FROM BUSINESS WORLD OF 14 NOVEMBER 2006
A Better Use for Surplus Revenue
When the finance minister told the economic editors that there was
scope for “further” tax reductions, most could not believe their ears: who ever
heard of a government wanting less tax? Others thought he was having a little
joke. They pondered whether such an irresponsible idea should be reported at
all. But finally, competition won over prudence, and all newspapers gave it
banner headlines.
There are enough reasons to think that Mr Chidambaram was serious.
For one thing, he is not given to making jokes, especially about his work. For
another, he has done it before. After his first budget proved extremely
unpopular, he made up for it by reducing taxes in his 1998 budget. There was no
call for it; but because it was so unexpected, the tax cut cheered up taxpayers
and made up partly for the previous year’s follies. And finally, if there is
ever a good time for reducing taxes, it is now. For government revenue is going
up by leaps and bounds, the government’s overdraft has been repaid, and despite
its spendthrift habits it is finding it difficult to spend the flood of
revenue. No wonder Mr Chidambaram is thinking of how to get rid of the unwanted
cash. And bearing a heavy tax burden himself, he can sympathise with other
taxpayers. A more self-centred finance minister would have thought of
introducing some exemptions and rebates. But he is quite against them. He knows
that they complicate tax law and turn into avenues of evasion and draw the tax
authorities into a tiresome campaign to keep taxpayers straight. Hence he is
thinking of straight tax cuts.
All taxpayers will welcome his frame of mind. But as finance
minister, he must not act on impulse. He must consider the alternatives
carefully. What are other uses to which he can put the surplus revenue?
His fellow ministers would love to pocket it, and will no doubt give
him their ideas about how he can pass on the money to their own
ministries. But that is not what I have
in mind. I believe Rajiv Gandhi was optimistic when he said twenty years ago
that only 15 per cent of government expenditure went to the intended
beneficiaries. So I am entirely with Mr Chidambaram if he thinks that government expenditure must not be enhanced.
If it is kept unchanged, a higher
revenue than was budgeted will lead to a fall in government deficit. This is
the major alternative to a tax cut that the finance minister must consider, and
to my mind it is a better alternative. In my view, the finance minister should not
only collect all the revenue he can, but he should rein in expenditure and
maximize the reduction in government deficit. He should aim to eliminate the
fiscal deficit by 2009-10, the last year he may expect to present a budget.
We have run a fiscal deficit for
almost 30 years – so long that we have forgotten the benefit of not running
one. For with a fiscal surplus, the government will stop borrowing, and start
repaying its debt. Once it does so, the “statutory liquidity ratio” – the rule
imposed on banks compelling them to buy government debt with a quarter of their
cash inflows – will become unnecessary; the SLR can be brought down. And as it
comes down, more bank credit will become available for financing productive
enterprises.
Once the need for the government
to borrow is removed, government’s manipulation of interest rates too can
cease. At the moment, Reserve Bank is torn between two objectives. On the one
hand, it wants to keep interest rates down, to reduce the cost to the
government; on the other hand, it wants to keep up the interest income of banks
which are compelled to buy government debt. So it is obsessed with control of
the debt market. Once it ceases to have to find a home for ballooning
government debt, it can leave the interest rate to be determined by the market.
Interest rates will on balance come down, and stimulate the economy.
And finally, once the flood of
government debt stops, all financial institutions – banks, insurance companies,
pension funds, etc – will be forced to invest in the equity market. The supply
of equity will expand, especially to small companies. Capital will be
distributed, and growth will spread far more widely than now. With many more
companies growing, there will be more competitive pressure, and there will be
more growth with lower inflation. That is when India will be able to match China’s
growth.
