The government juggled with key inputs
to get the desired results:
Change in the base year from 1993-94 to
Greater coverage of production activities for better estimates
Inclusion of new economic activities, especially those in
the unorganised sector
Changes in the weightage given to various sectors of the economy
it seems, are chomping on copious quantities of paan, consuming
humungous amounts of sea water salt, drinking lots of goat, buffalo
and camel milk and toasting every new economic high with the much
maligned toddy. And, these, believe it or not, are turning the
country into an economic superpower. On February 7, the Central
Statistical Organisation (CSO) let the cat out of the bag. In
its advance estimates for 2005-06, it projected a gross domestic
product (GDP) growth rate of 8.1 per cent, a significant improvement
over last year's figure of 7.5 per cent. This growth was fuelled
by the manufacturing and services sectors, which are likely to
grow 8.1 and 11 per cent, respectively. The farm sector will grow
at 2.3 per cent during 2005-06 compared to 0.7 per cent last year.
So far, so good. But it might be prudent
to add a few of qualifications to these rah-rah figures. CSO has
conjured them up by shifting the base year from 1993-94 to 1999-2000
and by improving its terms of coverage by incorporating the recommendations
of the United Nations System of National Accounts, 1993. Production
of salt through sea water evaporation, production of betel leaf,
toddy, goat, buffalo and camel milk and meat production from unregistered
slaughter houses have been included in the data for the first
time. A new category of "valuables", which covers expenditure
on the acquisition of valuables, has also been included in gross
capital formation. Besides, reinvested earnings of foreign companies
have been added to the savings of the private corporate sector;
this has, naturally, also impacted the external transactions account.
There's more statistical jugglery: the weightage of trade, hotels
and restaurants has increased from 14 to 14.2 and that of finance,
insurance, real estate and business services from 12.5 to 13.
CSO officials take pains to point out that
these changes have brought the results in greater sync with Indian
economic reality. Has it? "It is a little more reflective
of the Indian economy because it covers many new areas,"
contends Subir Gokarn, Chief Economist at credit rating agency
CRISIL, "but the major issue here is of extrapolation of
the data and the multiplier effect that each sector has on the
economy." Conclusion: the CSO needs to be commended for its
efforts at increasing the depth of its coverage, but questions
still remain over the integrity of the statistical methods used
to analyse the raw data.
A Taxing Proposition
With the Budget just a few days away, here's
a look at some anomalies in the tax structure.
|Chidambaram: Reality bites
would have thought that a dream team could also cause nightmares
for an entire nation? But that's precisely what Prime Minister
Manmohan Singh and Finance Minister P. Chidambaram have done.
How? This reformist duo introduced three very bad taxes in the
last Budget-the Securities Transaction Tax (STT), the Fringe Benefit
Tax (FBT) and the Banking Cash Transaction Tax (BCTT)-which have
further complicated an already complex system. The stated goals
of simplifying the tax structure and streamlining its administration
were obviously not on their minds when they authored these.
A lot has been written about these. The FBT
increases compliance costs for employers and has been challenged
in court. And the BCTT has achieved precisely the opposite of
what it set out to. All it has done is drive a large part of the
parallel economy out of the banking system, and, in effect, outside
the pale of the law. These are just two high-profile tax-related
boo-boos. But there are other, less discussed, anomalies that
need urgent correction. Says Gaurav Taneja, National Director,
Ernst & Young's India Tax Practice: "The existing service
tax regime is completely out of tune with the new realities of
the economy and needs to be reworked." Mandap owners, for
instance, have to pay both service tax (on services rendered)
as well as the value added tax or vat (on the sale of goods).
This is obviously neither justifiable nor equitable. "The
number of withholding taxes should also be brought down from 27
at present to three or four at the most," says Taneja.
"We need greater clarity on a host of
issues such as e-commerce, cross-border transactions, and taxation
of satellite companies. And why should expatriates working in
India for limited periods have to pay taxes on incomes they earn
abroad?" asks Ketan Dalal, Senior Partner at RSM & Co.
Then, there is the inverted customs duty
structure, which discourages value addition in the country; and
octroi, entry tax and mandi tax which prevent the creation of
a single pan-Indian common market and merely increases the incidence
of indirect tax liability on companies.
All these taxes need a fresh, and critical,
look. Mr Chidambaram, are you listening?
Too Much Of A Good Thing
The government's FTA signing spree is giving
nightmares to the customs department.
|Kamal Nath: FTAs and after
raining trade pacts. The government has inked a Comprehensive
Economic Cooperation Agreement with Singapore, free trade agreements
(FTAs) with Thailand and Sri Lanka, and a South Asian Free Trade
Agreement with its neighbours. On the anvil are FTAs with the
Association of South East Asian Nations (ASEAN), Egypt and Chile
and the Gulf Cooperation Council. That's great news (well, mostly)
for Indian industry, but spare a thought for officials in the
customs department. Their job has become mindblowingly complicated,
and this, worryingly, has major fiscal implications. How?
| CONFUSION CONFOUNDED
Multiple free trade pacts lead to the
Increases the chances of arbitrariness
Defining and policing of rules of origin becomes difficult
Keeping track of multiple negative lists is difficult
Documentation and enforcement of rules and origin increases
Customs officials have to be clear about rules
of origin definitions. They have to ensure that tariff preferences
are accorded only to goods "actually produced" in the
partner countries and not to goods from the rest of the world
seeking to transit into the FTA through these countries. Singapore,
for example, is a trade-dependent economy with zero tariffs on
almost all products. It is very easy for third countries like
South Korea and Japan, with which Singapore has free trade agreements,
to route their products through Singapore into India. India's
losses will be two-fold: it will lose customs revenues and the
imported goods will, in all, likelihood eat into the market share
of some domestic company, resulting in lower realisations for
it and, consequently, lower excise and other taxes for the government.
Again, since India has a "negative list" with most of
its FTA partners, it will become very difficult for customs officials
to check the negative lists of individual trade partners and ensure
that such items do not come in through a lower tariff route. This
point is accepted even by the Commerce Ministry. But its officials
believe that this problem will be sorted out once import duties
are brought down to ASEAN levels.
No wonder eminent economist Jagdish Bhagwati
says the proliferation of FTAs will lead to the world trading
system looking increasingly like a spaghetti bowl of ever-more
complicated trade barriers, each depending on the supposed "nationality
The easy way out: cut import duties to ASEAN