Govinda Rao, the director of the National Institute of Public Finance and Policy, tells Indivjal Dhasmana & Vrishti Beniwal that relief from inflation rather than tax should be the priority of the Budget
With direct tax reforms expected to come from April 1, 2012, what relief can the inflation-hit common man expect from the Budget?
There may be some rationalisation in the slabs, particularly the exemption limit, which may be increased marginally. The DTC (Direct Taxes Code planned in place of the Income Tax Act) will be introduced next year and there may be some move towards that. They may also decide that since the DTC is coming next year, whatever changes are needed they should be done next year. But, some marginal changes might happen just to give some relief to the common man from inflation. However, I do not expect any significant change. The need is to work more on the exemption limit than on standard deduction, because standard deduction accrues to organised employees, whereas the exemption limit applies to everyone.
What are the other tools that the government has to give relief to the common man from inflation?
The best relief they can give to the people is to control the inflation, especially food inflation. In the last two years, the cumulative increase in food inflation has been 40 per cent. Vegetable prices have started falling and I believe by the end of the year the overall average inflation rate will be around eight per cent. I think food subsidies will continue for a while because there is so much political pressure to do that. Everyone gets affected by inflation and not just the taxpayer. Don’t forget that 97 per cent of the population doesn’t pay income tax. Tax sops will benefit only three per cent of the population. So, tax sops will not neutralise the inflationary impact.
The government is under attack from the Opposition on charges of corruption, price rise and black money. Do you think this is going to be a populist Budget and the finance minister will try to do some damage control?
Issues of governance deficit and trust deficit cannot be addressed through the Budget, these have to be separately dealt with. Obviously, a poor finance minister cannot afford to be populist. There are fiscal consolidation targets set for him. In any case, no election is approaching as far as the Central government is concerned. So, I don’t see any reason to be populist in this Budget. At the end of the day, people have to realise that by being populist you are only going to increase the deficit, which is going to harm everyone.
What is your take on the immunity scheme for bringing back black money stashed abroad?
Amnesty is a very controversial issue. We have done amnesties in the past, but giving amnesty from time to time is not going to solve the problem. It will only aggravate expectations that you can merrily go about doing things because after sometime there will be another opportunity for amnesty. We may collect a small amount of revenue but that’s not going to solve our problem. Amnesty has never been followed by any significant improvement in tax administration to prevent creation of black money. Morally, it is not the right thing to do. We need to get information on them and put heavy penalties on them. Tax compliance is a function of tax rates, the probability of detection and the penalty rate. I think we need to keep tax rates reasonable and increase the probability of detection to ensure that the people who owe the taxes pay. Also, we should improve our judicial system to ensure that the penalty is slapped in time.
Crude oil prices are again going up. If the government passes on the increase to the consumers, inflation will go up. Is there a case for reducing duties on petroleum products?
Rationalisation of taxes on petroleum products is important not only because of the inflationary impact, but also because of the cascading impact of taxes on petroleum products. Value added tax is not applicable on petroleum products at the state level. On diesel, the floor rate (the minimum rate that states have agreed to impose) is 20 per cent. But Punjab has flouted it and levies the tax at eight per cent, while Maharashtra levies it at 37 per cent. Whenever the Centre raises prices, these people get a windfall gain. At the Centre, a lot of these taxes are on specific basis and not on ad valorem basis. So, this Budget can hardly do anything about it. Petroleum products should be part of the GST (new proposed indirect tax system) and there should be an additional ‘green tax’.
How should Finance Minister Pranab Mukherjee tackle the issue of boosting growth and taming inflation in the forthcoming Budget?
There are short-term measures and there are long-term structural reforms that are needed. In the short-term, you need to augment the supply and curb expectations about high inflation. This also implies that policymakers should not press the panic button. If they go on the TV and say supply is going to reduce and prices are likely to rise, then obviously prices are going to rise. In the long term, we need to make huge investments in agriculture storage, marketing facilities and transportation. You also need to increase the productivity in agriculture. That would mean substantial investments in irrigation. Similarly, you need to augment your post-harvest technology in order to prevent wastage.
Are you implying that opening up of multi-retail trade would be a step in the right direction?
We recognise that the government does not have a great deal of money to make investment in various infrastructure facilities. Therefore, it would be useful to open up the FDI in retail. The storage infrastructure that is required for the purpose and intermediation with the farmers at the various levels will be cut down. In fact, the competition increases. Similarly they are talking about allowing the farmers to come and directly send their products to the mandis here. We should have infrastructure facilities created to allow the farmers to come and sell their products.
