Politics and economy: It takes two to tango

The political situation and price movements will continue to create shaky conditions. A fresh look at rising rates and the burden on the people is a must.

Shivaji SarkarUpdated: Monday, July 04, 2022, 09:55 AM IST
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The constant dance between politics and economics often leaves one puzzled. If the change of government in Maharashtra is for an ideology, how did the Aarey metro depot and a water project take precedence over everything else to get clearance? Similarly, higher taxes are known to spur rising prices – but that is how the GST council and the direct taxes board decide to raise the rates on many items, a repeat of what was done in January even as the wholesale price index touched 1588.

At times it is difficult to understand how the GST council can take decisions that have an obvious impact on the overall price situation. In January too the rates on critical textiles, handloom and shoes were raised 5 to 18 per cent. Now the Reserve Bank and SEBI workings are defined as services and brought under the tax net. Even a cheque book, normal for a banking transaction, 18 per cent tax. It means each transaction would have a huge additional cost. Cumulatively these would have severe cost increases on all business activities.

Similarly, it is irrational to propose that post office services other than postcards, inland letters, book post and envelopes weighing less than 10 gm be taxed. Each such move has a cascading effect on the price situation. This must have foxed the RBI, which is engaged in keeping inflation low. It will again resort to repo rate rises by August. The chain is likely to continue, as the government and the RBI are apparently not on the same page.

Regarding the two projects in Mumbai which were on hold for environmental and other concerns become a priority despite a court ruling. Is the present government right or was it the previous government? It seems that considerations are more than ideological, and at one level these seem to have been taken up as ego issues. Removing forests has an adverse impact all over the country. The recent flooding of large tracts in the North-East, for example, is ascribed to felling of trees for various ‘developmental’ projects. People’s representatives need to show more concern about such fragile issues that affect everybody’s lives.

Another issue certainly is the bullet train, with a stake of over Rs 1.08 lakh crores investment. The Maha Vikas Aghadi government had virtually stalled it. Now it may again see an acceleration of land acquisition. The change of government is possibly to restart such projects.

On the tax front, a crucial government decision is to raise the taxes on gold to dampen its high demand. The import duty is raised to 12.5 per cent from 7.5 per cent. If the surcharge is added, it reaches effectively 15 per cent from the existing 10.5 per cent. The hike has raised the gap between local and overseas prices to more than 15 per cent. There may be marginal fall in imports, but historically high duty makes dubious paths of smuggling more remunerative. No amount of policing could stop that as the once-zero duty on gold did.

Yet another business aspect is ignored: About half of the gold imports are re-exported as ornaments and other value addition. Expensive domestic gold will hit international prices, causing India to lose a lucrative market. India’s May trade deficit widened to $ 24.29 billion from $ 6.53 billion a year ago as gold imports surged to $ 6 billion from $ 678 million. During May, gold imports surged to 107 tonnes.

The new rates will impact banking services, milling machinery for cereals, and petroleum products, at rates varying from 5 to 18 per cent. It will impact family budgets as these cover wide-ranging goods like LED lamps, ink, knives, blades, power-driven pumps, and dairy machinery from 12 per cent to 18 per cent; milling machinery for cereals from 5 per cent to 18 per cent; and solar water heaters and finished leather from 5 per cent to 12 per cent. The rate for work-contract services supplied to governments and local authorities is proposed to be increased to 18 per cent. The rationale for taxing a contractual service, or pumping sets used by farmers, or milling machinery for cereals is baffling, as this will make basic food production expensive. A country pining to export wheat and other grains needs to rethink the benefits and losses of higher taxes on issues aiding its operations.

The GST council allows recommendations on withdrawing exemptions for services such as the transport of passengers in business class from airports in the North-East. Hotel accommodation costing under Rs 1,000 per day will be taxed at par with the industry (12 per cent). Hospital rooms except ICU, with a daily rent of Rs 5,000, could be taxed at 5 per cent. The government in the post-Covid situation has need for cash, but it must realise that the hotel and tourism industry suffered heavily during Covid. Imposition of such taxes will further hit travellers, who have just started venturing out. Penalising them with high duties may have a deleterious effect.

A cautious but pro-active step is the move to impose cess on export of petrol and diesel by private companies. The ministry says that they were compelled to take such action as diesel and petrol have shown sharper increase. The refiners export these at globally prevailing prices, which are very high, and private refiners find exports highly remunerative. The domestic crude producers sell to domestic markets at prevailing international prices and make windfall gains. Certain refiners, for purposes of export, keep their pumps in the country dry. To check this, Rs 6 on petrol and Rs 13 per litre on diesel or Rs 23250 per tonne have been imposed with a condition that they would not export more than 50 per cent of the total crude production. For the same reason cess on aviation fuel too has been imposed.

The states should feel happy at the extension of the GST compensation cess for 14 per cent CAGR till March 2026 but they also have be concerned for impact prices.

The RBI 25th Financial Stability Report sees global outlook uncertain and domestic situation, though improving, still far from being ship-shape. Geopolitical risks warrant careful handling and close monitoring. The political situation and price movements will continue to create shaky conditions. The states are still not satisfied on the financial fall-out for them, and a fresh look at rising rates and the burden on the people is a must.

(The writer is a veteran journalist, an observer of the socio-political economy, and a media academician.)

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