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A bit of pocket money

Ever notice how the Laffer curve for arriving at an optimum rate of taxation has always been used to the Indian government’s advantage? Venkat Iyer elaborates.

india Updated: Nov 23, 2008 23:35 IST

Ever notice how the Laffer curve for arriving at an optimum rate of taxation has always been used to the Indian government’s advantage?

We have seen four boom and bust cycles in the last 18 years since the country embarked on the path of opening up the economy, but I for one don’t recall a financial stimulus package from the government to kickstart demand. The response is largely restricted to policy measures from the commerce and finance ministries, encouraging tax breaks for exports and tweaking of interest rates by the RBI.

In the US and other developed countries, a downturn is a sure sign that tax rates or refunds need to be evaluated seriously as a policy measure to stimulate demand. However, our government has never in its history cut rates of taxation to provide the taxpayer with more money to pump the economy. Isn’t it time we started asking for reductions in the tax structure? After all, we are going to enter the slowest phase of global economic growth in the last 20 years.

I’ve watched the government muddle its way through the meltdown, looking for signals from all possible quarters, including the rates of crude oil to the drought in Australia. Isn’t it time we took advantage of having a billion people, with at least 200 million taxpayers, and started to tweak our own policies to see if it would have a significant impact on the growth rate?

Crude sank to $60 a barrel on November 6. That, according to my back-of-the-envelope calculation, would put the Indian crude basket at approximately $53 a barrel.

Cut the prices of petroleum, bring inflation under control, and remove the cesses that were put in for various purposes that never materialised, including the development of highways. Kickstart infrastructure growth now with all the funds parked in government accounts. It is good for P. Chidambaram to collect more money when times are good, but it is also prudent to not ask for more when your customer is in the doldrums.

Maybe it’s also time that an institution of some integrity and repute started an Index of Consumer Confidence, akin to the University of Michigan’s Consumer Sentiment Index, and worked out a way to publish quarterly findings, to enable companies to project demand and supply effectively. The current wholesale price index is full of errors and doesn’t do anything to instill confidence in the consumer regarding the way the prices are going, or make any sense of the RBI’s financial management policies which, at best, seem to be derived from flawed projections.

There is also a distinct need to monitor unemployment. In a market as big and widespread as India, collecting data is a huge problem. One can understand that. But unless the labour and finance ministries work on creating a model right now, it may be too late.

If you are successfully able to manage inflation, the rate of taxation and employment, we may still be able to aim for a 7.5 per cent growth trajectory this year.

One would also like to see an exchange for all kinds of derivatives. Maybe it’s time to see the Indian market become a forerunner in creating a market place for complex financial instruments.

Given that our financial markets seem to be parked in the isolation ward, in segregation from the global market, we may be the last to catch a cold. But we may also become the most critical patient in the hospital in two years’ time, unless the government starts to act now.

(Venkat Iyer is a Human Resource Consultant)

First Published: Nov 23, 2008 19:49 IST