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Savers and senior citizens short-changed - Outside View by S.S. TARAPORE
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Savers and senior citizens short-changed
Mar 11, 2013

The finance minister (FM), Mr P Chidambaram, presented the union budget for 2013-14 against the backdrop of some obvious difficulties. The growth of the economy in 2012-13 has been at a low for many years, consumer price inflation is at an intolerable level of 10.8 per cent and the balance of payments current account deficit (CAD) is perilously high, at 5 per cent of the GDP. The centre's Gross Fiscal Deficit (GFD) - Total Expenditure ratio is 32.6 per cent, which is not sustainable. The FM's task was to reduce the fiscal deficit, while providing adequate incentives for growth.

Fall in Savings Critical

The most alarming indicator is the fall in gross savings, from 36.8 per cent of GDP in 2007-08 to 30.8 per cent in 2011-12; during the same period the household sector's financial savings fell from 11.6 per cent to 8.0 per cent, while physical savings rose from 10.8 per cent to 14.3 per cent. There is a powerful message in these numbers. Continuing inflation is eating into the resources of the household sector. Overt pressures by the government to continue lowering interest rates reduces household sector financial savings and a switch to physical assets.

Implications of Some Budgetary Measures:

It would be pertinent to view some of the measures from the viewpoint of the common person. (a) Income Tax Rebate: The budget provides for a rebate of Rs 2,000 for incomes in the range of Rs 2-5 lakh. An estimated 288 lakh tax payers (89 per cent) are in this range. The argument is that if the basic exemption were raised from Rs 200,000 to Rs 220,000, lakhs of tax payers would go out of the income tax net, which the government feels would not be desirable. From the viewpoint of efficient tax administration, the government would be freed from scrutinising a large number of tiny incomes and could concentrate on larger incomes. A more equitable approach would have been to raise the general exemption limit from Rs 200,000 to Rs 220,000 and for senior citizens from Rs 250,000 to Rs 270,000. It is pertinent to note that those over 80 years of age gain nothing from the tax rebate. The authorities need to be more sensitive to the interests of senior citizens. The age profile of tax payers would reveal that relatively few survive beyond the age of 80 years. Would it not be more humane to raise the exemption for senior citizens from Rs 250,000 to Rs 350,000 at age 70 and Rs 500,000 at age 80? The repeated pleas that senior citizens not be given the 80C deduction from income but an additional Rs 100,000 by way of general exemption has been ignored. Again, the additional incentive provided for first time housing loans are unlikely to be availed by senior citizens. The government needs to appreciate the life cycle under which there is accumulation of savings in the early years of life and drawdown by senior citizens.

(b) Surcharge on the Super-Rich: The 10 per cent income tax surcharge on taxable incomes over Rs one crore has created a furore. It is claimed that the authorities are going after honest taxpayers rather than the dishonest tax evaders. There are only 42,000 individuals who have taxable incomes of over Rs one crore for the following reasons: (i) The taxable income excludes dividend income which is reportedly very large. (ii) Large agricultural incomes are exempt from tax. (iii)Permissive tax administration allows large incomes to be concealed.

(c) Inflation Indexed Bonds (IIB): This is the one measure in the budget which should be a ray of sunshine, unless it is botched by bureaucratic tangles. The new instrument should be operationalised quickly. The government and the RBI have enough information on how this scheme should be operated. The bond could have a tenure of five years with a real rate of interest of at least 3 per cent. There should be full compensation for inflation based on the Consumer Price Index (CPI), with a lag of one quarter. If over the five years, the inflation is 40 per cent, on a face value of a bond of Rs 100, the maturity value should be Rs 140. If in a year, the CPI increases by 10 per cent, the bond holder should get Rs 13 as the nominal interest, inclusive of the real rate of 3 per cent. There should be no limit for investments by senior citizens and there should be a limit of Rs 5 lakh per year for other individuals. If properly devised, the IIB could attract significant amounts and there would be a strong incentive for the government to bring about a significant and enduring reduction in the inflation rate.

(d) Dividend Distribution Tax (DDT) on Debt Funds: The budget has doubled the DDT for debt funds operated by mutual funds from 12.5 per cent to 25 per cent, which is a cruel blow to senior citizens who prefer to invest in such schemes to generate steady incomes. In a double whammy, the financial services department of the ministry of finance has directed public sector banks to withdraw the senior citizen's premium on fixed deposit interest. The unmistakable signal to senior citizens is that they are not relevant

(e) Absence of Measures on Gold: The official view is that gold imports account for a sizeable portion of the large CAD. The KUB Rao Working Group of the RBI has come up with concrete suggestions for monetising domestic idle gold and has also suggested the setting up of a Gold Bank. The absence of any reference to these recommendations is glaring. Mere exhortations to refrain from buying gold is unlikely to yield any results, unless strong steps are taken to activate idle gold holdings. In the absence of measures the common person has innate common sense and would, and should, continue to invest in gold.

Please Note: This article is exclusive to The Freepress Journal and was first published on March 11, 2013.

This column, Common Voice is authored by Savak Sohrab Tarapore. Mr. Tarapore, is an economist and he runs his own Multi-Language Syndicated Column. Mr. Tarapore's other column, which appears in The Hindu Business Line, is titled Maverick View.


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