There are many good reasons for the cautious and conservative approach the Union finance ministry has adopted towards direct tax reform. Expectations of a radical reform of tax policy have understandably been belied because of the government&rsquo;s cautious approach. The most important reason for such cautious conservatism would be the likely revenue implications of the changes being proposed.

Decoding the tax code

Business Standard

There is absolutely no denying the fact that the sight of rotting food stocks on the one hand and hungry poor on the other is a blot on government and governance in India. Union Agriculture Minister Sharad Pawar deserves all the rap on the knuckles that the country&rsquo;s highest judiciary can give. Indeed, Mr Pawar ought to step down apologising for his inefficiency in handling the food and agriculture ministry.

SC for Santa Claus

The 8.8 per cent growth in gross domestic product (GDP) in the first quarter of 2010-11 (that comes on the heels of 8.6 per cent in the last quarter of 2009-10) should put to rest any doubts about the durability of the economic recovery. It could also mean that the economy is getting back on the 9 per cent growth trajectory of the pre-crisis years. Besides, the fact that GDP growth is being driven by industry, that grew 10.3 per cent in the quarter, should augur well for revenue mobilisation and the fiscal health of the government. The sustainability of this revival would depend on the extent to which investment activity is revived and employment generated. That said, there is usually no dearth of caveats when it comes to interpreting economic data and this week&rsquo;s data is no exception.

Downside to the upside

A parallel system of futures trading in commodities, operating outside recognised commodity exchanges, better known by its colloquial epithet Dabba, has been thriving unchecked and is believed to be now generating bigger trading volumes than the regular exchanges. This is chiefly because curbing this mode of trading is proving difficult under existing rules governing commodity futures. The Forward Markets Commission (FMC), the main regulator of this sector, in its present avatar does not have adequate powers to directly intervene in Dabba trading. Nor can the commodity exchanges do much to stop it, though the Dabba operators are known to be using the prices discovered at the exchanges to settle their unwritten deals.

Time to put a lid on Dabba

The Indian Navy&rsquo;s reported preference for imported submarines over domestically manufactured ones because of delays in getting the latter is understandable. If the navy&rsquo;s requirement is that it needs 24 submarines to deal with extant maritime security requirements, while it has only seven or eight that are actually operational out of a fleet of 15, then there is good justification to shop around the world and bridge the gap with whatever is available. However, if early delivery becomes an overriding criterion for defence equipment, an indigenous defence equipment industry may never come into being. And, certainly not unless the Indian private sector is allowed to invest in it. Indian private sector companies like L&amp;T are, therefore, justified in their complaint that government policy is not helping the growth of an indigenous private sector defence industry.

National security dividend

Third party administrators (TPAs) for health insurance companies perform a valuable service for the insured. They enable &ldquo;cashless&rdquo; settlements of insurance claims. Without TPAs, the claimants have to first pay the hospital bills and then get reimbursed from insurance companies. Prior to TPAs, this created a host of problems, not the least among them being the fact that people had to keep cash around the house to cover unexpected hospitalisation expenditures. For this service, the TPAs collect 5 per cent of the insurance premium paid by those who buy insurance. TPAs are now protesting on two counts. First, they do not like the idea of four public sector insurance companies setting up their own TPAs. Second, they want to be paid 10 per cent of the premium and not 5 per cent. They have threatened to boycott the public sector insurance companies and stop cashless and other services for the general public if their demands are not met.

Insuring their margins

On New Year&rsquo;s Day last year we made the point editorially that in India most people have more than one New Year&rsquo;s Day. Apart from the fact that there are Hindu and Islamic calendars, as opposed to the usual Gregorian one that is in fact used, Indians have other reference dates that are also observed as symbolising the beginning of a &lsquo;new year&rsquo;. Different parts of India have, therefore, different New Year&rsquo;s days. Then there is Deepavali &mdash; a new year&rsquo;s day for business, like the modern concept of the first day of a new fiscal. While there are, indeed, so many New Year&rsquo;s days, the fact remains that the 1st of January has acquired a special place. The main reason for this, of course, is that it is the first date of the normal calendar that all Indians and people all over the world use.

Resolution time again

After several years of comfort, is India under pressure on the external account? The sharp rise in India&rsquo;s current account deficit (CAD), by a whopping 72 per cent year-on-year, as shown in the latest balance of payments data released by the Reserve Bank of India (RBI), suggests that the external account needs careful management. The rise in CAD has occurred both on account of a higher trade deficit, despite exports growing faster than imports during the last quarter, and a slowdown in foreign direct investment (FDI). The trade deficit of $35.4 billion was about 20 per cent higher than for the corresponding period last year. The capital account surplus increased slightly based on higher volumes of portfolio investment, external commercial borrowings (ECB) and short-term capital inflows. However, net foreign direct investment dropped alarmingly by two-thirds on year-on-year basis, due to both lower inflows and greater outward FDI by Indian firms.

