Old arguments, warmed up

While seeking support from the aam aadmi for the “hard decisions” which his government took a few days earlier, Manmohan Singh’s televised address to the nation was devoid of any new messages. Reiterating the government’s stand, the Prime Minister maintained that the diesel price hike and the capping of cooking gas cylinders were unavoidable in the context of the burgeoning subsidy bill. If the government had not acted, the unsustainable fiscal situation would have led to a further rise in prices and a loss of confidence in the economy among domestic and foreign investors. What the Prime Minister left unanswered was the key question of why he waited so long to make the eventual hike so steep. Surely a transparent mechanism administered by an independent regulator to oversee the gradual and periodic transmission of global oil prices to the domestic retail sector would have been more equitable and politically acceptable. On the other contentious proposal of foreign direct investment in multi-brand retail, the Prime Minister provided no clues as to why a wider discussion with the States and other stakeholders to seek a consensus was not possible. Nor did he disabuse the notion that with the relaxation, foreign money will be available on tap.

The two measures announced last week by the Finance Minister, ostensibly to give a further impetus to economic reform, are not new either. They carry forward certain budgetary initiatives announced earlier this year. As part of a general easing of external commercial borrowings (ECB) norms, the government has notified a reduction in the withholding tax from 20 to 5 per cent for 3 years. The relaxation in the ECB policy, meant to facilitate cheaper overseas borrowing by Indian corporates including those engaged in infrastructure, will in practice increase the level of short-term external debt. That is why this concession is unwise from a macroeconomic perspective. Indeed, past policies have sought to restrain such loans which have, for the borrowers, involved the additional risk arising from exchange rate fluctuations. As for the sycophantically named Rajiv Gandhi Equity Savings Scheme (RGESS), it is intended to give a fillip to the equity cult by giving first time investors attractive tax concessions. The RGESS has now been extended to cover mutual fund investments but it is still going to be a mammoth task to assure first time investors that it is safe to invest their hard-earned savings in stocks and shares. While SEBI will provide operational details, the basic question of whether tax policy should at all be used to encourage inherently risky equity investments remains unanswered.