CHIDAMBARAM SURPRISES

Finance ministers are known to be parsimonious as well as unforgiving to taxpayers, denying in doling out to them and demanding of them to pay up. They cannot but be petty like this. For it is their business to raise revenue of government, not to cut it down.

So India’s finance minister, Mr. P. Chidambaram, caused a surprise when on August 18, eight days before Parliament was due to pass the 2004-2005 budget he had presented in the preceding month, he announced a cut in fuel taxes. He halved the customs duty on imported kerosene, a household fuel, to 5 per cent, and reduced the excise duty on petrol and diesel respectively from 26 and 11 per cent to 23 and 8 per cent.

The tax cuts to result in consumer prices to drop caused instant alarm bells of revenue loss to the government as well as of its revenue deficit (the difference in spending and income) rising. Both these were anathema to the finance minister and especially since when he presented the budget he pledged to wipe out the government’s revenue deficit put at 4.6 per cent this year by 2008.

Chidmbaram took the uncommon step, as he was obliged to in order to fight inflation. Inflation rate in India currently is reached a three-year high and risen still in the last two weeks from 7.6 per cent to 7.8 per cent.

However, inflation is measured in India, not by consumer prices, but by wholesale prices. It is also a key factor equating dearness allowance (part of salaries) of government servants. These not only constitute the bureaucracy. They also belong to defense and railways as well as state enterprises and nationalized banks and life and general insurance.

But inflation also affects the country’s growth, which is increasing in India, and which is furthered by lowered interest rates.

Cut in taxes was a way out to contain inflation in the circumstances.

But consider the position from the side of the economy.

Revenue loss on account of cuts made in fuel taxes is officially put at Rs.25 billion ($540 million). India’s top refiner, the Indian Oil Corporation, which is in the public sector, expects crude oil imports in the current year to rise by 11 per cent, as demand this year is to increase by 4 per cent more. Crude oil imports actually went up 23 per cent in July itself. Increased imports could mean more government revenue even when the import duty on kerosene is cut.

Excise, on he other hand, is an indirect tax levied on sales. Manufacturing costs of which energy is an important element contribute much to inflation. In energy billing industries’ grouse is of overcharging by the public sector Oil and Natural Gas Commission, whose costs though lower are equated to high international oil prices to which its selling rates are fixed.

Where the rub in inflation lies is then not much in question.

But Chidambaram can be washing his hands of it. For oil and petroleum products lie in the realm of another ministry.

So much for accountability made one of the planks by Prime Minister, Mr. Manmohan Singh, of the present government.