PRICE RISE
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UPA government’s maths shaky

The government is entirely to blame for the exponential price rise that is convulsing the country. And it stands to suffer at the hustings for is ennui.

The spectre of inflation is haunting the government. The latest figure of 6.58 per cent increase in the wholesale price index for the week ending January 27, 2007, is the highest increase in the past two years. The consumer price index for agricultural labour shows an increase from 8.33 per cent in November to 8.96 per cent in December 2006.

The UPA government is squarely responsible for the present state of affairs. In the middle of last year, the government claimed that the price rise was seasonal. Later, the finance minister argued that inflation was a natural consequence of rapid economic growth. The argument that inflation is a consequence of rapid growth also does not stand scrutiny. The Chinese economy has been registering rapid growth for three decades. Inflation is currently below 2 per cent in China. Recently, the government and its economic advisors are pointing to "supply"
constraints as a main cause for inflation. Despite all these arguments, the government cannot escape the responsibility for its gross failure. The rising inflation and price rise is a direct result of its policies.

The world prices of sugar have fallen sharply, yet the retail price of sugar in India continues to climb. The fiasco of wheat imports last year underlined the failure to procure adequate amounts of wheat from farmers because private players are being allowed to corner stocks. Large-scale import of wheat last year did not check the rising price of wheat.

A major reason for the rising prices is the UPA government's refusal to reverse the steps taken by the BJP-led government in 2003 to lift all restrictions on futures trading in agricultural commodities. In the past three years, there has been a huge increase of over 600 per cent in the total value of commodities traded in the futures market. It is not the farmers who are benefiting from the futures trading but a handful of big companies and traders. The government has refused to accept the recommendations of the parliamentary standing committee on food, consumer affairs and public distribution to ban futures trading in essential agricultural commodities.

International oil prices have come down substantially. After the token cut in Rs 2 for petrol and Re 1 for diesel in December 2006, the government has refused to restore the pre-June 2006 prices by making a further cut. Neither is the government prepared to do away with the ad valorem duty structure on oil imports.

Food security and strengthening of the public distribution system is linked to adequate production of foodgrains. Encouragement of incentives to switch from foodgrains to cash crops alongwith other reasons has led to a fall in production of foodgrains. The public distribution system has been systematically weakened in order to cut back on food subsidies. In the union budget last year, there was a cut of Rs 3,000 crore in the food subsidy. The government will have to take urgent steps to strengthen the public distribution system and expand its purview by including pulses and edible oils and other essential commodities.

Instead of taking these steps, the government announced in January cuts in import duties on cement, capital goods, project imports, metals and chemicals. Such drastic cuts in import duty on manufactured items will have an adverse impact on domestic producers leading to deflation and unemployment. The government should immediately put curbs on the futures trading of essential commodities. It must reduce the prices of petrol and diesel further; it should revise the ad valorem duty structure on petroleum products.

  

Taxed to death by policy wonks

No sooner were deposits in banks taxed than any gain was lost. Black money is increasing and speculative financial activities are fuelling inflation. Where have our planners gone wrong?

Inflation has touched almost 7 per cent and the government is aiming at 9 per cent growth, a target set in 1999-2000. Every year the finance ministry and Reserve Bank of India have been promising the nation that it is within reach. The process of growth all these years has never been smooth. Each time a modest growth appeared closer, taxes have been increased. Various panels suggested that personal income tax be kept at 30 per cent. But subsequent governments raised it by levying one or the other cess. Now, it is around 35 per cent and, if the overall tax burden is taken into account, it touches 70 per cent.

The government has been trying to mobilise resources by increasing taxes and not through any innovative tax reforms. In reality, the higher the taxes, the higher the inflation. The worst the finance ministry has done is to tax intermediaries like savings and deposits in the banks. High taxes only lead to avoidance and evasion. But the government has not tied up the taxes with its new liberalisation policy.

Over the years Rahul Bajaj, Arun Bharat Ram, Sanjiv Goenka, Nusli Wadia, Ajay Piramal and Arvind Pande all have expressed concern over the high tax regime. It is high time a critical look is taken at taxing the deposits in banks. It followed a move of voluntary disclosure (VDS) of accumulation. It was a welcome move to integrate the so-called black money with the legal white system. Whatever little gain was there through VDS has virtually been lost. With the VDS, many who had been shunning the banking system, had started keeping their money in the banks. That was also the time when real estate prices had found an affordable level and increase till 2004 was minimal. Speculative activities had come to a halt. Those who looked for parallel for parking their money opted for the banking system.

But no sooner were the deposits in banks taxed, the gain was lost. Black money is increasing and speculative financial activities are fuelling inflation. The money that would have gone into legal channels is feeding illegal activities—real estate, where only one-third or less is transacted in white, hawala, pseudo-stockmarket operations, satta, and the like. Petrol is not the only product that fuels inflation. There is a need to have a holistic look. Inflation also means higher government spending on all its activities, higher borrowings and higher needs to generate resources through taxes. Inflation results in throwing all calculations to the wind. At the government level, it is bound to affect developmental activities. For the market it means lowering of purchasing power of the people—something undesirable in a consumer-driven economy.

For years reform of the tax regime is being talked about. In reality, these have proved to be lip services. Not more than two per cent of the population still pays taxes. Over 80 per cent of them come from poor income bracket of less than Rs 3 lakh a year. They also form the so-called rising middle class.

By taxing them and depriving almost 35 plus per cent of their income directly and another 30 to 40 per cent through indirect taxes at Central, state and local bodies level, can the economy really expect to boom? The manufacturing sector growth would become an illusion if the real consumers were kept out of the market through such tax- driven mechanism.

The bureaucracy has already come up with formulae to tax the common man more. It is the most pernicious of all ideas. The need is to lower the taxes and abolish the personal income tax, which unfortunately has come to be known as “impoverishing tax”.