Ad hoc, improper

The manner in which the government has announced a series of indirect tax changes is unprecedented.

These ad hoc and arbitrary policy measures are bound to adversely impact the precarious fiscal position of the government and make the economy more vulnerable to a fiscal crisis, because it cannot be anyone's case that the fiscal situation is so comfortable that Rs 10,000 crore, or close to 0.4 per cent of GDP, can be given away at one stroke.

No Budget presented by the Vajpayee government since 1998 has seen such massive giveaways. Why now, through a press note? It is easy to guess.

This may not violate the electoral code of conduct in letter, but there can be no doubt that it is a complete violation of the spirit of the code.

The move to announce a slew of changes is therefore objectionable for three reasons. First is the context (or the lack of it) in which these measures have been taken; second is the content of some of the measures; and third is the timing.

Companies and consumers will naturally celebrate the giveaways and the drop in prices, and there will be fresh steam in the Sensex, but if fiscal solutions were so easy and popular, fiscal management would not have been such a hard nut to crack.

The finance minister will argue that growth in demand will fill the tax hole, but the Laffer curve has not worked with previous rounds of tariff cuts.

The problem is that these measures are independent of any statement on the finances of the government.

While, constitutionally, there is nothing to prevent the government from announcing such measures, they are normally a part of the Budget because they have revenue implications that must be understood in their totality.

By divorcing these changes from such budgetary arithmetic, the government has opened up the economy to the dangers of a possible fiscal crisis.

To act as though the government knows all the answers, and that these answers do not have to be shared with the public at large, is to show contempt for the usual proprieties of the system whereby budgetary matters are taken seriously and debated at length.

So, in addition to bad economics, these measures reflect political impropriety. Coming as they do just before the expected announcement of general elections six months ahead of schedule, these measures amount to by-passing the parliamentary system and buying favour from voters.

As for the micro-impact of the specific measures, it is easier to find that a lot of good things have been done "" though there is once again multiplicity of rates.

Customs tariffs are imposed at 5, 10, 15, 20 and 25 per cent, with no particular rationale to explain why any item figures in one category and not another.

Why should the air travel tax be abolished when it could be used, like the road cess, to finance the creation of airport infrastructure, badly needed?

There is some logic to dropping the taxes on aviation fuel (which puts the loss-making domestic airlines at a disadvantage against foreign carriers who get cheaper fuel elsewhere), and the halving of taxes on cellular phones is clearly aimed at killing the "grey" market.

Ditto with duties on computer hardware, which additionally has the merit of improving the country's IT-connectedness.

It is also a welcome feature that the thrust is to lower tariffs and open up the economy, especially when steel prices have been climbing and cuts are imposed on investment goods like power equipment.

The moves on filing of returns by specific categories of individuals are clearly aimed at reducing the hassle factor.

But the old specter of special interests emerges in the duty reduction for mosquito nets that are treated with pesticide!