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Since 1st March, 1999
 
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THE LOADED FISCAL GAME
- Passing the parcel of spiralling prices up and down

Not that the upper classes are particularly worried over the tidings from the price front. Since the beginning of the past decade, they have been rolling in money they could not have ever dreamed of. Inflation to them is therefore like water off a duck’s back. Their archetypal social behaviour is nonetheless interesting. The fact of spiralling prices hits them with a three-week time interval, after official data on the rate of inflation — defined as the percentage rise in the price level in a particular week compared to what it was in the corresponding week in the preceding year — are released through a prim press note. All hell is then seemingly let loose. The media go crazy; politicians, till now their entire attention riveted on the US-India nuclear deal, feel obliged to make a few squeaks, the agriculture minister writes to the finance minister seeking an explanation, as if there is no such thing as collective responsibility residing in the government in New Delhi; the governor of the Reserve Bank of India is summoned to the nation’s capital and, in the interminable meetings the Planning Commission loves to convene, soggy vegetable sandwiches are replaced by soggier thin arrowroot biscuits.

It is the same reflex at work every time the international price of crude petroleum is further pushed up. Imposing controls on the consumption of petroleum products is a scandalous thought. The authorities in New Delhi therefore raise the administrative prices and watch the subsequent fun. It is, the idea is sought to be spread, not in the line of their duty to consider the impact of the rise in prices on the conditions of living of ordinary men and women. The finance and commerce ministers condescend to a token reduction in customs and excise duties on petroleum and petro-products, and sit back to enjoy the spectacle of state governments competing with one another in slashing the sales tax on these products so that public wrath can be at least marginally contained.

Official concern is not so much about the degree of suffering of the people as about the magnitude of the anger they give vent to. Anger, in its combustible form, is capable of singeing the electoral booths. While neo-liberal economics regards it as fatuity to take into account the aspect of human suffering, a cost-benefit analysis, in electoral terms, of a particular decision is still de rigueur. Even so, the accent continues to be on paring one’s own expenses; if it is possible to shift the burden of costs to the state administrations, the Centre will be under advice never to miss any such opportunity. In ancient scripts, this doctrine was known as beggar-my-neighbour policy; ancient scripts stand in good stead.

The state governments are caught in a jam. They are physically more proximate to the people, and feel the heat of public resentment much more and much earlier than the ethereal beings in the nation’s capital. Their class bias may be no different from that of those ruling the roost at the Centre; the immediate issue of survival politics they cannot however get away from. They slash the sales tax on petroleum products in order to off-set, even if only partially, the blow occasioned by the New Delhi decision to raise administrative prices.

Thereby hangs another tale. About three years ago, the country had supposedly crossed over from the primitive sales tax system, administered severally by the state governments with their own individual rates structure, to the value-added tax regime marked by a uniform rate of tax for each commodity or service all over the country. That transition was considered to be an important milestone in the nation’s inexorable march towards full-scale economic liberalism: capitalist growth, it was explained, could reach its apotheosis only if the country’s market ceased to be fragmented and splintered by differing rates of sales tax imposed and administered by different state authorities. Qualms regarding the constitutional propriety of what was contemplated were brushed aside and a uniform structure of VAT was introduced for the entire country; everybody was supposed to live happily ever after.

Discretion was obviously the better part of valour. State governments, some of them in zestful hurry, some with a bit of trepidation in their heart, crossed over to VAT. On a crucial issue, though, a majority of them held back. Barring Tamil Nadu and Gujarat, none of the major state governments agreed to give up their prerogative to impose sales tax on petroleum products. VAT, they agreed, was fine and excellent, but let petroleum products be for the present kept out of its purview. A very substantial chunk of their commercial tax collections comes from the levy on petroleum products, with the sales tax rate on them ranging between 25 and 30 per cent, sometimes even more. The highest permissible rate under VAT is, on the other hand, only 12.5 per cent. The state governments wanted to eat the cake and keep it too. They crossed over to VAT, but petroleum products were left out of its ambit. It was, in retrospect, a most wise decision. Even as administrative prices of petroleum products were adjusted upwards from time to time by the Centre during the past three years, receipts from sales tax imposed on these products rose too at a brisk pace. It is still an open question whether the general eclipse of the sales tax regime and its replacement by the VAT system has had a positive impact on the resource-raising ability of the states. The buoyancy in sales tax receipts from petroleum products has till now prevented any thorough analyses of the negative aspects of the crossover. It is this buoyancy again which has this time permitted the states to lower the sales tax rates on petro products, thus providing marginal relief to the harassed consumers.

This hardly brings the narrative to its end though. On the contrary, it only brings it back to the beginning. On fiscal issues, New Delhi rigidly follows the line laid down by the Washington Consensus. The masters of our destiny, operating from ten thousand and odd miles away, regard the constituent states of the Union of India as a nuisance. They would like to deal with just one administrative unit in the country: the government in New Delhi; it is immensely easier to command and discipline one entity than to discuss, negotiate, cajole, browbeat or blackmail something close to thirty entities. For understandable reasons, those entrenched in power at the Centre readily go along with the proposition. The farce following the latest rise in the administrative prices of petroleum products could not have made the consensus happier. The fiscal prowess of the Union government has been augmented further, with a corresponding weakening of the condition of finances of the state regimes.

But has not such a development another, ominous side? India’s poverty-ridden countryside is crammed with stories of calamities and disasters occurring every day here, there, everywhere. News of these grim events reaches New Delhi, which controls the purse strings, only with a time lag, if they ever reach at all. A nightmare of procedural merry-go-rounds ensues before official disaster relief funds start percolating downwards. Whatever little succour can be provided meanwhile has to be provided by the state governments and their rural network, including the panchayats. By eroding the financial capability of the states, the Centre might win a glowing testimonial from the consensus. The market value of such testimonials could well be rapidly reduced to less than zero were distress to reach such dimensions that the states are unable to cope with them and chaos takes over.

A final comment. The money a state administration forsakes by charging less sales tax for petrol sold to a gas-guzzling luxury limousine is money that cannot be spent to provide succour to the rural poor perpetually at death’s door.

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