Rahul
Agarwal
With whopping oil subsidies of Rs 96000 crores in 2012 and a high fiscal and current account deficit, Can Finance Minister & RBI Governor revives the sluggish Indian Economy?
From past three years Indian economy has
been on a very slippery path with a GDP growth rate which is below 6 percent.
Now after these three years, we can see the sign of recovery in the Indian
economy in which UPA (United Progressive Alliance) government has been taking
reforms in the form of steps to revive this Indian economy. But, after the
massive reforms taken by the UPA government, still there is a concern for both
Finance Minister and RBI Governor and that is “Twin Deficits”. With a record
high CPI (Consumer Price Index) around 10% in December 2012 and WPI (Whole Sale
price Index) around 7.4% (It’s still very high) in December 2012. Fiscal
deficit, which is excess of expenditure over its income was also very high
around 5.3% of GDP where as CAD (Current account deficit), which is excess of
imports over exports was also very high around 5.4% of GDP. Both these deficits
lead Indian Economy into a Twin Deficits. So to curtail the effect of this Twin
Deficits, UPA government has been taking steps of reforms to boost the Indian
economy like FDI, deregulation of Diesel prices, cap on LPG cylinders etc.
Reasons for these huge Deficits…
1. Subsidies:
In 2012 alone, the burden of subsidies on
the head of the government was around Rs 2.16 lakh crores in which Petroleum
subsidy’s share was 31.7%, fertilizer Subsidy’s share was 31%, Food subsidy’s
share was 33.7% and rest for others. Due to this whooping subsidy bill, the
expenditure of the UPA government had increased and on the other side its
revenue decreased and this lead to fiscal deficit which UPA government had been
tackling this menace from past many years. This is a huge concern for any
government of a nation which has a fiscal deficit of 5.3% of the GDP. Now to
tackle this menace government took serious steps like increase in the prices of
diesel (decontrol of oil prices) which will reduce the gap between petrol and
diesel and will curtail the subsidy bill of the government.
2. Yellow Fever:
In past one year the
demand for precious yellow metal gold had been rising due to sluggish economy
with high cost push inflation. So, people of India felt that gold is the safest
investment because gold prices were kept on rising. Due to this, Indian
jewellers were importing gold from Thailand. In the (FTA) foreign trade
agreements between India and Thailand there was a point of import duty. So when
someone import gold from Thailand then the person have to pay Import duty of 1%
where as if someone import gold from any country other than Thailand then they
have to pay import duty up to 10% approx. Due to this, a massive demand of gold
emerged and huge amount of gold imported from Thailand and this lead to Indian
currency going outside the country which increased the CAD (Current Account
Deficit). To curtail the demand of gold, Finance Minister P Chidambaram
took the step of raising import duty on gold to 6% percent. Due to this, people
need to pay higher prices for gold to import which lead to the demand of gold
fallen down.
Now to overcome from these twin deficits Finance Minister P Chidambaram would likely to announce higher tax rates for the rich ones in his next budget which he will announce on February 28. But according to some top economists, tax rate shouldn’t be increase for rich because if tax rate would increase for super rich then it directly encourages tax evasion because the tax base is not rising. In 2002, the number of tax payers was just 316.88 lakh where as in 2012, it was around 324.16 lakh. If the tax base will not rise and if the tax rate will increase of super rich people then it will lead to tax evasion and the rich will shift income to tax havens, it will also lead to massive under reporting of incomes by professionals and traders and companies will structure salaries to make their employees less taxing. So it shouldn’t be increased for the rich, as high income earners already pay bulk of tax. The solution for this is widening the tax base so that more and more people will pay their tax honestly. So this is one of the challenges for the Finance Minister to curtail fiscal deficit.
After increasing the tax rate proposal, to reduce the fiscal gap, UPA government would likely to reintroduce the inheritance tax in the Union budget which will be announced by the Finance Minister on February 28. This tax was introduced in 1953 and abolished by former finance minister VP Singh in 1985. Inheritance tax is a tax which imposed on a person who inherits assets. It is also known as death tax. This is the recommendation of finance minister to reduce the fiscal gap but the argument against this proposal of implementing this is when the deceased had already paid income tax on income earned and possibly wealth tax every year for possessing the assets, to pay tax on it again is harsh and may result in multiple taxation. This argument could lead to create problems for Finance Minister.
