Financial Daily from THE HINDU group of publications
Saturday, Mar 02, 2002
Industry & Economy
Money & Banking - Interest Rates
Sinha for linking interest rates to inflation
Saying cheese: The Finance Minister, Mr Yashwant Sinha, with the FICCI President, Mr R. B. Lodha, and former Presidents, Mr Sudhir Jalan, Mr S. K. Birla, Mr K. K. Modi, Mr C. Amin and Mr . S. Kasliwal, at the post-Budget meeting with industry in the Capital on Friday.
NEW DELHI, March 1
THE Finance Minister, Mr Yashwant Sinha, today made a case for effective linkages between the interest rates and inflation levels in line with the prevailing practice in other economies of the world.
Such a mechanism, he held, would ensure that the real interest rates do not remain unduly high in situations marked by a significant drop in inflation levels.
"Today, our real interest rates are the highest in the last one decade. This is mainly because of the one per cent inflation levels. The practice of linking interest with inflation is happening all over the world," Mr Sinha told newspersons on the sidelines of a FICCI seminar on the Union Budget for 2002-03.
The Finance Minister had only on Thursday (in his Budget speech) announced that administered interest rates will now be benchmarked to the average annual yields of government securities of equivalent maturities in the secondary market. Accordingly, most administered interest rates are being reduced by 50 basis points from March 1, Mr Sinha had said.
Earlier in his address to industry captains, Mr Sinha defended his budget proposals as one of further consolidation and extension of the second-generation reforms embarked upon last year.
The Finance Minister warded off criticism and stated that there was a clear direction to achieve a balance between fiscal deficit, fiscal consolidation and the need to rejuvenate demand in the economy.
"This is a budget that will take more time to sink in. The fine-prints have to be studied carefully," Mr Sinha said.
Despite the giveaway of about Rs 16,000-crore last year, there has been a shortfall in tax collections to the extent of more than Rs 20,000 crore in 2001-02. "I was told that such giveaways would be made up by increased turnover. Experience shows that this has not happened. The Rs 16,000-crore revenue giveaway of last year continues this year also," he said.
"I could have easily given away Rs 5,000 crore of revenues through introduction of investment allowance, Rs 7,000 crore through five percentage point reduction in corporate tax and Rs 5,000 crore through abolition of MAT. We would have only ended up with higher fiscal deficit to the extent of seven per cent of GDP. This would have resulted in more government borrowing and crowding of private sector in the market, more pressure on interest rates and even a downgrading by international credit rating agencies," he said.
He also defended the proposals on shifting the incidence of taxation of dividends from the companies to the recipient shareholders.
"I had pointed out two or three years back when I had removed tax exemptions on export incomes that income from whatever source it comes is income and should get taxed. I have applied the same principle in respect of dividends. There are a number of high net worth individuals in this country who earn large amounts of income as dividends without paying tax," Mr Sinha said.
On the demands for re-introduction of investment allowance, he pointed out that the Indian economy witnessed spurt in investments in the mid-nineties despite the absence of an investment-allowance. This allowance had been completely withdrawn in 1990.
"The point is that sometimes we look at solutions which are simplistic. They don't often deliver the goods. You feel that introduction of investment allowance would solve your current problems. But, the Government would have had to lose Rs 6,000 crore if it were to bring back investment allowance," Mr Sinha said.
He also urged domestic industry to prepare themselves for an import regime of about 10 per cent in the case of raw materials and intermediates and 20 per cent for finished goods by 2004-05.
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