A K Bhattacharya: UPA: Waiting to inhale

Last Updated: Sun, Sep 09, 2012 20:24 hrs

If you talk to civil servants in some of the economic ministries at the Centre, you are likely to get the impression that the government is perennially waiting for the right window of opportunity to take decisions that have been pending for months. As that waiting period does not appear to end, this may well reflect another aspect of the policy paralysis with which the government has been suffering from for several months.

Take, for instance, the unqualified welcome accorded by everyone in the government to the Parthasarathi Shome Committee’s recommendation that the policy on the General Anti-Avoidance Rule (GAAR) for taxation should be postponed by three years. It seems the tax department in the Union finance ministry is not fully prepared to implement GAAR and without necessary training and preparation, the new regime may cause problems. It is a good idea to be cautious while introducing a new taxation system. But would retraining tax officials take three years? Or was it to buy time and postpone the decision to a new government to be formed after the next general elections? What new window of opportunity will be there after three years?

Similarly, the direct taxes code now stands postponed. It was to have been tabled in Parliament during the just-concluded monsoon session. No one knows when it would become effective and indications are that the code may well be reviewed by the new finance minister. If that happens, do not expect the direct taxes code from 2013.

There is no movement on the much-delayed goods and services tax (GST) regime either. The current mood of the opposition political parties, including that of the Bharatiya Janata Party, is hardly conducive to holding any meaningful dialogue between the states and the Centre. Thus, the chances of the Centre getting the states to agree to the GST regime are remote. So, for all practical purposes, three key fiscal policy initiatives that would have made a big difference to tax compliance and revenue growth have now got postponed.

Then there was the decision taken last year to allow foreign direct investment (FDI) in multi-brand retail. It was an executive decision without needing approval from Parliament. Yet, the decision had to be rolled back because the Trinamool Congress, a partner of the ruling United Progressive Alliance (UPA) government, opposed the move. Officials in the commerce and industry ministry believe that within a few days of the end of the monsoon session of Parliament, the notification allowing FDI in multi-brand retail would be issued. No one though knows for sure if the government, after the battering it has got from the current coal mining scandal, has the political courage to move ahead on FDI in multi-brand retail.

On the crucial question of petroleum product pricing also, the government is playing a similar game of waiting for the right window of opportunity. The government’s failure to increase prices of diesel, domestic cooking gas and kerosene has already meant that the current fiscal year could see a record rise in the oil companies’ under-recoveries to Rs 1.9 lakh crore. The Union Budget for the current year provided for a little over 20 per cent of this amount to compensate the oil companies, whose total borrowings have already crossed Rs 1.4 lakh crore, up from about Rs 1 lakh crore six months ago.

The under-recovery on account of diesel is Rs 17 a litre (about 40 per cent of the current selling price) and for cooking gas it is Rs 320 a cylinder of 14 kg (almost 80 per cent of the current selling price). For kerosene, the under-recovery is over Rs 30, almost three times the price. Add to that the under-recovery of Rs 6 a litre for petrol, the precarious financial state of the oil companies should become evident.

As government officials are fond of saying, they have a small window of opportunity of a few months before the Gujarat state elections scheduled for December. The question is: Will the UPA government have the courage to go ahead with these decisions in the current situation? Unlikely. So, what is the way out? According to some of these officials, the government should stop thinking of implementing big bang ideas or schemes in the current scenario. Ideas like the GST will require the government to perform the difficult task of securing consensus across the entire political spectrum and, therefore, are better postponed to a new regime.

Instead, the government could focus on how it could take some baby steps towards fixing the problems. For instance, instead of planning a steep increase of fuel prices, could it simply go for a fairly moderate increase in prices of diesel and cooking gas? Could it then introduce a system of a monthly petroleum product price reviews? That would result in price adjustments by a small margin every month. Will that be better than waiting, almost indefinitely, for a window of opportunity, as the government has been doing for the last several months?

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