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Reach versus grasp

Govt promises on tax and infra must be matched with action

Business Standard Editorial Comment  |  New Delhi 

The government is making a great effort to persuade investors - domestic and foreign - that it will do everything necessary to assuage their concerns. At their addresses to the Mumbai Next conclave last week, both Union Finance Minister Arun Jaitley and Minister of State Jayant Sinha spoke about two issues worrying this constituency for a while now. The first is the complexity and arbitrariness of the tax system, something that was vividly demonstrated in 2012 when the government, in a bid to set aside an adverse order from the apex court, gave into the temptation to tax income retrospectively. On this particular issue, while it is now clear that this government will soft-pedal on the use of this power, the fact is that the power still exists and can be exercised at any time. Nothing short of an amendment to the Finance Bill will convincingly deal with this threat. Mr Sinha's assertion that the government wants to quickly move to global best practices in taxation is clearly a strong signal of intent. But long years of experience with good intentions failing to translate into practice will keep investors sceptical until real change is seen on the ground - the attitude and behaviour of assessing officers and commissioners. It is not enough to express noble intentions at the ministerial level; genuine reform of the tax system can only be achieved by a thorough revamp of the boundaries within which the assessors work and the targets that they are incentivised to achieve. It is this dimension that Mr Jaitley and Mr Sinha must primarily focus on; without this, the credibility of their promises is always going to be under threat.

The other critical issue worrying stakeholders is the strategy for reviving and accelerating investment in infrastructure. The finance ministry has, through its mid-year analysis, already accepted the inevitability of public funds being the only possible way to do this in the short term. Many stakeholders have accepted this proposition. The financial condition of the companies heavily involved in this sector clearly leaves no room at all for more funds coming in via that route. But acceptance does not per se provide a solution. The government has committed itself to a fiscal-consolidation programme, which will leave virtually no room for a significant expansion of capital spending. Here again, the translation of noble intent into effective action needs a radical change of approach. The government has to first rescue critical projects that are currently caught in a trap of regulatory bottlenecks and financially stressed promoters. Beyond this, it has to create a robust mechanism to sustain large flows of funds into infrastructure.

In a sense, these kinds of assurances coming a few weeks ahead of the Budget from the very people who will put it together is promising. This could mean that they have accepted the inevitability of dramatic changes and will deliver on these on February 28. If this happens, confidence among investors will surge. However, there are also risks. Grand announcements that will inevitably take time to translate into action will be met with scepticism. Particularly on the infrastructure front, with few concrete actions by the new government, the battle seems increasingly to be lost. The government needs to ensure that its reach does not exceed its grasp.

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First Published: Sun, February 08 2015. 21:40 IST