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Last Word: Half Done, Well Begun
The resort to cess revenue is against the spirit of cooperative federalism, since it is not shared with states
Photo Credit : Shutterstock
Arun Jaitley’s budget proposals got a rare triple salute from the bond, stock and currency markets. His decision to stick to the decimal of the fiscal deficit target promised last year was the trigger for this elation in the markets. What exactly is the market cheering?
It’s the possibility of a virtuous cycle, starting with a booster shot of a rate cut from the Reserve Bank of India. Surely, the RBI is now satisfied the government will not gobble up all the loanable funds, and hence can slacken rates. A rate cut leading to large dollar inflows, a stabilising currency, moderating inflation leading to further rate cuts is now a distinct possibility.
This script has played out before in a previous NDA regime when Yashwant Sinha was the finance minister and Bimal Jalan the governor. That had kicked off a growth rally. But the props are different this time, and hence the script and plot will unfold differently.
Unlike the early 2000s, the present global economy is barely shuffling along, and global trade is shrinking. The huge fall in commodity prices has inflicted casualties; most notably the recession-hit Russia and Brazil, two BRIC members.
Of course, India is a big beneficiary of the falling oil and commodity prices, but it still needs global tailwinds to sustain its high growth. India’s exports have shrunk by 15 per cent in the past one year, while its trade deficit with China has reached a record $52 billion. It is as if China is harvesting India’s consumer spending, and domestic manufacturers are at a disadvantage. Goods produced in Thailand have duty free access to India, while goods produced in the Special Economic Zones within India face a stiff duty barrier to sell outside the SEZ. The budget proposal has not addressed such tax anomalies.
There is also an unwelcome enthusiasm to impose taxation via cess. At least four different cesses were introduced this year. There’s the Swachh Bharat and Krishi Kalyan cess, adding 1 per cent to the service tax rate, and the infrastructure cess which adds 1-4 per cent excise on cars. And then the Rs 400 per tonne cess on coal, which amounts to an increase of 800 per cent in just five years.
India has the world’s third largest abundant reserves, and in the foreseeable future will depend on coal for its electricity. With discoms in dire economic health, this additional cost of coal was surely avoidable. The steep increase in taxes on petrol and diesel along with the coal cess means India has the highest form of carbon taxation in the world. This increase in power cost is antithetical to the Make In India initiative, and is also needlessly hasty.
The resort to cess revenue is also against the spirit of cooperative federalism, since it is not shared with the states. Almost one fifth of the tax revenue share of the Centre comes from cess. Maybe this was the secret behind achieving fiscal prudence. If that prudence is rewarded by an interest rate triggered rally, then we might have a bumper Diwali, what with pay commission awards to urban folk, and significant spending push toward rural folk. Even then we need the passage of crucial Bills like Aadhaar, bankruptcy and the above all GST. The job of putting the economy in a higher orbit has just begun.
The author is President & Chief Economist at Aditya Birla Group
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.