Recently, to reduce the consumption of diesel, government wanted to impose green tax on diesel vehicles and the tax rate is 25 percent of the cost of the vehicle. This would lead to discouragement of diesel vehicles by consumers. But there is also an argument against this proposal that if the green tax will impose then the demand of second hand diesel cars will increase abruptly and will extracts more carbon than the newer one. Already consumers are paying premium on diesel models over petrol models and if this green tax will impose then the demand of diesel models will decline sharply which lead to huge losses to the auto sector. Due to this, many foreign companies who are planning to increase their share in India will go back to their respective nation and remove India’s name in their lists of investment destination. So this is also one of the challenges for the finance Minister
Now to overcome from these twin deficits Finance Minister P Chidambaram would likely to announce higher tax rates for the rich ones in his next budget which he will announce on February 28. But according to some top economists, tax rate shouldn’t be increase for rich because if tax rate would increase for super rich then it directly encourages tax evasion because the tax base is not rising. In 2002, the number of tax payers was just 316.88 lakh where as in 2012, it was around 324.16 lakh. If the tax base will not rise and if the tax rate will increase of super rich people then it will lead to tax evasion and the rich will shift income to tax havens, it will also lead to massive under reporting of incomes by professionals and traders and companies will structure salaries to make their employees less taxing. So it shouldn’t be increased for the rich, as high income earners already pay bulk of tax. The solution for this is widening the tax base so that more and more people will pay their tax honestly. So this is one of the challenges for the Finance Minister to curtail fiscal deficit.
After increasing the tax rate proposal, to reduce the fiscal gap, UPA government would likely to reintroduce the inheritance tax in the Union budget which will be announced by the Finance Minister on February 28. This tax was introduced in 1953 and abolished by former finance minister VP Singh in 1985. Inheritance tax is a tax which imposed on a person who inherits assets. It is also known as death tax. This is the recommendation of finance minister to reduce the fiscal gap but the argument against this proposal of implementing this is when the deceased had already paid income tax on income earned and possibly wealth tax every year for possessing the assets, to pay tax on it again is harsh and may result in multiple taxation. This argument could lead to create problems for Finance Minister.
Recently, to reduce the consumption of diesel, government wanted to impose green tax on diesel vehicles and the tax rate is 25 percent of the cost of the vehicle. This would lead to discouragement of diesel vehicles by consumers. But there is also an argument against this proposal that if the green tax will impose then the demand of second hand diesel cars will increase abruptly and will extracts more carbon than the newer one. Already consumers are paying premium on diesel models over petrol models and if this green tax will impose then the demand of diesel models will decline sharply which lead to huge losses to the auto sector. Due to this, many foreign companies who are planning to increase their share in India will go back to their respective nation and remove India’s name in their lists of investment destination. So this is also one of the challenges for the finance Minister
Deregulation of oil prices:
With a view to revive the economy,
Finance Minister took the step of Decontrol of oil prices in which prices of
diesel will increase by 50 paise every month for ten months which will ease the
pressure on OMC (Oil Marketing Companies). This was one of the good steps taken
by the Finance Minister. But, after implementing this step, Sales of diesel
soared up to 22 percent in Delhi in December quarter. This happened because the
bulk users of diesel like malls, public transport buses etc are directly
purchasing diesel from petrol pumps because the bulk users which usually
purchase diesel in tankers directly from oil companies, now have to pay about
20% more than the price at retail pumps. This has triggered a rush of big
buyers to petrol pumps where they find diesel about Rs10 cheaper. This increase
in the sales of diesel is a bad news for all the OMCs (Oil Marketing
Companies), which were hoping bigger margins from big customers. So this
is also another bad news for the Finance Minister as well because it is very
difficult to prevent malpractices.
Rate Cut/CRR:
On 29 January 2013, RBI Governor Duvvuri Subbarao
nodded for the market sentiments and lowered repo rate and CRR (Cash reserve
ratio) by 25 bps which created boost for the inflation hit economy. Lowering
the two key variants will no doubt increase in investment but also benefit the
borrowers which will take loans from the commercial banks at a lower rate. But,
after the announcement of the rate cut, Subbarao said Twin Deficits leave
little room for further easing. This means that in coming months RBI can
increase repo rate and CRR and that will depend on the situation of the
economy. Subbarao also said that CAD (Current account deficit) poses a barrier
on the easing of the monetary policy. This means monetary policy cannot be
further down due to high Current account deficit in a slowing economy.
Moreover, Subbarao told to the reporters that high Current Account deficit in a slowing economy with a huge fiscal deficit of 5.3% of GDP exposes our economy to the risk from Twin Deficits. So we are keenly watching the market and will take appropriate steps in the future.
So a question comes in the mind of every citizen of India “Can RBI Governor & Finance Minister revives the sluggish Indian Economy”?
Let’s wait and watch!
Moreover, Subbarao told to the reporters that high Current Account deficit in a slowing economy with a huge fiscal deficit of 5.3% of GDP exposes our economy to the risk from Twin Deficits. So we are keenly watching the market and will take appropriate steps in the future.
So a question comes in the mind of every citizen of India “Can RBI Governor & Finance Minister revives the sluggish Indian Economy”?
Let’s wait and watch!
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