Sunil Jain: Who likes inflation?

PERSPECTIVES

Traditional wisdom has it that finance ministers may worry about the impact of inflation on the common man, but it does wonders for their finances. In times of inflation, revenues and profits of both individuals and companies increase and, therefore, so do taxes. But a lot depends on how those taxes are split. A high proportion of indirect taxes, on imports for instance, should yield very high tax buoyancy especially at a time when commodity prices are so high. But if corporate taxes are a large proportion of taxes, and inflation begins hitting corporate profits, as indeed it is, then these taxes don’t grow as well. So, corporate taxes that rose 55 per cent in the first month of the 2008-09, grew by just around 38 per cent in the third month. Income taxes have seen a similar fall in growth, though this is not so easily explained since inflation doesn’t result in salaries falling; customs duty collections which grew 25 per cent in April saw their growth fall to under half in June, probably the result of tax cuts made by the government as part of its anti-inflation battle during the year. As a result, overall tax growth which was 52.5 per cent in April fell to around 21 per cent in June. Of course, the overall fiscal balance still looks rosy since total expenditures in the first quarter were down 6.5 per cent, from Rs 179,900 crore in the first quarter of 2007-08 to Rs 168,939 crore in the same period this year — the fiscal deficit, as a result, was down from Rs 112,404 crore to Rs 86,126 crore respectively. The main reason for this was a sharp compression in non-plan capital expenditure, from Rs 38,479 crore in the first quarter of 2007-08 to just Rs 3,494 crore in the April-June quarter this year. Presumably this is a statistical blip and will rise in later months. Inflation’s going to hit the finance ministry soon.