Like honeybees collecting nectar

Ever since 1991 we have come to expect a vision of the economy's future in the Budget speech of the Finance Minister. This did not happen on July 6, 2009. The day before, the Economic Survey had raised the hopes of real reform. Those hopes were dashed. Pranab Mukherjee spoke like an accountant, not a statesman, and the stock market fell by almost a thousand points. The new government lost an opportunity to spell out its program and win over domestic and foreign investors.

Ultimately, the nation needs private investment to pull us out of this economic downturn. Because of the failure to articulate the long term, investors worry that the big spending stimulus of this government is here to stay and it will crowd out private investment. A large deficit is understandable in these recessionary times, but we needed a commitment to return to fiscal responsibility once normal times return. Deficit spending on this scale risks a re-rating of the country, which would mean a higher cost of money, higher inflation, and bad consequences for the Indian rupee.

Nevertheless, there are many positives in this Budget. In our bad old socialist days, Finance Ministers would have raised tax rates to cover fiscal deficits. This time the FM actually decreased tax rates for individuals (from 34% to 31%) while holding them for companies. This was courageous and it is strongest indicator that Pranab Mukherjee has changed and believes in growth. Many countries suffering from the global recession have increased tax rates. This FM also showed guts in scrapping the irritating and ugly Fringe Benefit Tax. The major negative was the raising of the Minimum Alternative Tax for companies from 10% to 15%, and this will hurt our fastest growing companies and those in infrastructure.      

The best thing the in the Budget is a re-commitment to a dual Goods and Services Tax (GST) from April 2010. This is a wonderful idea which has been championed for years by Vijay Kelkar. India is not a common market where goods and services move smoothly. Anyone who sells a product lives through a nightmare of excise, state and central sales taxes; entry, turnover, and service taxes; and the terrible octroi which keeps trucks waiting for hours at check points. GST will integrate all these indirect taxes into one flat tax, which is IT intensive, offering frictionless interface between taxpayer and collector. Like the VAT, it taxes only the added value at each stage, lowering the overall tax burden. Those who persist in selling without a bill will lose credit on taxes already paid, it will force them into the tax net. It will improve compliance and make us a more honest nation. A lot of work needs to be done to make GST happen but the Finance Minister's re-commitment to GST will now galvanize the centre and states to work hard and move to the most important tax reform in India's history.

Another positive feature of Pranab Mukherjee 's speech was his commitment to changing the attitude of tax collectors. P. Chidambaram, in his well-intentioned zeal for taxes, had let loose the tax departments on the taxpayers and this had created fear, bad blood, and the loss of some of the goodwill created during Jaswant Singh's time. Mukherjee wants tax collectors to be “honeybees collecting nectar from the flowers without disturbing them, but spreading their pollen so that all flowers can thrive and bear fruit.” This is the right attitude. Despite many honest and hard working officers in income tax, customs and excise, these departments continue to give India a bad name. In successive surveys, foreign investors cite them as the reason why India is not a good place to do business.

The Congress Party was re-elected in May on the promise of economic populism. On July 6 the government delivered on that promise. This is bad news for India because populism is a temporary palliative and does not lead to long term prosperity of the poor; it is also something that our country cannot afford. The nation waited to hear about the reforms that would create precisely those enabling conditions for the poor to pull themselves up. India's tax payers are not against a safety net for the poorest, but they want the benefits to reach the poor. When the FM announced handouts in the thousands of crores, it was his duty to reassure us that the money would not be lost once again in corruption. We waited in vain to hear what government was doing to improve delivery. Without the overhang of the Left, there is no excuse for the UPA taking the country backward.   If it persists in this it will lose the goodwill of so many who voted for it.

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