RBI Governor Y.V. Reddy: Read my lips

Will the RBI (reserve bank of India) spring a surprise on October 26, 2005, when it announces the busy season monetary policy, just like it did last year? On October 20, 2004, the central bank had raised the repo rate-the rate at which banks lend government securities to each other-by 25 basis points to 4.75 per cent, but left the Bank Rate and the Cash Reserve Ratio unchanged at 6 per cent each. The repo rate is now at 5 per cent. The RBI rationale for the repo rate hike: inflation had touched 8.7 per cent in the second week of August last year.

The story is very different now. There is little reason for the RBI to intervene: inflation is at a benign 3.53 per cent (at the end of the second week of September), the economy is on a roll (the RBI projects a GDP growth rate of 7 per cent and inflation of 5-5.5 per cent for 2005-06) and the stock markets are on fire. "There is little reason for a hike in interest rates," says Surjit S. Bhalla, Managing Director of Delhi-based Oxus Research & Investments. Any move in this direction will hit the country's growth story by adversely impacting consumption expenditure as well as the investment plans of corporate India.

But there are others who believe that a quarter per cent jump in the Bank Rate could well be in the offing. "Don't be surprised if the RBI increases rates by a quarter per cent in order to divert some funds to fixed-income instruments," says Rajiv Kumar, Chief Economist at the Confederation of Indian Industry. That will provide some relief to bank deposit holders, but increase cost of funds for almost all other sections of society.

These are the two sides of the story. How will it pan out? Wait till October 26 for the answer.

-Ashish Gupta

A Law For Your Stomach
The new Food Bill will boost the food-processing sector and change the face of rural India.

Hold on: Better products are in the offing

The food sector is the next Big Thing in India; experts are near unanimous on that. But strangely, the government didn't seem to have a bigger picture in mind. A plethora of legislations- some archaic, others irrelevant- governed individual segments of the sector. The result: food companies were over-regulated in some spheres and left to their own devices in others. But that will change soon: the government has introduced the Food Safety and Standards Bill, 2005, in the monsoon session of Parliament. Says Subodh Kant Sahai, Minister of State for Food Processing Industries: "Once passed, this comprehensive law will fulfil the decades-old demand of the industry and consumers by putting in place a policy structure that will remove inspector raj, encourage FDI and usher in a self-regulatory mechanism in the food sector."

There are a host of other proposals in the offing: a National Safety and Standards Authority for setting food safety standards; Food Appellate Tribunals at the central and state levels to resolve disputes; and the setting up of scientific and technical committees to look at various other issues such as limits on the use of food additives, crop contamination, pesticide residues, etc. The Bill also provides for a regulatory authority for the foods sector and a National Institute of Food Training and Management, which will impart training to officials. The new law has provisions for offering tax concessions to the industry and penal provisions-fines of up to Rs 5 lakh for selling sub-standard food and Rs 3 lakh for selling misbranded food.

The new Bill strikes a blow for transparency, too, by replacing and repealing nine existing food laws and bringing manufacturing, sale and safety of food and water under a single umbrella. On the chopping block are the Prevention of Food Adulteration Act 1954, Edible Oils Packaging (Regulation) Order, 1998, and Milk and Milk Products Order, 1992, among others. Secondly, a comprehensive food law will incentivise food retailing and FDI, and attract much needed investments in India's agri-infrastructure.

By boosting the foods sector, this Bill, more than any other single piece of legislation, can potentially change the country's farm economy. Whether it does or not depends on how it is implemented. But the government has, at least, taken a first decisive step in that direction.

-Ashish Gupta

"Tax Easily Observed Transactions"

Nobel laureate Prof. James A. Mirrlees, who pioneered the concept of economics of uncertainty, was in Delhi recently. He spoke to BT's Ashish Gupta on various tax issues confronting the government.

What do you think should be the ideal tax-to-GDP ratio for a developing country like India?

There's no ideal figure. I think government expenditure-to-GDP is a far more important ratio. That should be at least 30 per cent. (It is 27 per cent for India).

What should the government do to widen the tax base in India?

Obviously, the answer lies in bringing more individuals and firms under the tax net. However, the problem lies in accurately estimating personal income and in recording transactions between small producers in a country with a large informal sector. I also believe that the personal exemption limit of Rs 1 lakh is rather high and the lowest tax slab, at 10 per cent, too low. These can be increased.

How can the government increase tax revenues?

The answer lies in taxing easily-observed transactions-transactions between large producers as well as exports and imports. Exports can be taxed under World Trade Organization rules. A case can also be made for different tax rates for different goods. For instance, petroleum products should attract higher taxes because they cause social damage such as pollution and road congestion.

What is your solution to the problem of tax evasion in the country?

There are no clever tricks involved. A good method will be to impose a penalty immediately when tax evasion is detected by the authorities. An effective punishment system can work wonders.

Is there a case for reducing taxes to ensure greater compliance?

Such a case should only be made out in areas where enforcement levels are high. When enforcement laws are put in place, the cost of tax administration goes up. To compensate, tax rates should be lowered to ensure that government revenues increase.