Centre Slashing Rates on Small Schemes a Blow to Middle Class

Government may have to bear consequences of the bitter pill of rate cuts on savings schemes, writes Gautam Mukherjee.

The abrupt slashing of interest rates payable on small savings instruments has the middle-class, which was ignored in the Union budget, annoyed at this fresh gouging, and worried about their retirement savings.

Particularly, as the non-performing assets-ridden banks, offering nothing better, have also cut rates, and the stock markets are in a bear grip too.

Even if the RBI now cuts repo rates sharply, the beleaguered banks probably can’t lower lending rates with so much bad debt. This is in reality, a double whammy with no silver lining.

Bitter Pill

The opposition Congress was immediately up in arms. The government is trying to brazen it out, suggesting that a low interest regime for deposits/lending is beneficial in the long run. But it is more like a bitter pill prescription from abroad, a requirement against the government’s own long term loan demands from the World Bank, ADB, IMF etc.

For the public, these savings rate cuts of up to 1 per cent, coming with a sharp hike in petrol and diesel prices, feels like a grim start to spring and summer. And these new financial blows have been delivered, seemingly via the back door, just days after Finance Minister Arun Jaitley pulled back, under pressure, from taxing part of the PPF in his budget proposals.

Frittering Away Oil Bonanza

Crude prices, everyone knows, have dropped 75 per cent from its peak but we saw only an 18 per cent cut in total, issued in dribbles and drabbles. The rest of the oil benefit has gone into an easy-dip government revenue generation.

The finance ministry is clearly struggling to garner revenues. Direct taxes are below targets, the government divestment programme at the bourses is running at less than half levels, indirect taxes, though better, are still grossly inadequate to finance the government’s ambition.

FDI, looking good, is a big hope, combined with those long-term development loans.  Frustratingly, structural reforms like GST, which can add a full percentage point to GDP, are still pending.

Besides, every initiative has its related costs: OROP, the Seventh Pay Commission, rural uplift, infrastructure boosts, the revival of the Railways/power/mining/inland and coastal waterways, defence procurement/manufacturing. The government’s refusal to relax the fiscal deficit target of 3.5 per cent of GDP has been praised by all quarters, but it makes it tougher to mobilise resources on a very narrow tax base.

Will This Boost Revenues?

• Slashing of interest rates on small savings schemes by govt coupled with RBI’s reluctance to lower lending is a severe blow to the middle class.
  
• These financial blows come soon after the finance minister rolled back proposal to tax the employees’ provident fund.
  
• The finance ministry is clearly struggling to garner revenues at a time when structural reforms like GST are still pending.
  
• The perennial problem of revenue generation on a tiny base is not being addressed.
  
• Government has no mechanism to tax the money in the hands of a few hundred immensely ‘rich farmers’.
  

Too Much Dependence on PPF

Apologists point out that the PPF, once paying 12 per cent tax rate, has been handing out single-digit returns since 2001, and 8.1 per cent tax rate is not so bad. International rating agencies like Fitch too like these cuts and consequently expect more money to flow into the stock markets.

But the deeper and perennial problem of revenue generation on a tiny base is still not being addressed, resulting in a high direct and indirect tax regime, and the same people having to pay for the entire edifice.

Consider that in India, for past many centuries, the only tax applied was a land-based revenue. It was levied on peasants who worked, feudal vassals etc. It was rich enough to create and support a network of hundreds of maharajas plus thousands of rajas and zamindars with very low rates of inflation. It also financed at least two immensely rich dynastic reigns -- that of the great Mughals, than endured for 400 years, and the British Raj, spanning another 200 years.

But once we took on Fabian socialism at independence, these universal tax bases were history. All agricultural taxes, even on the rich, were abolished forthwith.

Nabbing the Money Launderers

A recent report had great and inexplicable riches, multiples of annual GDP, masquerading as agricultural income to bamboozle the tax authorities. It was speculated that it might be the unaccounted monies stacked abroad being brought back to avoid being nabbed in various secret bank accounts.

And still the government has no mechanism to tax this money in the hands of a few hundred immensely ‘rich farmers’. It doesn’t even dare venture into a universal expenditure tax, oft suggested, of say 0.25 per cent, applicable on all bank transactions involving more than a threshold of Rs 10,000 for example.

Yet, only 3 per cent of 1.2 billion are even in the Income Tax rolls as PAN card holders. Corporate taxes too are paid by a small proportion of companies and businesses in the organised sector, while 90 per cent of commercial activity is carried out by the ‘unorganised sector’. Our black economy rivals the $2 trillion official one.

Isn’t the refusal to grasp the political nettle of expenditure tax and imposts on high agricultural income unfair to all current revenue generators?

(Gautam Mukherjee is a plugged-in commentator and instant analyser)

Also read:

Banks may Not Cut Lending Rates, but Cut in PPF Good: Experts

Non-Performing Assets of Banks: Turning a Blind Eye Won’t Help