The external constraint

Even as some major environment polluting countries have chosen to put on hold their plans for introducing domestic greenhouse gas (GHG) emission trading, India seems set to go ahead with it, disregarding the imperfections in a market-based emission reduction mechanism. No doubt, some well-conceived initiatives and incentives are badly needed to encourage polluting industries to cut down harmful emissions. But, a government-run emission trading system may not yield sufficient gains. The scheme mooted for this purpose by the Union environment ministry, to be tried out initially on a pilot basis in Tamil Nadu and Gujarat, envisages setting ceiling on permissible emissions of individual industrial units and issuing permits to them in accordance with their pollution quota. The industries which do not limit their pollution level can offset their default by buying permits from others.

Cart before horse

It would be instructive to check out how many of the speakers who addressed the 98th session of the Indian Science Congress in Chennai were below the age of 40. The programme circulated suggests not more than a handful. As in the past so many years, delegates to the 98th Congress had to hear many of the same worthies who have been addressing these annual jamborees year after year but whose contribution to science in the past several years has been at best questionable. Science in India needs a fresh lease of life. A liberation from the bureaucratic and feudal stranglehold of those who fund it and the gray eminences who either continue to hold the purse strings or preside over institutional empires. Prime Minister Manmohan Singh, therefore, quite understandably expressed the hope, in his inaugural address, that &ldquo;more young people (should) increasingly participate in the deliberations of the Indian Science Congress in years to come.

The annual science con

The Indian pharmaceutical industry can look forward to 2011 with greater optimism than most. This is because it finds itself to be robust both at home and abroad. At home it anticipates healthy demand growth, projected at around 16 per cent. It will be fuelled primarily by rising incomes and private health-care expenditure, which is high in India. To this will hopefully be added higher public health-care expenditure in which India remains a laggard and there is a political consensus to make the Indian story more inclusive. What is more, the Indian industry does not fear import competition as it has a global price advantage which is equalled only by the Chinese in the case of some bulk drugs. It is one industry that does not need protection. A stable and growing domestic market will offer it the best springboard for global assault.

Pharma rides high

When the Union Minister for Environment and Forests, Jairam Ramesh, defended some of his actions on the grounds that he was &ldquo;only implementing the laws of the land&rdquo;, his critics may well have wanted to quote a character of Charles Dickens&rsquo; Oliver Twist who thought &ldquo;the law is an ass&rdquo; because of its wrong presuppositions. Any minister or official of the government would be entirely right to defend her actions on the grounds that such actions amounted to no more than an implementation of existing laws. That is why it is important to draft laws carefully and precisely. Normally a Bill brought before Parliament or a state legislature goes through several stages of drafting and vetting that ensure that the final draft would stand the test of time and implementation. A draft Bill originates in a particular department or ministry and then is vetted by the law ministry and the law officers of the government.

The cost of bad Bills

Opinions may differ on whether the offer made by Prime Minister Manmohan Singh to appear before the Parliament&rsquo;s public accounts committee (PAC) was warranted or not, and whether it was constitutionally correct to make such an offer. On his part, the prime minister was right to show his willingness to be cross-examined. Equally right is Union Finance Minister Pranab Mukherjee when he says that there is no need for the prime minister to seek the approval of a sub-committee of Parliament when, in fact, he enjoys the confidence of the elected majority of Parliament. Perhaps, the prime minister&rsquo;s offer was in the nature of a peace offering to the Opposition. If so, it failed to elicit the desired response. Earlier, Mr Mukherjee&rsquo;s offer of a special session of Parliament to discuss the 2G telecom issue was also rejected by the Bharatiya Janata Party (BJP).

PM and Parliament

As the Union finance ministry settles down to prepare its annual financial statement and the Budget for 2011-12, the challenge of fiscal consolidation faces the Union government starkly. The reassurance provided by the Union finance minister and his officials on their commitment to stick to the fiscal projections of the 2010-11 Budget is welcome. However, as they well know, this has been made possible both on account of higher-than-forecast national income growth and the higher-than-expected windfall gains from disinvestment and the sale of 3G telecom spectrum. As the Mid Year Analysis of the economy provided by the ministry of finance candidly states, higher-than-expected non-tax revenues have played a critical role in the government cushioning increased expenditure this year. Going forward, the document clearly recognises the nature of the fiscal challenge at hand.

