrawals are a negative development but I don’t know the details. The reason why we now have the CCI is to prevent this kind of thing…if certain clearances are being delayed too much, then the Cabinet committee will be able to intervene, a very positive development.
The current account deficit (CAD) widened to a record 5.4 per cent of gross domestic product (GDP) in the second quarter. Is it worrisome from a long-term point of view?
There is no question that CAD in 2012-13 is an area of weakness. A lot of this has to do with very high gold import. These are not like normal imports; you don’t need gold for GDP growth, unlike oil, fertiliser or other products. To some extent, large gold imports reflect the fact that people think gold prices might rise further. There could be several reasons — global excess liquidity, uncertainty in the Middle East, all of this could create that expectations. But I don’t expect large gold imports to continue.
Will increasing the import duty on gold not result in smuggling?
That is always a danger in the case of gold. I don’t think there is anything wrong with a little increase.
There is a talk of a food security law and there is a five-year map for the fiscal deficit. Can both go hand in hand?
Yes. If food security is a critical programme, we can give it top priority and cut something else. We have talked about reducing subsidies from 2.4 per cent of GDP to 1.5 per cent. We have not said there should be no subsidy. There is enough room in the limit indicated to accommodate a sensible food security bill but it does mean other subsidies will have to be cut more.
The plan document has said foreign direct investment (FDI) in retail should be supplemented by back-end investments.
Correct. Our focus should be to remove the many constraints which limit the ability of modern retail to operate. Modern retail requires more electricity, better roads, logistics, transport systems, etc, and also a modernised APMC (agri produce marketing) Act. You won’t get the full benefits of modern retail until these happen. But you can’t wait for all that — if FDI wants to come in at this stage in spite of our system, we should allow them to do so. The constraints are as binding on FDI as on domestic modern retail.
We ended 2012 on a rather sour note. Do you think by the end of 2013, we will be happier economy-wise?
I think so. I hope the economy will rebound strongly in the next four months. If you interview me this time next year, you will yourself say it has been a much better year.