Rahul 2.0 needs some basic lessons in economics

rahul gandhi
Rahul Gandhi recently came back to India from his foreign sojourn of nearly two months. And in his new avatar, Rahul is angry. One of the things he is angry about is the fact that the Narerndra Modi government after coming to power decided to go slow on increasing the minimum support price of wheat and rice. The MSP is the price at which the government buys rice and wheat from the farmers, through the Food Corporation of India(FCI) and other state government agencies.
Rahul told a farmers’ rally in New Delhi on Sunday: “We increased the MSP of wheat from Rs 540 to Rs 1400…The MSP has not changed, no benefit to farmers.”
Between 2005-2006 and 2013-2014, the MSP of wheat was increased at an average rate of 14% per year. The Congress led United Progressive Alliance(UPA) was in power throughout this period. In comparison, between 1999-2000 and 2005-2006, the price had gone up by 4% per year.
The decision to raise MSP did not have any method behind it. It was totally random. A report released by the Comptroller and Auditor General in May 2013 pointed out that “No specific norm was followed for fixing of the Minimum Support Price (MSP) over the cost of production. Resultantly, it was observed the margin of MSP fixed over the cost of production varied between 29 per cent and 66 per cent in case of wheat, and 14 per cent and 50 per cent in case of paddy during the period 2006-2007 to 2011-2012.”
Nevertheless, political decisions do not follow economic logic. But the question is did this decision to constantly keep increasing the MSP benefit the people of India at large. The answer is no. It was the major reason behind the high inflation in general and food inflation in particular, that was seen between 2008 and 2014. As economist Surjit Bhalla put it in 
a November 2013 column in The Indian Express “For each 10 per cent rise in previous years’ procurement prices, there is a predicted 3.3 per cent increase in the current year CPI…When the government raises the MSP, the prices of factors of production involved in the production of MSP products — land and labour — also go up.”
Food inflation hurts the poor the most. Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011). What Rahul and the Congress party need to understand is that everyone associated with agriculture does not own land. As per the draft national land reforms policy which was released in July 2013, nearly 31% of all households in India were supposed to be landless. The NSSO defines landlessness as a situation where the area of the land owned is less than 0.002 hectares.
Any price rise, particularly a rise in food prices which is what an increase in MSP leads to, hurts this section of the population the most. Is Rahul not worried about them? They may not be farmers who own land, but they also farm land in this country.
Also, Rahul needs to realize that only a small section of the farmers have a marketable surplus, which they are able to sell to the government. This is primarily because the average holding size of land has come down over the decades. 
The State of the Indian Agricultural Report for 2012-2013 points out that: “As per Agriculture Census 2010-11, small and marginal holdings of less than 2 hectare account for 85 per cent of the total operational holdings and 44 per cent of the total operated area. The average size of holdings for all operational classes (small & marginal, medium and large) have declined over the years and for all classes put together it has come down to 1.16 hectare in 2010-11 from 2.82 hectare in 1970-71.”
This means that only a small section of the farmers make money only from agriculture. Only 17% of farmers survive on income totally from agriculture. The rest do other things as well to make money. And given this they are hurt by the food inflation because of a rapid increase in MSP.
The Congress led UPA government also increased the MSP of rice at a very rapid rate.  In 2005-2006, the MSP for common paddy(rice) was Rs 570 per quintal. By 2013-2014 this had shot up to Rs 1310 per quintal, an increase in price of around 11% per year. In comparison, between 1998-1999 and 2005-2006, the MSP of rice had increased at the rate of 3.8% per year.
This rapid increase in MSP led to a huge amount of food grains landing up with the government. The FCI did not have enough space to store all this grain. “Between 2005 and 2013, close to 1.94 lakh tonnes of food grain were wasted in India, as per FCI’s own admission in the Parliament,” a Crisil Research report points out. Rice formed 84% of the total damage.
While rice and wheat rotting in government godowns, there wasn’t enough of it going around in the open market.  The CAG report referred to earlier points out that in 2006-2007, 63.3 million tonnes of rice landed in the open market. By 2011-2012, this had fallen by a huge 23.6% to 48.3 million tonnes. The same is true about about wheat as well, though the drop is not as pronounced as it is in the case of rice. In 2006-2007, the total amount of wheat in the open market stood at 62.1 million tonnes. By 2011-2012, this had dropped to 61.4 million tonnes.
Also, with MSPs being increased every year at a rapid rate, “the cropping pattern,” the Crisil report points out, was also “biased towards food grains like rice and wheat,” and this led to their “excessive production”.
This is what the Congress led UPA’s policy of constantly increasing MSPs, actually did.
To conclude, as the old English saying goes, “the proof of the pudding is in eating it”. If the policy of the Congress led UPA government of increasing MSPs at a rapid rate was so good, why did the Congress party end up with only 44 seats in the 2014 Lok Sabha elections? Maybe Rahul Gandhi has an answer for that.

