The monetary policy of the Reserve Bank of India has invited despairing reactions from a cross section of the industry, media and analysts. The issues staring the Indian economy are complex and cannot be addressed by tinkering with repo rates to slash the cost of funds to be made available to the industry. However, the need for a boost to the industry cannot be overstated. In this background an attempt is to be made to devise innovative methods to kickstart the economy and create a favourable atmosphere for the Central Bank to pitch in by slashing the repo rates.
Cost reduction to fuel demand:
The fuel prices have been spiralling and have impacted the prices of all manufactured products. There is a need to initiate a reform process in pricing of fuel products. These products being essential in nature should attract levies at a flat value rather than a percentage of the base price with varying bases. The Central and State Governments should agree to not levy more than 4% for every Rs 25/- of the company price. Further, to this if the retail value of the fuel is fixed across the country, it would ensure that all industries benefit equally. The initial value can be fixed at Rs 60/- wherein the State gets Rs 2/- and Centre Rs 2/- per litre or unit effectively slashing the value to Rs 54/-.
The subsidy factor of the fuel products could then be phased out in a period of three years while the amounts parked for subsidy can be shared in a ratio of 80:20 between States and Centre.
The next step would be to reform indirect taxes by ensuring that at no point the levy exceeds 8% except in cases such as tobacco products etc. This would considerably reduce the prices of the manufactured products. The MODVAT system would ensure that the loss is effectively compensated to a larger extent though not fully. These steps would ensure that inflation could be controlled and and also fuel a demand from the supply side.
Consumer driver:
The consumer is now inhibiited by prohibitive pricing. He neither spends nor invests resulting in locking up of funds. Hedging against the inflationary tendencies, consumers are driven to purchase gold or save in fixed deposits. These deposits attract higher rates of interest while the industry does not borrow funds due to high interest costs. This would end up destabilising the banks in the longer run. The need of the hour is to hand a carrot to the consumer to either invest in the industrial or agricultural sector or spend rather than hoard gold. Lower cost of products would drive them towards purchase but this would impact the economy only in the medium term.
For the benefit of the short run, the direct tax reform is to be introduced. The deductions accorded favour the rich against the poor as they get higher relief of taxes. If the same were to be converted into rebates and categorised, the economy could benefit. Savings should attract a rebate of 10% of the amount saved from the tax liability. Expenses in the form of contributions to 100% tax free funds should attract a rebate of 20% of the amount contributed from the tax liability. Similarly, the investment in industrial and agricultural sector should attract a 30% rebate from tax liability. A ceiling of Rs 20000/-, Rs 40,000/ and Rs 60000 could be prescribed. This would encourage even the marginal class to invest as their tax liability could be extinguished faster. The rich are dissuaded from saving and motivated to spend or invest.
Fiscal Management:
The reforms in the indirect and direct taxes would appear to diminish the revenues. This will not be the case. The lower the levies the wider the tax base and compliance. This fact is best established from the phenomenal growth in revenues since 1996. Lower costs stimulate greater demand resulting in larger production and therefore higher revenue. Similarly, the cost of investment and management is prudently addressed by ensuring that no interest costs are tagged nor is the banking sector taxed. In fact, it would also be a good measure to consider restoring the standard deduction for salaried class thereby ensuring that people do not drift to other heads of income and reduce tax liability artificially by charging expenses. This would also increase compliance levels
The levy of tax on transaction in immovable properties at a flat rate is to be considered. If the definition of the term short term capital asset were to be amended to bring under its ambit immovable properties which are held for a period less than ten years and a levy of 5% is prescribed on them while in case of long term capital assets it is prescribed at 2.5%, the administrative mechanism of a capital gains scheme account or the tracking of the deductions and their claims would not be warranted. It would also minimise the scope for corruption on these fronts. Such a flat levy which would neither be refundable nor taxed again would ensure that compliance levels on such transactions bring in larger revenues to compensate the loss even during the short term. This levy should however not exempt any class of immovable properties. Even if one were to consider agricultural properties for an exemption, the same should attract this levy at the time of conversion for non agricultural purposes. Similarly, the levy should stand attracted in the case of joint development agreements. This would deter channelising of black money through real estate transactions.
A levy of commodity transaction tax on bullion, silver on the lines of securities transaction tax could be considered to compensate the short term loss by the outlined direct tax reform measures. A levy of 0.01% on payments to e payment gateways irrespective of whether they belong to India or outside would also bring in substantial revenues especially in the light of the growth in ATMs, debit cards and credit cards.
The conferences such as G 20 and other summits could be established through video conferencing rather than travel of global heads. This would set a sterling example for minimising public expenditure. Public expenditure should be in the nature of development. Focus should be placed on education, health, transport etc. Construction of rain water harvesting cells on major roads and linking them to major tanks or construction of fresh tanks would also ensure provision of water for the future.
Euro zone crisis and India
India must also focus on increasing its imports from countries hit by euro zone crisis as a measure to fund such nations. Parallely, it should encourage exports by looking East and to the African nations which are largely untapped. The African market is to be drawn into the global market by India. The Euro zone crisis should be viewed as an opportunity to strengthen the rupee. A vision to convert the rupee to a hard currency should lay a roadmap out of the present scenario.
These with other innovative ideas should be conceived to take us out of a crisis and not to look at the Central Bank to bail us out each time.
No comments:
Post a Comment