“The move to cut interest rate on small savings is significant...” - Views on News from Equitymaster

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  • Mar 4, 2003 - “The move to cut interest rate on small savings is significant...”

“The move to cut interest rate on small savings is significant...”

Mar 4, 2003

Mahesh Vyas began his professional career as a research assistant with Centre for Monitoring Indian Economy (CMIE) in 1980. He did his graduation in science and post graduation in Economics & Statistics. He then moved to International Economics to research the economics of East Asia and China between 1982 and 1985. Besides, he has worked on several sectoral studies and developed new systems at the CMIE.We caught up with Mr. Vyas for his take on Budget 2003-4. He talked at length on the hits and misses of the budget, and gave his views on the industrial and investment climate in the country. Definitely worth a read.

EQTM: Do you think the budget for FY03-04 is a right step in India’s journey to economic progress?

Mr. Vyas: Well, that is a very heavy statement and it places an unfairly large responsibility on the budget – of taking the Indian economy to a faster growth path. I would not place such huge responsibilities on the budget. The budget finally is a statement of accounts of the country. However, it has become fashionable in the 1990s to throw in a lot of other measures as well. Most of these measures over time have taken the shape of a policy stance of the government, which consistently has been that of moving towards reforms. A new element has come in to the statements, and this has nothing to do with the ministry of finance, that is to try to create a feel good factor and perceptions of reform or growth or whatever that is fashionable.

I think this not exactly a healthy trend. It is better if policies with respect to a particular section come from the ministry associated, rather than be clubbed together for the budget day announcements. Even if ministry of finance has to do it, things should be kept away from budget per se. Budget is about taxation and about allocation (how government is going to spend). It is not be mixed up too much with issues that are not related to taxation. The proportion of the mixing is very high.

I would, therefore, like to shift the focus of what the budget should actually be doing.

EQTM: What do you see as one very big positive in the budget this year?

Mr. Vyas: I find the move to cut interest rate on small savings to be a very significant and important step. It effectively has made it a lot more possible now to see interest rates come down further. There was some stickiness at the lower end of the interest rate structure. I think this has been reduced substantially. This is consistent and that is a very important element in this policy. I would say this is the single most important step taken by the government.

The other important thing, which ties up with the reduction of interest rates, is the reduction in custom and excise duties, except for the increase in service tax. Effectively the reductions are likely to see fall in inflation as well. Therefore, we can look forward to a scenario where inflation rates and interest rates will decline. This I think, is a positive thing to happen and is very good for the Indian industry to become globally competitive, as this makes it possible for companies to reduce costs and exports to become aggressive in their stance with respect to global markets.

EQTM: Any other interesting measures in your view?

Mr. Vyas: Well, one major issue budgets have talked about in the recent past has been the need to control fiscal deficit. The current budget does not talk too much about that i.e. it does not talk about the need to keep fiscal deficit under control and therefore, to keep costs under control and so on and so forth. In my opinion that is a healthy trend. The focus is now more on bringing about growth. It is not so much about reducing government expenses.

The move away from the great attention that fiscal deficit enjoyed all this while is a good step. However, I do not mean to say that fiscal deficit can rise to any level. We have reduced it to a great extent and it has moved up marginally. So long as it is not rising any further than 6.5% to 7.0% (I am happy there as well) we don’t have a reason to worry about. The focus has to be on growth.

EQTM: Any areas that you feel were left out and could have received more attention?

Mr. Vyas: Continuing on the fiscal deficit, I said the government spending shows a growth of only 8.6% in the coming year (FY04) compared to historical trends. Last year government spending grew by 11%. This is going to be a fall compared to that. For the growth to really take off, I would expect the government spending to be much higher than what is budgeted.

I also think the budget is not actually putting so much money on the table as it should. For example, investments in infrastructure is not by the government investing but giving some money to bridge the gap between what private sector will invest and what it will get in return. The upfront payment is only Rs 20 bn per annum. It is not going to be easy to get investments into infrastructure. It’s going to be tall order.

