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May 29, 1998


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The Rediff Budget '98 Special/Dr U Shankar

'China also has a low income tax rate... In a globalised economy, we do not have the freedom to choose our own tax structure'

I think the sanctions imposed on India by some countries will only be temporary. For, the sanctions hurt both India and the countries that are giving financial help, particularly countries like the USA.

As the US, which is a major trade partner, is concerned about its long-term prospects, the sanctions will be a temporary phenomenon. They are just trying to bully India and applying pressure. The sanctions will be withdrawn after a few months, especially because India is a big country with 50 million consumers.

So any foreign country will be interested in having a market in India. Even Japan will not go ahead with further sanctions as a large number of Japanese companies have operations in India, especially in the electronics field.

Japan and some other European countries have surplus funds. Now most of the money is going to China. My feeling is that all these threats will not last long.

One thing we can expect from the Budget is: they may try to increase the domestic savings as there is some uncertainty about the flow of foreign funds.

Therefore, there may be some tax incentives to encourage domestic savings.

As for imports, I expect some increase in the customs duty, just to please the Indian industry which has been complaining about the 'level playing field'. Playing to the swadeshi plank, the Bharatiya Janata Party-led coalition government may increase the import duty. However, all over the world, they are reducing the import duty.

The need of the hour, they should remember, is coming out with out with some long-term policies. Unless this is done, our economy will suffer again.

As for the personal income tax, I don't think there will be any big change. We already have the 10-20-30 per cent range. There is a possibility that they may create a fourth tax slab -- 40 per cent tax rate. But that may lead to evasion.

One thing is almost certain. There will be incentives for the savers. So long as one invests, why should the society be bothered about one's income?

India needs a lot of money for infrastructure. Since they hope for at least 7 per cent annual growth rate, they need a capital formulation at the rate of 28 to 30 per cent per annum.

Our domestic savings must be around 26 per cent. So, we have to fill that 3 to 4 per cent.

All the infrastructure projects have long gestation period, hence not many private investors will invest in them. The cost of capital is very high in India but, in other countries, it is quite low. But we have to assure the investors that they can get their money back.

As for foreign investors, why should they bring in money and construct a road which they cannot take back? This is called sunk investment or irreversible investment. It is not like an airline where you can hire an aircraft, operate for sometime and, if the business is not good, you can take it back. So, you have to create a climate to bring in more foreign investment. But, in India, most of the things are highly politicised.

Same is the case with telecommunication. There is no excuse at all for our slow progress. We can modernise India in just four or five years if you have good communication facilities. Similarly, we made a lot of mistakes in the power sector. People were willing to come with money. Because of the lack of clarity on the part of the government, nothing happened.

In the USA, for example, neither the Republicans nor the Democrats talk about electricity prices or telecom prices in their election speeches. They are totally depoliticised. If you want to give subsidy, it has to be a political decision. Why should you burden the electricity board? It is costly to provide telephones in villages where there is no demand. The government can do such social work, not the commercial institutions. If the government wants to do something, let them do it, let the subsidy be borne by the government.

As there is no other alternative, some governments are coming out with new schemes. See, we must have toll roads where the traffic can go fast.

Now the Tamil Nadu government and many other states are coming up with private roads. When the government has to look after so many other important needs of the people, why should they unnecessarily waste their time on things which can be done by other people at a cheaper rate and more efficiently?

Former finance minister Manmohan Singh had given a more open economy, but these people (the BJP) are going to be very cautious. Otherwise, there will not be much difference in the policies.

American businessmen are very shrewd and very practical. They are not worried whether you have a communist system or democracy. As long as they are allowed to function freely, they are happy. China creates a better ambiance for them, so they go there.

Many countries, when they opened up their market, deregulated telecommunication, airlines, etc. But they tried to look at the retail market first. The retail market is where you get the money.

Unfortunately, in India, we reversed the process and without touching the prices, we produced guarantees, counter-guarantees, etc.

Ultimately the investor would like to know how much money he would get for his product.

Even today the prices are determined by the state. That must go. The prices will change depending on the market conditions, particularly in an open economy based on international conditions. We must accept this fact.

At present we have quite a lot of liquidity in the system. If the government comes out with a concrete plan which may involve a long-term fiscal policy, tariff policy for imported duties, regulatory framework for power, road, telecom, etc, then there is a possibility that the economy may grow.

I feel that it is possible to achieve 7 per cent growth. Unlike China, Indian development is much broader, that is throughout the country. For that the government has to provide a good environment.

But political uncertainty persists. That is why I feel economic education for the politicians is very important. It is necessary that they must understand the pros and cons of the decisions so that they will be fully informed about the consequences. Now many of them become emotional or sentimental about many things... Sometime back, in India, there was training programmes for politicians.

Legal reforms are as necessary as economic reforms. Only now we are trying to amend the Urban Land Ceiling Act. Some of the industrial disputes are due to the faults in the ULC, the Companies Act, the Essential Commodities Act, etc. These are totally inconceivable in a market economy. But any change is possible only if you have a strong government at the Centre.

Another thing we have to keep in mind is that when you are talking about foreign loans and aid. They will be concerned about getting their money back. It has a bearing on the tax structure, the personal income tax and corporate income tax.

See, China also has a low income tax rate. So, the tax system of our country cannot be independent of the neighboring countries. If you have a 50 per cent income tax rate and China 30 per cent, people will prefer the latter.

In a globalised economy, we do not have the freedom to choose our own tax structure, our own interest rate.

We have to look at the consequences of the policies in terms of the affected parties too. It is no use talking about what's good for India alone. If Pakistan offers 20 per cent tax rate, they will go there. They are highly mobile. Millions of dollars can move from one national boundary to another very fast.

In one way, the government is doing one good thing, that they are transferring most of the responsibility to the state government. Now the state government can directly get foreign collaboration.

That way, the instability of the central government may not be a headache. So, you can say some good things are happening due to this instability.

As told to Shobha Warrier

Budget '98

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