Devangshu Datta: Rock 'n rollbacks

BEATING THE STREET

Yashwant Sinha initiated rollbacks and he probably did everyone a favour. Irritating as they are, rollbacks are a reasonable mechanism given the hypocrisy and hidebound traditions of the Indian political system.

The Budget is drafted in secrecy. There is no reason bar tradition why this should be so. Indeed, a transparent budgeting system would be preferable.

In a more transparent system, the Finance Minister would announce the measures he is contemplating in Parliament, take note of objections, and gauge the mood of the populace at large before actually drafting the Finance Bill.

A pre-Budget debate would provide better checks and balances against badly drafted laws or poor concepts. But moving to such an open system is unthinkable.

It would erode a key power of the Babu-Mantri nexus "" the ability to deny information to people outside the charmed circle. So the rollback presents one last chance for the FM to review measures before they are enshrined into law and inflicted on the nation.

If he reckons that the opposition to some specific provision is very strong or loopholes in the original draft come to light, the rollback offers a last chance to rectify matters. Of course, rollbacks also offer various interest groups and lobbies one last chance to block reformist measures.

But no system is perfect and given the opaque nature of Indian Budgeting, rollbacks seem, on balance, to be a good thing. Without a rollback, the government would have shot its borrowing programme in the foot this year.

The original provision for transaction tax on the trade of government securities led to an instant loss of liquidity in the debt market. A loss of liquidity means a rise in yields. A rise in yields means a rise in interest rates across the board.

As and when the government's revenue projections fall short, a high-yield, low-liquidity debt market leads to a ballooning fiscal deficit since market-borrowing has higher costs.

Whether he admits it or not, the FM must be aware that his revenue projections are extremely optimistic and actual collections are likely to be well under the estimates. He would not want to fund the difference by selling T-Bills into an illiquid market and so, he has removed the provision of STT on bonds.

Transaction taxes on equity, F&O and equity mutuals may not be a bad thing if these measures are coupled to cuts in capital gains taxes as they have been. The other "rollback" of lower STT rates and differential rates for delivery/ non-delivery will moderate the immediate impact and make the market more attractive in the long-term. Most investors will accept a small increase in front-end load if it's coupled to a drop in taxes on the profits.

Other nations have imposed stranger taxes. For example, Argentina and Brazil have a small fixed tax on every cheque transaction. This seems so retrogressive one is afraid to mention it for fear of giving ideas to our desi mandarins.

The cheque-tax has led to a rise in the tax-GDP ratio of the Latin American majors. However GDP growth has fallen along with the rising tax-GDP ratios. Obviously India doesn't have a monopoly on either strange taxes or bad governance.