EQTM: This budget is said to have increased the disposable income by lowering tax outgo. This is expected to increase consumption demand. Your views?

Mr. Vyas: Well, I don’t think the tax proposals are going to make any significant difference to disposable incomes with people. Apparently, there has not been much leeway available to bring about a great change If one was looking for tax breaks, it larger standard deductions for income tax payers that has not come about. The consumers are on the other hand are happy that all the various deductions have not gone away. In that sense it is pretty much of a status quo. Minor changes here and there, but largely status quo.

EQTM: There is a big debate about the rates of taxation. Compared to global standards, where does taxation in India stand? Is it too high or too low? The base of taxation is low. Your views?

Mr. Vyas: I will take the first part of the question i.e. compared to global standards are we taxed too high or too low. It depends on what you expect from taxation. For e.g. we are taxed quite low compared to the European countries. But then they get back a lot from the taxation as well. You can have low taxation and then have no services from the Government. I think this entire attention that compared to other countries are we taxed high or low is a debate which has gone too far. One needs to match all tax monies given to the government with what you get back in return. We have no food stamps, no food security, we have no unemployment security, we have no social security that you get in countries where taxation is high. If you give me the kind of social security European countries give, I am sure I will be happy to pay the kind of taxes they pay.

If you do not look at the returns on the taxes you are paying and only look at the payments, then you are not looking at the whole picture. So this debate has gone askew and needs to be balanced. Its important for us to debate as to what we are looking for in return for having given the taxes. And unfortunately, there is no debate on what the government is giving us back in services for the taxes it takes from us.

The second part of the question talks about the small tax base. Sure enough. The large part of the population is dependent on agriculture. It is very difficult to tax agriculture, as it is not an organised industry. It is very difficult to make a farmer come and calculate your taxable income. So I think it is not fair to expect them to pay taxes till they become organized into industries. If you keep them away and if you keep the 25% of the population below the poverty line you don’t have much left anyway. If a country has 25% of the people below poverty, I am sure there are a lot of people who are just above poverty. They don’t even fall under the middle classes. A large chunk of the population is below poverty and just above poverty. So you are left with very few people actually to tax.

There is certainly a need to tax more people, but it is certainly not going to be an easy thing. The largest and the fastest going segment of the Indian economy is the services sector. A larger part of this is outside the purview of indirect taxation as it is in the unorganized sector.

EQTM: Agricultural output for FY03 is expected to decline by 3.3%. What are implications for the industry?

Mr. Vyas: I expect negative impact on the industrial sector because of the fall in agricultural production. Well, it not a very linear relationship, a lot of complex things are happening. It depends upon which crops have failed. For example, if the rice crops fail, the kharif crops fail, but the impact is marginal as the marketable surplus of these crops is lesser. But if the oilseeds, cotton or wheat crops (rabi) fail, then the impact on the surpluses is more severe. Thus, if these crops fail, industrial sector suffers more, but if rice fails the impact is not so significant.

The impact primarily is due to farmers earning less, due to lower marketable surplus, therefore, being able to spend less.

EQTM: One of the nagging concerns has been the investment in the Indian industry? Have you seen any improvement in this in the recent past?

Mr. Vyas: Well, it is the most serious concern all of us should have regarding the Indian economy. Investments have not been growing. New proposals for infrastructure, manufacturing and even the service sector now a days, are woefully lagging. I see nothing that is going to change in the foreseeable future (at least for a year) for investments to pick up. We first need to see consumption increase and only after consumption spending increases and current capacities get fully utilized, will we see an increase in investments.

The environment has become a lot more conducive now. If you look at the turnaround time for the ships in ports, it has come down. If you look at shortages of power it has come down. The interest rates have come down, bureaucratic hassles have come down. Certainly business environment has improved dramatically over the last few years. So it’s got nothing to do with those things. The problem is with demand.

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