The fiscal challenge

All river water-sharing awards invite controversy. So, the varied reaction to the ruling given by the second Krishna water disputes tribunal, headed by Justice Brijesh Kumar Mishra, is not surprising. But what sets it apart from most other river water awards is that all the three main contending states (Maharashtra, Karnataka and Andhra Pradesh) have found something positive in it, though some concerns have been expressed against the award in Andhra Pradesh and Maharashtra. The four-decade-old dispute pertained essentially to sharing of 448 thousand million cubic (TMC) feet of surplus water of the river Krishna, over and above the existing quotas of these states fixed by the first Krishna water disputes tribunal, headed by Justice R S Bachawat in 1969. The present tribunal has allocated the largest share of 190 TMC feet of water to Andhra Pradesh, followed by 177 TCM feet to Karnataka and 81 TCM feet to Maharashtra.

Sharing Krishna's bounty

The brightest star on the Indian economic firmament through the first decade of the 21st century was information technology (IT) software and IT-enabled services (ITeS) or business process outsourcing (BPO) exports. From a mere $2 billion in 1998, these exports touched $49 billion in financial 2010. Historically, IT penetration and absorption has been low in India, in tune with its level of literacy and availability of electricity. Hence the IT sector remained largely export-oriented, IT was something most Indians felt proud about but did not have much use for. Even as Indians helped maintain a lot of the world&rsquo;s computer systems, their own were dated and at times, at the individual level, quite pathetic. But this is likely to change. While software and services exports will continue to shine in India&rsquo;s export performance, a new star will emerge on the horizon of the overall Indian economy.

Make India IT-enabled

At a time when renewed concerns have emerged about power and coal shortage, the intra-governmental debate on the Union environment ministry&rsquo;s &ldquo;no-go&rdquo; policy on 203 coal mines appears out of touch with reality. There is no denying that in the interests of environment and the livelihood of people in the affected areas, the government must have a strict and transparent policy.

Go for no-go

Delivering the second Business Standard Annual Lecture, Reserve Bank of India Governor Duvvuri Subarao chose the rather curious, if highly important, topic of central bank communication. In an entertaining lecture illustrated with examples, anecdotes and interspersed with good humour, Dr Subbarao drew attention to the increasing sophistication of RBI communication. Market participants, analysts, economists and journalists who have been reading RBI statements and hearing the speeches of RBI governors and deputy governors have for some time noticed the fact of such growing sophistication in communication. While governors Rangarajan and Bimal Jalan were also familiar with the importance of subtle communication, the governor who perfected this to an art form was Venugopal Reddy, who derived immense pleasure from drawing attention to his subtleties, in case the media had not noticed it! Governor Subbarao has followed the fine tradition of his illustrious predecessors.

Language and communication

There is nothing sinister or diabolic about Union minister Kapil Sibal&rsquo;s latest argument regarding the findings of the Comptroller and Auditor General (CAG) of India pertaining to the loss to the exchequer from 2G telecom licences in 2007. The basic argument pertaining to the erroneous notion of &ldquo;presumptive loss&rdquo; has been made before and Mr Sibal&rsquo;s arithmetic is credible. Too much need not be made about this being a ministerial affront to a constitutional body.

Mr Sibal's arithmetic

Sometimes stating the obvious with charts and numbers helps. Just as the Justice Rajinder Sachar committee helped focus public attention on a well-known fact, namely the economic and educational backwardness of Muslims in most of northern and eastern India, the Justice Sri Krishna Committee (SKC) report has revealed the obvious, namely that the Telangana region of Andhra Pradesh is not as badly off as so many protagonists of the separate Telangana movement, including some well-known economists, claimed. Simple numbers tell a tale. In the forty years since the first separate Telangana agitation of 1969, this region has done well for itself, especially when compared to the really more backward Rayalaseema region. Why then did the agitation launched by Telangana Rashtra Samiti (TRS) leader K Chandrashekhara Rao in 2001 catch on? Partly because a desperate Congress party breathed life into it to bring down the Telugu Desam government of Chandrababu Naidu.

If not SKC, then an SRC

India has emerged as a major arms purchaser in the past few years, despite the slow pace of acquisition and defence modernisation. India&rsquo;s defence imports, of which there is no accurate figure, are estimated to have been around $15 billion in 2010-11. A heightened threat perception and a determined effort to overcome technological obsolescence in defence equipment are driving this process. However, such a high level of imports tacitly admits to the failure of the domestic defence production establishment, barring a few exceptions, to meet the requirement of the armed forces, both in terms of requisite volume and cutting-edge sophistication.

Manufacturing defence

Incisive columns and editorial comment by top opinion leaders

Page 423 - Editorial Comment