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Impetus and impediments

K. Venugopal

PRICE reduction is a time-tested device to stimulate demand. The corporate sector knew it all the time; the explosive growth in the telecom sector in response to dramatic tariff cuts being the latest proof of the concept.

The Railway Minister, Mr Nitish Kumar, learnt the lesson the hard way. After raising passenger fares last year only to see earnings fall, he has reduced some fares this time in the belief that earnings will surge upwards. May be the need to catch the votes in the impending polls lent strength to his conviction, but the commercial need was strong all right.

The Finance Minister, Mr Jaswant Singh, too seems to have picked up this tack, but ambiguously. Reduction in the tax for the salaried sector and the abolition of the tax on dividends in the hands of the shareholder are some of the moves that will leave consumers with more spending power.

The continuation of the tax breaks for housing is designed to sustain the momentum in the construction industry, while the new funding strategy for road projects should invite investment in secondary roads to match the National Highways development programme that has played a distinct role in reviving sections of industry over the past year.

The reduction in the excise duties on motor cars, air-conditioners, bicycles, pressure cookers, umbrellas, walking sticks, etc, may stoke new demand should manufacturers lower sticker prices.

But Mr Jaswant Singh failed to take the price-cut strategy any further, raising the duties on goods such as cement, petrol and diesel and, more pointedly, the service tax from five to eight per cent across the board. It has been the services sector that has been showing the maximum rate of growth this year (7.1 per cent) and shoring up the GDP growth to 4.4 per cent.

One rationale for the increase is that the rate of tax has only been brought up to the lowest excise rate on goods. Will the tax increase work on the mind of the consumer and dampen demand for these services?

The Budget numbers offer a clue to the thinking at North Block. Given the increase in the tax, the revenues from service tax are expected to rise from Rs 5,000 crore to Rs 8,000 crore. Whether it is lazy arithmetic or a perceptive study of market behaviour, the estimate indicates the Government does not expect any growth in volume in what has so far been some of the fastest growing segments of the economy.

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