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Govt's fiscal plan means give more to the rich, squeeze the deprived

The hullabaloo over the so-called deficit in Oil Pool Account was always a bit of a hoax. This deficit, official spokesman had slunk into the habit of suggesting, represented a collective sin committed by the people of India. It was nothing of the sort. At a certain phase a couple of decades ago, domestic prices for the entire range of petroleum products ruled higher than the then prevailing international prices; the consequential surplus led to the formation of the Oil Pool Account.

The surplus was turned into a deficit by the profligate regime which presided over the destiny of this nation during the quinquennium 1984-89. Had that government not frittered away the accumulated funds in the manner it did, no deficit would have emerged in the Account, and the ministry of finance would have been deprived of its principal pretext for raising petro-product prices.

The supposed deficit was the outcome of financial deals between two government entities; a single paper transaction could have taken care of it. This is precisely what has now been done; the ministry of finance has made a notional advance equivalent to the outstanding deficit to the nationalised oil companies, the latter are to invest the entire sum in government bonds. No impost on the people has been called for to tackle the deficit.

The ministry has, nonetheless, proceeded to raise the administered prices of petroleum products, including the price of diesel, by a hefty margin. The exercise, is likely to yield additional revenue to the tune of plus minus Rs 100 billion on an annual basis, which is almost 3 per cent of the gross domestic product. Exclude from consideration the hardship inflicted on consumers of liquefied gas because of the price hike; they are by and large comfortably placed people and should be in a position to put up with the extra strain on their resources.

More than one-half of the total traffic of commodities in the country is through dieselised transport; the increase in diesel prices is, therefore, a matter of much greater concern. The cost of daily transport is also going to shoot up for the travelling public, who mostly belong to the poorer classes. The overwhelming majority of the latter have got nothing out of the 'reform process' initiated in 1991, in contrast to the constituents of the affluent sections whose income have jumped twenty, fifty or a hundred times in the course of the past half-a-dozen years. Asymmetry is as asymmetry does.

To those who have, more has to be given; those who are deprived. the corollary says, deserve to be further squeezed by the government's fiscal operations. Remember the Budget presented on the last day of February last? The finance minister was in an extraordinarily generous mood; the opportunity has come his way and he was determined to advance the cause of his own class.

The bounties offered by the Budget to the domestic rich and their foreign friends were indeed breathtaking in range; permission to companies to buy back shares, a unified limit of 60 per cent for intercorporate investment and loans, tax exemption of capital gains for stockbrokers who corporatised their activities, exemption of tax on dividend income at source, reduction of capital gains tax on investment by non-resident Indians from 20 per cent to a full 100 per cent, increase in the limit of portfolio investment in a company by foreign investors from 24 to 30 per cent, raising the limit of venture capital investment in new activities from 5 per cent to 20 per cent, substantial modifications in the corpus of the minimum alternative tax via exemption of net income from exports from the orbit of the tax and introduction of a system of tax credit that can be carried up to five years; finally, rates of direct taxes were heavily slashed, to the extent of 33 per cent in the case of rates of personal income tax and 25 per cent for corporate tax ratio.

The finance minister made a somewhat extravagant claim on that end-of-February day. The lowering of tax rates, he asserted, would not lead to any reduction in the aggregate yield of direct tax revenue; the producing classes would be so hugely stimulated by the numerous positive gestures his budget contained that the economy would be immediately lifted to an impressively higher plane of activity; greater compliance of tax laws on the part of a grateful tax-paying community would further ensure the buoyancy of tax yield.

Much of this was building castles in the air. The finance minister had not a clue on the economy's behaviour in the post-Budget period. The reality as it has emerged is way distant from his projections. Industry continues to be in deep depression; such being the case, total tax revenue, whispers from sources within the ministry of finance itself suggest, might experience a shortfall of as much as Rs 100 billion by the close of the fiscal year.

The International Monetary Fund is breathing down the neck, a commitment has been made to it that the fiscal deficit is to be brought down during the year to 4.5 per cent of the gross domestic product. The failure of the economy to pick up and the resulting setback in revenue collection threaten to make a mockery of that commitment. What is needed to be done in this situation has in fact been continuously drilled into the ear by the fund itself; hefty increase, across-the-board in petro-product prices. Such an increase is bound to hurt the poor and middle classes. So what, are you the keeper of these bothers? Besides, economic development, did not that Chinese dictator, Mao Zedong once say, was not a cocktail party, it called for sacrifice; the sacrifice is to be undertaken solely by the poorer classes.

The standard theorisations are trotted out. The richer sections are not to be touched in the vent of any shortage of public resources; that would affect their incentives. One sensible way to cover the resources gap in the circumstances is to cut down social expenditure, as has been done so effectively in post-socialist Russia; all subsidies for the poor are off and a slowdown has been arranged in the payment of wages and other contractual benefits to employees in the government sector. Since these measures have not succeeded altogether to narrow the deficit, imposts on a number of indirect taxes have gone up, the impact of which will be fully borne by the salaried and working classes.

Globalisation does not make a distinction between countries. Russia or India, it is all the same. A regime has to be judged by the kind of measures and policies, it concentrates upon. A bonanza of Rs 100 billion offered through the Budget to the comfortably placed sets a fiscal problem. The problem is however to be regarded as no problem; the poor are on tap, they have to be burdened with the onus of making up for the concessions accorded to the richer classes.

The ignorant ones will rush to describe the exercise as vitiated by blatant class bias. It is nothing of the sort, official spokesman will painstakingly explain; the immediate need for the economy is large-scale increase in investment; it does not matter from which source or sources the investment is forthcoming, foreigners, non-resident Indians, the rich set within, the rich set without. Whoever is willing to come in and invest will be assured facilities of all descriptions, including fiscal concessions. This is the grand design the budget has laid out.

It is not the finance minster's fault if the investors remain unconvinced; obviously the incentives granted till now are not considered as enough; a further agenda of action are called for. These will entail fresh sacrifices on the part of the poor classes. Be reasonable; it is after all, for the sake of the poor, in order that in some distant future, they could come to enjoy a comfortable standard of living, that all these investment proposals are on the anvil, they jolly well should cough up the extra sums necessary so that the budgetary deficit could come down.

The suffering sections must learn to suffer more. Those who have been the sole beneficiaries of the explosion in incomes in the post-reforms phase -- the executive and managerial classes, for instance -- are not to be asked to pay any extra bit of tax on their higher incomes. The increase in petro-product prices will be hardly a burden on them. In any case, the bulk of them ride in company-owned cars driven by chauffeurs provided by the company, and the usual tax exemptions apply.

This genre of economics perhaps permits ordinary men and women with the right to revolt. That denouncement, however, belongs to the long haul. Meanwhile, the facetious arguments will continue to be trotted out on why certain price increases were inevitable. And the prime minister will keep seeking advice from that group of economists alone whose credentials have the imprimatur of approval from downtown Washington DC.