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BW Businessworld

Partial Correction

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Pranab Mukherjee made history on 16 March. He was the first finance minister to present the budget other than on the last day of February. The breach of tradition was dictated by the spate of elections scheduled by the Election Commission in the early months of the year. It could have been avoided; all that was necessary was for the government to approach the Election Commission and persuade it to reschedule the elections. But reason and sensibility are in short supply at the present time.

In another respect, however, Mukherjee followed a precedent. His budget was as disruptive and ill conceived as those of his predecessor, the stern P. Chidambaram. That was quite an achievement, for Mukherjee is in in many ways the opposite of Chidambaram. Chidambaram finds it difficult to talk to anyone; he is particularly averse to listening to anyone. The result is that he made budgets that made unnecessary innovations in taxation, punished taxpayers for no fault of theirs and, in general, upset all and sundry. Mukherjee, on the other hand, is well known for his negotiation skills, for talking to people who cannot bear to talk to one another, and for finding solutions that bitter enemies can agree on. He is a consummate peacemaker; he can even pacify Mamata Banerji, though given her irrepressible effervescence, she would not keep peace for long. So it was quite a nasty surprise when he presented a budget in March that outdid any of Chidambaram's in the outrage it caused amongst honest taxpayers.

However, it is obvious that he has been listening to their voices, for on 5 May he promised a few amendments to his proposals intended to pacify them. He persisted in his determination to punish Vodafone for having bought into a telecom company from Essar in a tax haven. He promised not to tax deals retrospectively as long as they were made in countries with which India has double taxation agreements. This is quite improper, for at least two reasons: first, because the agreement was made abroad and is not therefore taxable in India and, more important, it is the gainer who should pay tax — in this case, Essar, which made huge capital gains out of the transaction. But then, Essar is a handspun, homemade company, and the finance minister is a committed patriot; it is difficult to think of any other reason for taxing the wrong party.

Mukherjee cut the proposed tax on foreign borrowings from 10 per cent to 5 per cent. That does not make it any more right. The general principle is to tax income in various forms, and to leave assets and liabilities alone; debt in particular does not deserve to be taxed. In any case, the Reserve Bank has traditionally operated quantitative restrictions on foreign borrowings. If Mukherjee, for a reason best known to him, wanted a reduction in debt inflows from abroad, he could have picked up the telephone and talked to the Reserve Bank governor. What reason he had in mind must remain a mystery, for in the same budget he took measures to encourage other capital inflows.

The proposed duty on branded jewellery was ill conceived, because branded jewellery constitutes a tiny proportion of the total jewellery market and has a close substitute in unbranded jewellery; an excise duty on it would have only led people to buy unbranded jewellery instead. More seriously, the finance minister's covetous eye fell on the rising imports of gold, on which he doubled import duty from 2 to 4 per cent. There, the substitution effect will be all on the wrong side. It will make smuggled gold cheaper and revive smuggling. The master smuggler used to be Dawood Ibrahim. After Chidambaram opened up gold imports as finance minister in the National Democratic Alliance government in 1997-98, gold smuggling died, and Dawood retired into a luxurious fortress built for him in Pakistan. Mukherjee's doubling of gold import duty may tempt him to venture out again for fat profits; more likely, it will tempt hundreds of criminals to buy speedboats and start running gold from Arabia to the west coast of India.

These are only a few examples to show that while Mukherjee abandoned a few of his unwise proposals, he retained a good many. This is not surprising, for wisdom requires boldness. All the nefarious proposals in his budget did not come from him, but were no doubt fed to him officials who appreciate the relationship between high taxes and high bribes or who think that all businessmen are crooks and that taxes are a way to punish them . While Mukherjee's retreat on some issues is welcome, it is disturbing that he continues to be surrounded by the same coterie and will be making another budget with their help next year.

(The story is issued in magazine dated  21 may 2012)