Fiscal concepts misconceived in An Uncertain Glory

The glory of the Indian story is uncertain because of weak performance of the economy and the democracy in India, say Amartya Sen and Jean Dreze in their book An Uncertain Glory. The authors have described the misery of India in excruciating details. But the suggestions to improve the jaded glory are based on weak logic. When the authors have discussed about how the fiscal improvement can be done to muster funds for enhanced food Bill, their arguments are based on misconceived notions about fiscal situations prevailing in India. I am writing about these fiscal propositions in their book and not about the growth-distribution controversy.

On the fertiliser subsidy, the authors have devoted only a three-inch paragraph in a book of 434 pages. They say that the subsidy as a percentage of GDP (1.5 per cent) in 2008-09 was more than the percentage of expenditure on health and, therefore, the priority is distorted. They call it distributionally regressive, because it benefits the larger farmers. They do not say how it could be made progressive. They also say it has adverse environmental impact. These are all bland statements without any explanation on how to reduce the subsidy and how to make it distributionally progressive or environment-friendly. They merely criticise without going deep into its complications. One has to understand the subsidy properly as to why it is given. The input for the fertiliser is naphtha, the price of which is also administered and the final price of urea, etc, is also administered. Without subsidy the manufacturers of fertiliser will close down, as have some, leading to industrial unemployment and unrest. The subsidy is highly calibrated and the government has already taken a decision to fix per-tonne subsidy on non-nitrogenous fertilisers to limit the subsidy. The authors have not suggested how to make the use of fertiliser friendly to environment. The contribution of Sen and Dreze is precious little in this respect.

The authors have also called the diesel subsidy pernicious and regressive without going into the matter of what will be the impact of reducing such a subsidy. And the petrol subsidy is not found to be wrong.

The authors have referred to "revenue forgone", that is the tax, which could have been collected but was forgone on account of various exemptions and incentives. There is a lot of misunderstanding about revenue forgone. It is not a loss of revenue, as it does zero-rating export which generates growth. Throughout the world exports are zero-rated. India has to do the same to remain competitive. Therefore, the loss of revenue is only if the schemes for export promotion are misused. Keeping gold and diamond import out of the tax net has come for scathing criticism from the authors. Factually speaking it is wrong to say that gold import is duty free. There has been a rate of duty for a long time and the rate is varied sometimes depending on the circumstances. The import of gold was banned completely earlier and in mid-1970s the debate started whether to allow import of gold on payment of duty. The duty has been there for many years. The standard rate was 10 per cent and the exempted rate varied at four, six and eight per cent. Gold was not out of the tax net. Misunderstanding on the part of the authors has been caused because the standard tariff rate being 10 per cent and the effective rate being eight per cent, the two per cent is shown as revenue forgone. But that is only a statistical calculation. In any case gold is not out of the tax net. The standard rate for diamond is also 10 per cent. There are some exemptions like for rough diamonds that are meant for cutting and polishing in India. On some diamonds like non-industrial diamonds and cut-and-polished coloured gems and stones the rate of duty is two per cent. It is a sound economic policy and the authors haven't said why they don't like it.

Conclusion: The fiscal concepts discussed in the book regarding subsidy on fertilisers and diesel, revenue forgone and gold and diamond being out of tax net are either rudimentary, derived from a misunderstanding or factually wrong.

smukher2000@yahoo.com