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Planning Commission deputy chairman Montek Singh Ahluwalia knows very well that he should not utter a word on controversial proposals like super rich tax and inheritance tax, little over a month ahead of the Budget presentation in Parliament. However, he says if the rich pays its due shares of tax, the government would get much needed revenues.
In an interview with Indivjal Dhasmana and Sanjeeb Mukherjee, he terms an indication by the government to gradually raise diesel prices a practical compromise and favours denationalisation of coal sector as well. He also calls for allowing spectrum trading and imposing a capital gains tax on those selling this natural resource and making gains. He describes GMR and GVK moving out of some road projects a negative development and rising current account deficit (CAD) an area of weakness. He doesn't think that small increase of import duty on gold will lead to smuggling and believes the economy would be much better in 2013 than 2012. Edited interview:
In the run-up to the budget, various ideas are mooted. One of these is super rich tax. What is your take on that?
I am not involved in the budget process.
As an economist, what do you think of the proposal?
I would not comment on tax matters, just before the Budget. Making the budget is a complex exercise which involves careful weighing and balancing of different considerations and this is best left to the Finance Minister to work out. However, I should point out that 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 income above Rs 10 lakh is far too small. We need to expand the tax net to catch more of the income and that will be generating a lot of tax revenue.
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.
What is your take on inheritance tax?
Again, I don't want to add to speculation when the budget is being made.
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 real cost of energy, why will anyone invest in energy saving equipment to save energy. 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, LPG 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 re-think on energy prices and align our prices close to world prices. We cannot close the gap at one go, but some sort of phased adjustments is necessary. Nobody likes to pay a higher price but we must recognize that we cannot expect to get on a 9% growth path, if we don’t align its energy prices with global prices.
Does that mean decontrolling diesel also?
That should be our objective. It is not possible immediately and the government has indicated a process of gradual adjustment. This is a practical compromise.
What should be the direction in the coal sector?
We need some difficult decisions there also. In the Plan we have clearly said that 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 this areas? Because we want to bring in as much investment as possible into energy production and we want to bring in 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 Indian private sector to mine Indian coal, but we will allow people to import from private parties in Indonesia and Australia. That doesn’t make any sense.
There has been diverse views on whether spectrum trading be allowed or not. Your take?
In my view we should allow spectrum trading. I don’t think that anyone has said that we shouldn’t have spectrum trading .
But people have said the time has not come to allow spectrum trading
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, now we are auctioning the spectrum, it is a market-determined price. If half way through the process, the buyer wants to sell it to someone else for the rest of the license 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 their effect on infrastructure projects?
These withdrawals are a negative development. But, I don’t know the details of these cases. However, the reason why we now have the CCI is to prevent this kind of thing…that is if certain clearances are being delayed too much, then the Cabinet committee will be able to intervene. I think that is a very positive development.
India's current account deficit (CAD) widened to a record 5.4% of GDP in the second quarter of the current financial year. Do you find it worrisome from the 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. Gold imports are not like normal imports. You don't need gold for GDP growth; it's not like oil, fertilizer or other products. To some extent, large gold imports reflect the fact that the people think that gold prices may 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 import duty on gold that various quarters are talking about not result in smuggling?
Ans) That is always a danger in the case of gold. A small duty may not increase smuggling very much. 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 roadmap of fiscal deficit for five years. 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 subsidy from 2.4% of GDP to 1.5%. We have not said there should be no subsidy. There is enough room in subsidy limit indicated to accommodate a sensible food security bill, but it does mean that other subsidies will have to be cut more.
The plan document mentioned that based on experience from domestic retailers…FDI in retail is just not the end all things…it should be supplemented by back-end investments as well because experience from domestic retailers has been the back-end has not come?
That is correct. Our focus should be to remove many constraints that limit the ability of modern retail to operate. Modern retail requires more electricity, better roads, logistics, transport systems etc. and also modernized APMC Act. You won’t get the full benefits of modern retail until that happens. But you can’t wait for all that to happen. If FDI wants to come in at this stage inspite 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. They believe economy is beginning to turn around. I hope it will rebound strongly in the next four months. If you interview me this time next year, you will yourself say that it has been a much better year.