The column originally appeared on The Daily Reckoning on Apr 23, 2015

The new Janata Party will be a challenge for Modi in Bihar

Vivek Kaul

The year was 1977. The emergency had just ended. The opposition leaders who had been imprisoned during the course of the emergency had just released. They were holding a massive rally at the Ram Lila maidan.
It was a rainy day in Delhi and well past 9.30pm by the time Atal Bihari Vajpayee rose to speak. He was the star speaker for the evening and the people who had turned up at the rally had stayed back just to hear him.
To the shouts of “
Indira Gandhi murdabad, Atal Bihari zindabad,” Vajpayee started his speech with a couplet:
Baad muddat ke mile hain deewane,
Kehne sunne ko bahut hain afsane,
Khuli hawa mein zara saans to le lein,
kab tak rahegi aazadi kaun jaane.”

(It has been an age since we whom they call mad have had the courage to meet,
There are tales to tell and tales to hear,
But first let us breathe deeply of the free air,
For we know not how long our freedom will last). (Source: Tavleen Singh’s

In the time to come all the major opposition parties came together and formed the Janata Party. This was the only way they could take on Indira Gandhi by ensuring that their votes did not split. The party won 295 seats in the Lok Sabha elections that followed and thus came to power. The largest number of 93 MPs were of the Jana Sangha (now the Bhartiya Janata Party) origin. Forty four MPs came from the Congress (O) party. Seventy one MPs came from Charan Singh’s Bhartiya Lok Dal. Jagjivan Ram’s Congress for Democracy brought in 28 MPs.
A large number of the Lok Sabha seats that the party won was limited to North India, given that the southern part of the country hadn’t really felt the ill-effects of the emergency implemented by Indira Gandhi as much as the north India had. Given this, Indira Gandhi’s Congress still managed to win 154 seats though they were wiped out in Uttar Pradesh with both Indira and her son Sanjay losing elections.
If one leaves out the Jana Sangha from this, the other parties were what we would call socialists, in the Indian sense of the term.
Nearly four decades later some of these socialists who were a part of the Janata Party have decided to come together again. This time to take on Narendra Modi. The parties which are merging together are Mulayam Singh Yadav’s Samajwadi Party, Lalu Prasad Yadav’s Rashtriya Janata Dal, Nitish Kumar’s Janata Dal(United) Indian National Lok Dal of Om Prakash Chauthala, Janata Dal(Secular) of HD Deve Gowda and Kamal Morarka’s Samajwadi Janata Party.
Mulayam Singh Yadav has been announced as the head of the party in Parliament, though its name and symbol haven’t been decided as yet. The Times of India reports that the party is likely to be called Samajwadi Janata Dal with the cycle as its symbol (which is the current symbol of the Samajwadi party).
So how strong a challenge is this new party going to be to Narendra Modi? Will it be as strong as the Janata Party was to Indira Gandhi? The first thing we need to understand is that the party has been formed when the next Lok Sabha election is still four years away.
After the merger, the party will have 15 members in the Lok Sabha, which is minuscule to the 295 members that the Janata Party had. In the Rajya Sabha the party will have 30 members. In that sense, the party will provide very little challenge to Narendra Modi.
Further, the support of all the parties which are coming together is heavily localized. Samajwadi Party is strong in Uttar Pradesh. The Indian National Lok Dal is strong in Haryana and Dev Gowda’s Janata Dal(Secular) is strong in parts of Karanatka. Hence, to that extent no consolidation of votes can be expected against Narendra Modi.
The only exception to this is Bihar. In Bihar, both Lalu’s Rashtriya Janata Dal(RJD) and Nitish’s Janata Dal (United)(JD(U)) are on a strong wicket. Data from the election commission shows that the combine of Bhartiya Janata Party (BJP) and Ram Vilas Paswan’s Lok Janshakti Party(LJP) got 35.8% of the votes polled during the Lok Sabha elections last year.
The RJD and the Congress Party which fought the elections together got 20.1% and 8.4% of the votes respectively. The Janata Dal(United) which fought the elections separately got 15.8% of the votes. Hence, the vote percentage of JD(U) + RJD matches that of the BJP + LJP. Further, RJD+JD(U)+Congress got more votes than BJP + LJP. Nevertheless, since RJD+ Congress and JD(U) were not in alliance, these votes did not translate into Lok Sabha seats.
Things changed in the by-elections to 10 assembly seats that happened in August 2014. In these elections the JD(U) came together with the RJD+Congress and took on BJP+LJP. The data from the election commission shows that the RJD+Congress+JD(U) got 45.6% of the total votes polled. The BJP+LJP got 37.9% of the votes polled. Given that, this time JD(U) was not fighting the elections separately, the votes polled translated into assembly seats as well, unlike the Lok Sabha polls. The RJD+ Congress+ JD(U) got six out of the ten assembly seats.
Hence, in Bihar, given the way the caste combinations work, the new Janata Party can be a potent force to take on Modi. The trouble is that Lalu and Nitish, despite the claims that they make in public these days, do not get along with each other.
Nitish became the Chief Minister of Bihar in 2005, more than three decades after he entered politics in the early 1970s. And for the first half of his political career, he propped up Lalu Prasad Yadav even though he knew that Lalu wasn’t fit to govern. Journalist Sankarshan Thakur puts this question to Nitish in his book Single Man: “Why did you promote Laloo Yadav so actively in your early years?” he asked.
And surprisingly, Nitish gave an honest answer. As Thakur writes “’But where was there ever even the question of promoting Laloo Yadav?’ he mumbled…’We always knew what quality of man he was, utterly unfit to govern, totally lacking vision or focus.”
So why then did Nitish decide to support him? “There wasn’t any other choice at that time,’ Nitish countered…’We came from a certain kind of politics. Backward communities had to be given prime space and Laloo belonged to the most powerful section of Backwards, politically and numerically.”
And this logic still continues to remain valid. The next assembly elections in Bihar are scheduled for later this year is in November 2015. And the chief minister’s post will be a bone of contention between Lalu and Nitish. It remains to be seen whether the new party will be able to survive this.
In other states the new party may be able to cause some damage to Modi only if it comes together with the Congress. To conclude, the biggest challenge for the party will be to survive till the next Lok Sabha elections in 2019.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The article originally appeared on Firstpost on April 16, 2015 

