It’s a stitch frequently used to secure edges. Two policy moves are underway – the formation of the Monetary Policy Committee (MPC) and Goods & Services Tax (GST), both likely to have far reaching effect.
Amendments to RBI (Reserve Bank of India) Act for MPC and connected rules have been notified in June. Once the MPC is in place, an old convention whereby the Central Bank of India took all decisions pertaining to interest rates, exchange rate management entirely on its own (based on internal process of periodic assessments of the economy), will come to an end. The MPC will consist of six members – of this, three will be appointed by the central government on the basis of recommendations made by a search committee headed by the cabinet secretary. Only half of the committee will consist of RBI (Reserve Bank of India) members including the Governor who will be the ex-officio chairperson. The Governor will have a casting voting right in case of a tie.
The mandate of the committee is to bring value and transparency to monetary policy decisions. This decision comes in two contexts worth mentioning, one, of reported conflict of interest between the government and the RBI governors on interest rate movements. With the RBI more focused on using interest rates for inflation control in accordance with its traditional mandate, and the government fixated on either growth or inflation depending on election cycles. The tension between the RBI and the government has been palpable. The MPC committee will meet four times every year and publicise its minutes and decisions. Such a mechanism is used to synergise monetary policy with fiscal policy. The other milieu in which this decision comes is the much admired doctrine, in India, that low interest rates will stimulate growth, access to finance will determine growth hence the financial sector itself should be liberalised and boosted by lowering interest rates. With political forces aligned behind this doctrine, it is not unreasonable to speculate that the pressure on interest rates to decline may have an edge they did not have before.
In August the Indian Parliament has cleared a constitutional amendment that will make it possible to introduce GST. Once the unified GST is in place, India will have only one tax on goods and services all across the country, creating a single market for goods and services, with no taxes like octroi, or sales tax on entry to different states. States lose the right to impose VAT and the Centre loses the right to impose excise and service taxes, but will share the revenue generated by GST, which is expected to be greater than the earlier system of multiple and cascading taxes.
Once GST is in place, 29 Indian states will lose flexibility of fixing their own indirect tax rates according to the needs of the local economy. Neither does it allow the state’s elected government to decide which goods are relatively necessary, beneficial or harmful in the local context. As the revenue generating options of states decline, so will their options of expenditure. This, usually damages states that have higher social sector-oriented spending.
A uniform tax on commodities and services irrespective of who is consuming the goods or where – developed or backward states, wealthy or poor individuals – is not an egalitarian policy, even if it promotes some form of efficiency in the amount of tax collected. As it is, taxes on goods and services constitute the bulk of tax revenue in India. Political forces are aligned against it. Henceforth, in case of revenue deficits it would be easy to raise GST and collect. (Already there is talk of it moving beyond an 18% limit, and no cap has been decided.) This will edge the policy against the weaker sections.
Both policy moves are stitches, which will reduce policy flexibility with possible benefits and likely drawbacks.
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Anuradha Kalhan
Anuradha Kalhan is an independent researcher. She was earlier a Fellow at NMML, Teen Murti.[/column]