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Tuesday, Apr 09, 2002

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An economy taxed

FROM ROLL-BACK to feel-good and now roll-over, the Finance Minister, Mr Yashwant Sinha, has played all the cinematic roles in presenting five Budgets. Yet, no political party will nominate him for a lifetime achievement award. Today, every constituent of the National Democratic Alliance, including the BJP, wants some parts of the Budget 2002-03 lopped off leaving little of the original document. The BJP has blamed its loss in the Delhi Municipal elections to the Budget while most parties are against the legitimate cut in the subsidy on kerosene and LPG to reduce its impact. Now, the TDP supremo, Mr N. Chandrababu Naidu, billed as a reformist, wants a review of the Budget proposal to tax 10 per cent of the export profits made by EOUs. To add to the mess is the goings on in Gujarat that have virtually doused hopes of any swift economic revival.

There is no denying that Mr Sinha got it all wrong in diluting the Section 88 benefit. Here he was withdrawing concessions to one section of taxpayers without providing a clear idea about how the structure of tax incentives across the economy is going to be handled. Shifting the burden of the tax on dividends from companies and mutual funds to individual investors hardly improves efficiency of collection; and an income-tax surcharge need not have been attempted when the economy is performing poorly. As many said on the day the Budget was presented, higher taxes need never have been thought of when investment demand is weak; and Mr Sinha retorted was that every Budget could not have a grand vision. When Parliament opens shortly to discuss the Budget, Mr Sinha will have no good news on hand to persist with the Budget package. The economy is not doing well and investment demand is still sluggish despite a further fall in interest rates. Banks have cleverly used the opportunity to make trading profits on government paper when they should have boldly dropped prime lending rates by one percentage point and gone in search of clients in the farm and services sectors. Banks do not bother to tap clients in the services sector saying they have no collateral to offer. Perhaps, the insistence on hefty collaterals by banks prevents funds flow into the economy except the corporate sector; but this aspect never came up for discussion at the recent CII summit on banking. The poor have no collateral except themselves and bankers will have to reconcile with this profile of the Indian economy. Evidence: Every year more funds are allotted to the Rural Infrastructure Development Fund while disbursals are at a low 30-40 per cent.

Mr Sinha will have to find a way to use the bagful of rupees and dollars to get the economy going. And that can be done only by lower taxes matched by cuts in government expenditure. Which State government has acted to free movement of farm products, as proposed in the Budget? Needs of economic growth do not square well with a prominent role for the taxman, Mr Sinha.

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