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Sweet tax may end in smoke

Sheila Dikshit has taxed sweets to reduce diabetes, and diesel cars to curb pollution. But evidence shows a more nuanced approach is required.

delhi Updated: Mar 28, 2011 23:53 IST
Abhijit Patnaik

It is well-known that eating jalebis is bad for health, but resisting the delicacy seems harder than watching Canada vs Kenya ball-by-ball. Similarly, driving around in sports utility vehicles (SUVs) isn't exactly greening the environment, yet one sees these monster trucks regularly at the local market for the morning grocery run .

To help Delhiites eat healthier and dissuade them from buying gas-guzzlers, chief minister Sheila Dikshit has slapped taxes making sweets, namkeens and diesel cars dearer. Sound economic logic, one might say. But do such hard-nosed tools actually change behaviour?

Sheila Dikshit's reasons for increasing the tax have raised the issue of whether price controls are effective in tackling the consumption of goods where psychological factors, such as pride and self-control, play a major part.(For example, people exhibit a lack of self-control by consuming the so-called "sin goods" – such as cigarettes, potato-chips and sweets.)

In such cases, traditional economic policy can prove to be a blunt instrument. A study titled "Food Prices and Obesity: Evidence and Policy Implications for Taxes and Subsidies", published in 2009, shows that small tax increases (such as the hike in sweetmeat VAT from 5% to 12.5% in Delhi) are almost entirely ineffective at encouraging healthier eating habits. Likewise, many of the diesel cars spoken of in the budget are in the Rs 20 lakh plus SUV category, and a 25% hike in VAT (which, for example, corresponds to a mere Rs 2 lakh increase for a top-of-the-line Range Rover worth over Rs 1 crore) is hardly going to make the rich switch to a hybrid car such as the Prius.

Rohini Somanathan, professor at the Delhi School of Economics (DSE), explains why. "Pricing policy in India has one big problem – there are huge inequalities in our system. For example, raising fuel prices will cause no real change in the number of people who drive cars. The affluent drive cars and are marginally affected by changes in price structure. Price hikes (usually through taxes) is a weak instrument to make corrections in India, we need other regulations," she says.

Singling out sweets and namkeens ignores the role of sugary drinks and many other food groups in causing diabetes and other ailments. And instead of trying to curb diesel-car sales, an effort to promote energy-efficient electric/hybrid cars could be far more effective. The government's subsidy on the electric Reva car and solar water-heaters is one such move. Some cities in the US state of Tennessee even provide free parking to electric car drivers!

Various studies have thrown up other interesting ideas to promote better choices among consumers. Some play on the idea of guilt or shame. "Showing average electricity use in the neighborhood alongside your household consumption in bills helps cut consumption according to some studies," says Christopher Olivola, Newton Fellow at the Cognitive, Perceptual, and Brain Sciences Department at University College, London.

A study on the use of plastic bags in a market in south Delhi by Kanupriya Gupta, a PhD student at the DSE, threw up interesting results. Some stores charged a nominal Re 1 per plastic bag, while others sold cloth bags at a discount. In less than three weeks the number of people bringing their own bags increased from less than 1% to more than 14%. "By charging for plastic bags, people behave differently, partly because of the message attached to this charge," says Somanathan.

Strong financial incentives may just prove to be better at making people change their behaviour than disincentives like higher taxes. While the government exchequer will definitely benefit from the tax hikes, it remains to be seen if a small increase in the price of a laddoo drive hordes of people into eating spinach salads.