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What should Sinha do? Tax more? No. Tax better? Yes. Bhalla suggests withdrawal of all exemptions and rebates allowed on income tax. No more deductions on premia paid on insurance policies, no more rebates on pension contributions. As a carrot to tax payers, Bhalla wants income-tax rates slashed to three slabs of 5, 10 and 15 per cent from the existing 10, 20 and 30 per cent. He also recommends capping the capital-gains tax at 10 per cent.

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Budget Factoids Exemptions and rebates on income tax cost the government Rs 18,000 crore a year. Only 50,000 Indians declare annual income of more than Rs 10 lakh, whereas there are an estimated 1,80,000 people in this category. The number of income-tax assessees have risen from 11 million in 1997 to 24 million in 2001. Only about 3 per cent of individuals with annual income of Rs 2-3 lakh pay income tax. 67 per cent of the country’s total tax revenues comes from the Centre. States generate the rest. Half of the Central government’s tax revenues are used to pay interest on borrowings. Sinha’s Unfulfilled Promises Downsizing of five ministries: Was to be completed by July 31, 2001. A new electricity bill and amendment to the Contract Labour Act and Industrial Disputes Act: Were to be tabled in the last budget session. Fiscal Responsibility Bill: Was expected to come into effect from April 2001. Reduction of government’s stake in public sector banks to 33%: No deadline, no progress.

A majority in the panel agreed on the need to phase out exemptions, but not on the rate cut. Gangopadhyay proposed a radical method of increasing the number of tax ayers—introducing a marginal tax (say Re 1) on every bank account. There are an estimated 350 million bank accounts in India and such a tax could generate a steady stream of income without being burdensome on the taxpayer. The consensus was to spare small taxpayers any new taxes and instead catch the big fish who continue to dodge the tax net. For instance, only 50,000 Indians declare annual incomes of more than Rs 10 lakh every year, while Bhalla estimates the number of such Indians to be 1,80,000. Rajaraman suggested creating a database of individuals making large bank transactions that can be used by revenue service officials to identify the rich evading or suppressing tax liabilities.

Of course, all this would not be needed if people pay taxes willingly. And that’s not an impossibility in India. “Willingness to pay taxes would rise if people felt they are getting good public services,” says Bery. Above all, the tax administration should be efficient and credible. Debroy pointed out that there are cases of income-tax assessees not having been issued a permanent account number (PAN) years after applying for it. He also forecast a cut in corporate income tax from 35 per cent to 30 per cent this year.

From babu-determined to market determined interest rates

In his last two budgets, Sinha had cut interest rates on small savings—PPF, NSC, GPF—from 12 per cent to 9.5 per cent. Small investors fear another cut this year. The panel warned Sinha against doing so, even though the historically low rate of inflation could be a basis for a further cut in interest rates. The objection is not to cutting interest rate, but to Sinha cutting the rate. Rationale: the market, not the Government, should determine interest rates. “It’s in nobody’s interest to rely on fixed interest rate. It must move up and down with inflation rate and market conditions,” says Gangopadhyay. However, in doing so a benchmark rate should also be evolved which sets the direction and pace for all interest rates in the economy to move.

On financial reforms, the panel reminded Sinha of his commitment to cut government ownership in all public-sector banks to 33 per cent. Bery wondered why Sinha was keen on retaining the public-sector nature of commercial banks even after the government ownership was reduced. Debroy would like the provision of Statutory Liquidity Ratio (slr) to be scrapped. Under the slr requirement, banks have to lend 25 per cent of all public deposits to the government.

Orphans of reforms need attention

Sugar, drugs, oil, coal, fertilisers and textiles have missed out on all the fun of economic reforms so far. These industries are still plagued by controls on pricing, distribution and investment. Though some controls on the sugar and drug industries were lifted on February 5, many remain. Virmani, who calls these sectors “the orphans of the so-called first generation reforms”, feels that freeing them from government controls will revive investment opportunities and sentiments. The budget will announce the final phasing out of the administered price mechanism for petroleum products, but coal and fertilisers will remain neglected. And the reasons for that, the panel stated, are political.

Watch what you say Mr Sinha

This is the mother of all advices for the finance minister: do not commit what can’t be delivered. Already Sinha’s load of unfulfilled promises is excessively heavy. It includes downsizing of five ministries, amendments to two labour laws, a Fiscal Responsibility Act, a new law for the power sector and phase-out of retention pricing for the fertiliser industry. Debroy goes to the extent of suggesting the scrapping of Part A of the budget speech, wherein traditionally all the tall promises are made. Part B is just an income-expense account of the government.

The finance minister has another opportunity to restore some credibility to his commitments, without actually fulfilling them. He can take out a comprehensive action taken report on past promises. A brief status report was distributed with the budget papers last year, but it meandered into too many obscure announcements and stopped short of listing the promises made and their status. It had no explanation of why what wasn’t done, wasn’t done.