The tax dividend

Getting industry back on track will take time. For new government, lowest hanging fruit is fixing taxes.

By: Express News Service | Updated: May 13, 2014 11:11 pm

Getting industry back on track will take time. For new government, lowest hanging fruit is fixing taxes.

Given that India’s industrial growth in 2013-14 has fallen to the lowest in a decade, tackling it is not going to be easy. High inflation means that the RBI cannot lower interest rates enough to attract investments or stimulate consumption, and a tight budget constraint means government investments can’t be raised quickly, nor can taxes be lowered sufficiently to stimulate demand. In any case, the excise duty cuts on automobiles in the interim budget — by as much as a third for two-wheelers, small cars and commercial vehicles — didn’t have as much of an impact as expected. While demand for cars and commercial vehicles has continued to contract in the period since, demand for two-wheelers picked up significantly, but just for a month. The reason is simple: tax and price cuts are all very well, but consumers want to see new jobs in order for confidence to return. And given the likelihood of an El Nino-induced drought this year, demand will only fall further.

In such a situation, any attempt to revive demand has to be multi-pronged. Working with states like Goa and Odisha to come up with a policy to award mines in a transparent manner, for instance, is a good way to revive industrial growth. Getting NHAI to speed up its awarding of new road contracts, similarly, will revive demand quickly, given the multiplier effects of construction are higher than in most other sectors. Hiking gas prices, easily done once the new government comes in, will go a long way in reviving investment demand. Telecom companies invested $10 billion just a month ago in buying spectrum and, were easier spectrum trading rules to be put in place along with reasonable spectrum usage charges, you can expect another investment fillip from this sector.

The lowest-hanging fruit, of course, is relating to taxes. Between 2008-09 and 2013-14, MNCs have been sent income tax notices for Rs 2.2 lakh crore — a large part of which has been based on various retrospective amendments. If a mechanism were found to settle such cases — in the case of Vodafone, which wants to take the case to international arbitration, the government simply refuses to engage — you can be certain there will be a spurt in investment levels in the country. Tackling the taxman’s irrational behaviour has to be top priority if India’s investment, and industrial growth, is to be revived.

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