<p>As India struggles to tighten a noose on round tripping of funds through tax havens, former Reserve Bank of India Governor Y V Reddy on Tuesday blamed the country’s tax regime for the menace, as it does not woo domestic savers much.
Delivering the India Policy Forum, 2012 Lecture here, he said, “You woo domestic savers. That is a better pay-off. The tax regime is less friendly to domestic savers and we are seeing it (coming back) through round tripping.”
He said most high net worth individual savings in the country were re-routed (through other countries).
The observation by Reddy, credited with effectively regulating India’s banking sector at the time of global financial crisis, assumes importance since the country is trying to deal with round tripping of funds by Indians to take advantage of low-tax countries.
One of the purposes of the proposed General Anti-Avoidance Rules (GAAR) and revision of double taxation avoidance agreements (DTAAs) is to plug the loopholes of round tripping.
The government is in the process of reframing draft GAAR rules, after Mauritius and Singapore objected to sudden change in rules by India.
Delivering the Lecture, 'India: New Strategies For Economic Development', the emeritus professor with the University of Hyderabad said domestic savings should be enhanced by three per cent of GDP to achieve 10 per cent annual economic growth.
He said domestic savers are contributing more than 90 per cent of India's development and they are a more stable source of finance vis-a-vis foreign funds.
In this context, he said there would be maximum demand for global capital from advanced economies for financing their public debt.
As global capital becomes scarce, financing of a high current account deficit (CAD) becomes difficult. As such, India should aim at cutting CAD, along with revenue deficit, to zero in the medium term, he said.
"There are global uncertainties and there is a risk in funding India's CAD," Reddy said.
He said zero per cent CAD gives the economy two to three per cent headroom in any year to absorb shocks.
When asked how CAD could be brought to zero in the medium term when it was as high as record 4.2 per cent of GDP last year, Reddy said average CAD at 2.5 per cent meant 4.5 per cent of deficit in current balance in bad times. As such, he meant cutting CAD to zero per cent from 2.5 per cent. India's CAD stood at 4.5 per cent of GDP in the last quarter of 2011-12.
However, India's trade deficit, which is an excess of merchandise imports over merchandise exports and is an important part of CAD, declined $40 billion in the first quarter of this year from $46 billion in the corresponding period of last year, as imports contracted faster for the second consecutive months in June than the rate of fall in exports. As such, CAD might not be as large as last year, but it would certainly be nowhere near zero.
In the matter of taxation regime, Reddy, however, did not dislike the idea of a Tobin Tax on financial transactions, opposed by the government. "Taxing financial sector is not a sin. That option should be on the table."
He said there was a headroom to reduce tax sops.
"If you give it (tax sops) to the poor, it is subsidy and if you give it to industry, it is incentive," he quipped.
He said the public policy should not be business-friendly, but marketfriendly. "Government should be transparent," he added at a time when charges of corruption fly thick and fast.
Reddy said both fiscal deficit and revenue deficit are understated.
In the economy, dominated by services sector, Reddy said both agriculture and manufacturing are critical, not only for growth, but also for employment.
He prescribed that strength of India's economy should be reinforced. "High domestic savings, dynamic and entrepreneurial talent, large labour force, banking sector, competition among state governments, focus on domestic savings-investment balance should be focussed," he added.