The last few days have witnessed a bizarre spectacle of persons affiliated with different ideologies sharing the platform for protesting the price hike in petroleum. The stranger aspect of this episode was that the States wished to hold on to its revenues while the Centre wished to hold deregulation of petrol prices the culprit. In the bargain, the common man of R.K. Laxman's fame was left in tatters with a placard in hand while his pockets were being emptied into the coffers of the State, Centre and the oil companies. Adding fuel to fire, a hike of Rs 7.50 per litre was compensated by a bandh which impacted the economy already in shambles followed by a cruel joke of a reduction by Rs 1.68 per litre. The whole charade went ahead as per the script without even making an attempt to identify and address the root causes of the issue on hand. Therefore, yours truly is making an attempt to look into the issue on hand dispassionately to the extent possible.
It cannot be gainsaid that the States look for their own share of tax revenues while the Centre also looks for its share in tax revenues. The land of Arthashastra should instil the economic sense of not having a percentage based taxation for a basic product such as fuel which triggers inflationary tendencies. Considering the fact that the Centre and States anticipate only a said amount of taxes, the freezing of the tax on petroleum products at a specific value per litre irrespective of the sale price would ensure that the Governments of the day got their share while the oil companies do not bear the brunt of the fluctuations in oil prices.
However, the arguments that would arise is that the Governments also would incur the additional expenditure on account of rising costs which needs to be factored in. this aspect cannot be denied but revenues from non taxation sources which would have no inflationary tendencies could be utilised to form a contingent fund for this purpose. The next question that comes up for consideration is what could be such source of revenue. The Government uses a large fleet of vehicles and also owns prime space with infrastructure. These vehicles and space could be utilised to generate income on the lean days and holidays by providing these locations and vehicles on rent. The use of vehicles for personal purposes on such days needs to be strictly on rental basis as provided in the existing rules. This would by itself generate substantial income. Further, the Government could facilitate training of personnel of different organisations for a fee in matters relating to compliance. This would also generate income for the Government. The share of revenue in Government private partnerships also provide a source of revenue without expenses being incurred. Provision of auditorium space for cultural events would bring rental income and also provide the recreation for the Government personnel. There is no dearth for innovation when the objective is clear.
The subsidy is another factor that bothers economists. The subsidies could be cut if levies are cut. If the states and Centre agree to tax only at the rate of Re 1/- for every Rs 25 of the price, the differential as on date would ensure that the subsidy is cut. Therefore, even by freezing the price at the average of the lowest and highest price across the country, a substantial portion of the subsidy can be removed since the levies would get restricted to maximum of Rs 4/-. This would mean that if the retail price of petrol rose to Rs 100/- the levy would only be Rs 8/- with the State and Centre sharing Rs 4/ each. This also is on par with the optimal rate of 8% levy of indirect taxes. This scheme of indirect taxation on the basic fuel would leave more money in the hands of the people.
This would also mean that a sum of at least Rs 10/- would be foregone by the Centre and the State which if the prices are frozen at the average of the highest and lowest prices say at Rs 70 would mean removal of subsidy to a differential extent. The next hike in the price can be deferred and the States and Centre would have the carrot of taking another Re 1/- each on the barometer crossing Rs 75/-. which would require another Rs 9/- ( Rs 75-(Rs 70-Rs4)). Effectively, removal of subsidies could be a reality while the Government also contributes to removal of inflationary tendencies.
The concern would then be to channelise such money into the development of the economy. To this objective, the tool of direct taxation needs a reform. It should provide for a tax rebate on the lines enunciated by the late Prof Madhu Dandavate instead of the present deductions. Savings should entitle a person for a rebate of 10% while certain expenses such as charity and medical expenses should attract a rebate of 20% followed by an investment rebate of 30% of the amount so invested. A ceiling of Rs 20000/- Rs 40,000 and Rs 60,000 respectively would ensure that the persons who are richer do not get a hefty deduction as in the present case. This would enable the Reserve Bank to channelise the surplus funds towards development.
Another source of revenue would be to streamline the reality sector. The Central Government could levy a nominal tax at the time of transaction of immovable properties and commodities transactions. The capital gains tax if any on these fronts should be removed to nullify administrative issues. This would go a long way in ensuring the tax revenues go up on this front. The taxes so generated should be shared with the States to offset the loss on account of the reduced taxation of petroleum products.
The other principal factor has been the fall in the rupee value. The reason for the fall in rupee value has been the demand for the dollar has been rising in the absence of a strong alternative in the form of the European market. The rupee could be insulated by promoting it as a hard currency in the international market. Iran has already agreed to a rupee payment mechanism and the Russians would not be averse to it. Roping in the middle east and the African nations could trigger the European nations to look at the Indian Rupee as an alternative to the dollar or the British pound. Mere interventions in the form of release of dollars in the market would be a short term measure while the long term strategy should be to hard sell the Indian currency. Indians per se have a gold reserve which could still back the rupee and once this amenable atmosphere is created the Indian exporters and importers would be willing to let go the dollar which would have a free falling impact considering that India is one of the largest markets. Initially the dollars in the EEFC accounts could be absorbed to the extent of 50% to meet the country's needs while the Indian community abroad could be used as instruments to promote the rupee into a hard currency.
Some brainstorming and thinking out of the box could save the country from bandhs which accentuate the losses as well as provide the much needed succour to the common man. Anyone listening?
With due apologies to Shri R.K. Laxman and Jim's Jokes and Cartoons.
1 comment:
thoughtful very interesting articles
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