Friday, February 24, 2012


It is the budget time now in India and as usual the Finance Minister goes through the motion of consultation with various stakeholders as far as the national economy is concerned. If one goes by the past experience it is rare that any suggestions made by those fortunate to be consulted, are incorporated in the Budget. With its eyes focused heavily on spreading the net far and wide, GOI obviously is averse to any pleas from the industry to forgo any revenue that is already assured through existing policies. One of the unique features of the financial policies of GOI is that those who pay taxes are repeatedly being asked to pay more taxes and most of the revenue generated through economic levies is spent on programs which are supposed to help poor people. In spite of massive subsidies distributed year after year neither the poverty level nor the hunger seems to be affected with more people being pushed under the "Below Poverty Line" though the statistics based on which these are estimated cannot be taken as reliable.

Recent debate regarding Food Security Bill throws up stark realities of Indian scenario where GOI wants to give food grains at throw away prices to more than 75% of rural population and 65% of urban population incurring a national financial commitment estimated at Rupees one hundred thousand crore, an enormous amount measured on any scale. Obviously the money has to come from honest tax paying citizens and business sector and the newest Budget, scheduled to be presented in the first week of March has to dig deep into the pockets of those already paying hefty taxes to "augment" the subsidy "frenzy" that has seized the government. There is no quarrel with the social justice philosophy inherent in such a mindset but when country's precious resources are squandered, pilfered or stolen, every citizen is bound to feel the pinch of the sacrifice made each one and the country's policies are questioned. On one hand the every day food is becoming increasingly expensive, casting a heavy burden on the family budget of an average citizen, protective foods like fruits and vegetables are non-affordable to most middle class consumers raising alarms all around regarding the adverse impact of such a run way price escalation on the health of the people in general.

According to some observers familiar with the government thinking, the Finance Minister may attempt to come out with policies that can nudge entrepreneurs to invest more on productive activities and this is sought to be achieved without worsening the already alarming fiscal deficit. Economy is sought to be revived through measures that include incentives for new infrastructure projects, labor-intensive industries, others manufacturing urea and a few agricultural input materials, setting up of cold chains and supply chains that help maintain the quality of food produce. It is recognized that a combination of unbearably high interest rates and tortoise paced decision-making at the government level have caused a policy paralysis which are responsible for stalling investments. Gross fixed capital formation, a measure of investments, contracted 0.7% in the second quarter of the current fiscal from a year ago. 

As in 2008, the government presently does not seem to have the leeway to step up spending to generate demand and probably dreaming to encourage private spending through policy impetus, least realizing that scope for major fiscal concessions is very limited. With the national debt mounting to unacceptable level, bordering on panic,GOI seems to have very limited options to keep the growth rate beyond 7%. GOI may not concede that it is unlikely to succeed in restricting fiscal deficit target of 4.6% of GDP in the current fiscal and naturally this will increase pressure to rein in spending. Commitments already made on food security bill, the pet project of the UPA government will suck more from the kitty and only future will tell whether this is a wise policy at all viewed from fiscal angle. If one has to hazard a guess, the forthcoming budget may make an attempt to ease norms governing foreign investment in infrastructure and set up a dedicated infrastructure debt fund to provide support to public-private projects. There is also a possibility of subsidizing imported natural gas to achieve higher urea production. 

Though nothing much is talked about food industry which has been knocking on the doors of the Finance Ministry every year at this time seeking tax abatement for its products, except for juggling with the excise duty with some items removed and others brought in there is hardly any relief to this sector. Of course the budget for the SPV for food industry, the MoFPI is increasing every year for various incentive schemes for the different areas of food processing like Food Parks, R & D, infrastructure, cold stores and chains, new food projects in backward regions, etc but the impact of these measures so far during the last few years has been not very significant. Still food industry is benefited by progressive lowering of packaging materials during the past which has enabled many small scale processors to break into the highly competitive market with low cost pouched products affordable to masses. If there is a single wish the industry is allowed to express, it will be to free all the products manufactured by it from all taxes at the federal and state levels, at least for a 10 years. 

The debate about taxing high end products will go on with no consensus about it in sight but there may be a case of taxing nationally branded products while leaving out local products from any levy. This move can give some relief to the small and medium scale industries which currently find it difficult to compete with large brands and wide scale sickness in this segment of food industry can be attributed to their insufficient marketing muscle. A fiscal incentive scheme for large players for bringing smaller ones under their tutelage for marketing purpose may give a fillip to the development food industry as a whole and must be considered by the government. GOI can definitely afford these steps because tax collection from the food industry is so minimal that there may not be any net benefit if the expenses for recovering the tax are computed. One can only hope that GOI can still listen amid the din generated by UP election and the slew of financial scams in which it is embroiled!  


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