Anger At Slashed Small Savings Rates:Government Revenues Teetering

Anger At Slashed Small Savings Rates: Government Revenues Teetering

The abrupt slashing of interest rates payable on small savings instruments, has the middle-class, ignored in the union budget, annoyed at this fresh gouging, and worried about their retirement savings.

Particularly, as the NPA ridden banks, offering nothing better, have also cut rates, and the stock markets are in a bear grip too.

Even, if the RBI now cuts repo rates sharply, the beleaguered banks probably can’t lower lending rates with so much bad-debt. This is, in truth, a double whammy, with no silver lining.

The opposition Congress is immediately up in arms. The government is trying to brazen it out, suggesting that a low interest regime for deposits/lending is beneficial in the long run.

But it sounds like a bitter pill prescription from abroad, a requirement against the government’s own long term loan demands, from the World Bank, ADB, IMF etc..

For the public, these savings rate cuts of up to 1%, on the whole gamut, coming back-to-back with a sharp hike in petrol and diesel prices, feels like a grim start to spring/summer.

And these new financial blows have been delivered, seemingly via the back door, just days after the finance minister pulled back, under pressure, from taxing part of the PPF in his budget proposals.

Crude prices, everyone knows, have dropped 75% from its peak, but the Indian public only ever saw an 18% cut in total, issued in dribbles and drabbles, at the pumps. The rest of the oil benefit has gone into an easy dip government revenue generation.

The finance ministry is clearly struggling to garner revenues. Direct taxes are below targets, the government divestment programme at the bourses  is running at less than half levels, indirect taxes, though better, are still  grossly inadequate to finance the government’s ambition.

FDI, looking good, is the great white hope, combined with those long-term development loans.  Frustratingly, structural reform like GST, which can add a full percentage point to GDP, is still pending.

Besides, every initiative costs: OROP, the 7^th Pay Commission, rural upliftment, infrastructure boosts, the revival of the Railways/ power/ mining/ inland and coastal waterways, defence procurement/manufacturing.

The government’s refusal to relax the fiscal deficit target of 3.5% of GDP has been praised by all quarters, but does make it tougher to mobilise resources on a very narrow tax base.

Apologists point out that the PPF, once paying 12% tax free, has been handing out single-digit returns since 2001, and 8.1% tax free is not so bad. International rating agencies like Fitch too, like these cuts, and consequently expect more money to flow into the stock markets.

But the deeper and perennial problem of revenue generation on a tiny base is still not being addressed, resulting in a high direct and indirect tax regime, and the same people having to pay for the entire edifice.

Consider that in India, for many centuries past, almost the only tax applied, was a land based revenue. It was levied on the peasants that worked it, feudal vassals etc. It was rich enough to create and support a network of hundreds of maharajahs plus thousands of rajahs and zamindars, with very low rates of inflation. It also financed at least two immensely rich dynastic reigns-that of the great Moghuls, than endured for 400 years, and the British Raj, spanning another 200 years.

But once we took on Fabian socialism at independence, these universal tax bases passed into history. All agricultural taxes, even on the rich, were abolished forthwith.

A recent report had great and inexplicable riches, multiples of annual GDP, masquerading as agricultural income to bamboozle the tax authorities. It was speculated that it might be the unaccounted monies stacked abroad, brought back in, to avoid being nabbed in various secret bank accounts.

And still, the government has no mechanism to tax this money in the hands of a few hundred immensely ‘rich farmers’. It doesn’t even dare venture into a universal expenditure tax, oft suggested, of say 0.25% , applicable on all bank transactions involving more than a threshold of Rs. 10,000/-  for example.

Yet, only 3% of 1.2 billion are even in the income tax rolls as PAN holders. Corporate taxes too are paid by a small proportion of companies and businesses in the organised sector, while 90% of commercial activity is carried out by the ‘unorganised sector’. Our black economy rivals the $2 trillion official one.

Isn’t the refusal to grasp the political nettle of expenditure tax and imposts on high agricultural income, unfair to all current revenue generators?

For: The Quint

(752 words)

March 20^th, 2016

Gautam Mukherjee