Santa Jaswant

Nobody can disagree with Finance Minister Jaswant Singh that a government8217;s economic policy initiatives have a political dimension in a democracy. There can be no economics without politics and there should not be any politics without economics. So it is pointless to quibble over whether or not there is a clear political message in his recent economic policy initiatives. He wants to add to the 8216;8216;feel good8217;8217; factor in the markets and wants consumers to feel better. In this aim he has succeeded. Fiscal purists have, however, questioned the financial implications of what he has done. A Santa Claus-like giveaway of Rs 10,000 to Rs 12,000 crore in lost revenues? Can the fisc afford it? Indeed, should it?

There are two ways of addressing this concern. First, that much of the revenue loss is on account of Customs duty reductions that are long overdue. These revenues were waiting to be lost since the NDA government has postponed trade liberalisation for much of its term in office. The last time round when duties were cut like this was during the tenures of Manmohan Singh and P. Chidambaram. India lags behind many of its Asian neighbours on tariffs and successive finance ministers have committed themselves to bringing Indian tariffs in line with 8216;8216;Asian8217;8217; levels. The pursuit of free trade agreements with Southeast Asian economies will also entail tariff reduction. Hence, Singh has done what was due. The sops offered in the area of direct taxes do not have any significant fiscal costs. This enables the government to in fact claim greater progressivity to its fiscal policy because the share of indirect taxes has been reduced in revenues while that of direct taxes increased.

A second response to the critics is that some of this revenue loss, estimated at about 0.6 per cent of national income, can be made up with increased income if these policies stimulate new investment and generate growth. By spurring consumer expenditure these incentives can help raise the revenues required to compensate for the fiscal loss. Finally, Singh is correct in arguing that a government cannot go into policy paralysis before an election in a dynamic and open economy. Consider the fact that one reason for tariff reduction is the rising forex reserves and the upward pressure this has exerted on the rupee. By liberalising external transactions the finance minister is allowing people to use these reserves. The principle of freezing all new policy in the run-up to an election does not make sense in a modern economy where governments must constantly be alive to global and domestic changes. Hence, while Singh8217;s policy announcements of the last week may make political sense for his party in the run-up to an election, they must be welcomed because they also make economic sense.