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Why Pranab needs to change India's subsidy regime

Last updated on: February 28, 2012 13:41 IST

Why Pranab needs to change India's subsidy regime

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Business Standard

Finance Minister Pranab Mukherjee's task in drafting this coming Budget is unenviable.

He has to balance growth-enhancing measures with a move back to fiscal sustainability.

While there are differences about details, there is a surprising degree of consensus among observers on the broad features of the approach he should take.

He will have to transform India's creaking, leaking, overreaching subsidy regime; he will have to push for more reform across sectors; and he will have to broaden the tax net and roll back the tax cuts introduced after the global financial crisis in 2008.

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Image: This file photo shows Finance Minister Pranab Mukherjee smiling as he leaves his office to present the Budget.
Photographs: Vijay Mathur/Reuters

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Yet not everybody in India Inc seems to agree to this approach.

Or that, at least, seems to be the thrust of recent statements from industry organisations.

The pre-Budget memorandum from the Confederation of Indian Industry, for example, agrees that fiscal space is limited.

Yet it goes on to demand exemptions for industry from this agenda.

CII insists that 'there is a strong need for retaining the current rates of excise and service tax to spur investment'.

Indeed, CII has argued that the exemption limits for service tax should actually be raised two and a half times.

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Why Pranab needs to change India's subsidy regime

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It is worth remembering how these taxes got to their current level.

Excise was, in February 2008, at 16 per cent.

It was cut to 14 per cent in that year's Budget, and then it was taken down by a further six percentage points in the period following the financial crisis of late 2008.

At the same time, service taxes were cut by two percentage points.

These duty cuts were justified at the time as essential stimulus measures.

But the point of stimulus, surely, is that it can be reversed -- when, in particular, fiscal space gets limited and calls for a phase-out of the stimulus measures.

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Why Pranab needs to change India's subsidy regime

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Recommending a contraction of the tax base, and an extension of low-tax stimulus measures, is not only irrational but also irresponsible at this point.

Yet it appears that this is precisely what industry is advocating.

Even more egregiously, sections of industry have come out against taxation of diesel cars.

These cars are an embodiment of the diversion and warping of India's outdated subsidy regime.

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Why Pranab needs to change India's subsidy regime

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It is an unfortunate reflection on India's inability to phase out diesel subsidies that newer luxury diesel cars are entering the market and are poised to dominate sales in a few years.

There is a clear case for taxing them, one that industry chooses to overlook.

Pushing growth and investment is all very well, and this Budget should indeed do that -- but not through special interest-focused measures.

There are questions here both for industry organisations and for those they claim to represent.

For organisations, it is a question of their conception of themselves.

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If industry organisations are to be taken for more than just another pressure group making compromised recommendations, they will have to show that their suggestions are rational and responsible.

And industry, overall, must recognise that this is not the time to look for narrowly focused exemptions and tax breaks.

The only way industry will prosper in the medium and long term is if the Indian economy is restored to a fiscally sustainable growth path.

An exemption-filled, special interest-driven Budget will not do that.




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