What one hand taketh

Going by recent reports, the finance ministry appears to have developed a case of split personality. At one level, ever since the 1991 reforms, the predominant themes in fiscal policy have been rationalisation, streamlining, and consolidation.

The objective, and a completely legitimate one at that, was to make the tax system as neutral as possible with respect to its impact on production, investment, consumption and savings decisions.

While one may argue that there was still a long way to go down that road, there is no denying that an enormous distance has been covered. The extremely wide ranges of rates in both customs and excise duties have been considerably narrowed by successive governments.

Income tax rates were streamlined in accordance with international practices by Mr Chidambaram in his previous term in the ministry.

What remains to be done, as spelt out in the Kelkar Task Force blueprints, is to now eliminate exemptions and other sources of discrimination, while continuing with the effort to lower rates as far as possible.

On the other hand, starting from the Union Budget of 2003, there has been a distinct sense of a return to a sector-based fiscal policy.

The Budget speech of that year contained a relatively long section on specific benefits and exemptions geared to a variety of sectors.

This approach, which constitutes a rather undesirable backtracking from the trend towards rationalisation and neutrality, seems to have entrenched itself in the present ministry as well.

Every few days, there are reports of a special package for one sector or other industry, usually referring to a tax concession. Such concessions are typically justified on the grounds that the sector concerned is employment-intensive or a major exporter.

Employment generation and export promotion are perfectly laudable objectives in their own right. The question that needs to be squarely addressed, however, is whether it is the burden and responsibility of the finance ministry alone to further that objective.

Over the last decade and a half, this ministry has come to be seen as a key initiator and facilitator of reforms across the board. While this is a critical role even in the current context, it simply does not justify the ministry trying to compensate specific sectors for the obduracy and resistance to reforms that many other ministries have displayed over the years.

The most important role of the finance ministry today is to ensure that taxes that are owed are collected and that money gets spent in growth- and welfare-enhancing directions.

It is certainly within its right to browbeat and cajole other ministries, even using the threat of choking off funds if necessary, to move recalcitrant ministries in the right direction.

All kinds of policy constraints still hinder competitiveness and productivity growth across a variety of industries. The ministry simply cannot think of offsetting these through a never-ending series of tax concessions.

Its energies will be far more productively spent in using its resources to induce other ministries in pushing through the required changes as quickly as possible. It should return to the path of neutrality; that is in the economy's best interest.