Modi’s mann ki baat on land acquisition is the first attempt to explain reform in 25 years

In a column I wrote on February 27, 2015
, I had said that prime minister Narendra Modi should talk to the people of this country directly through his mann ki baat programme on All India Radio. Modi spoke to the people of India directly yesterday on mann ki baat and addressed the contentious issue of land acquisition.
Among other things he criticized the Congress party which has been protesting against The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Ordinance, 2014.
Modi said that “those projecting themselves as sympathisers of farmers and undertaking protests,” had been using the Land Acquisition Act 1894, a 120 year-old law for 60-65 years after independence. In the process he exposed the hypocrisy of the Congress party, which has been in power in every decade after independence, and had the opportunity to set things right on the land acquisition front. But it never went around to doing this.
The Land Acquisition Act 1894, had been the law of the land until 2013. This Act gave unparalleled powers to the government to acquire land. A 1985 version of this Act stated: “Whenever it appears to the [appropriate Government] the land in any locality [is needed or] is likely to be needed for any public purpose [or for a company], a notification to that effect shall be published in the Official Gazette [and in two daily newspapers circulating in that locality of which at least one shall be in the regional language], and the Collector shall cause public notice of the substance of such notification to be given at convenient places in the said locality.”
This was not surprising given that the law came into being when the British ruled India. This allowed governments all over India to acquire land from the public. Many governments passed on this land to corporates, and in the process both the government and the corporates made money. The only one who did not make money was the individual whose land was being acquired. Of course, this did not go unnoticed. People saw politicians and corporates making a killing in the process. And the trust that is required for any system to work completely broke down. In 2013, the Congress led United Progressive Alliance (UPA) brought in The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act 2013.
One of the major provisions of the Act was that private companies acquiring land would require the prior consent of at least eighty percent of the affected families. In case of public-private partnerships(PPP) the prior consent was required from at least seventy percent of the affected families.
The ordinance brought in the Modi government is essentially the same as the 2013 Act, except for a few changes. The ordinance does away with the requirement of prior consent for land being acquired for affordable housing, defence, defence production, rural infrastructure including electrification, industrial corridors etc. There is nothing wrong with this change.
Also, the 2013 Act stipulated that the land acquisition carried out under 13 Acts of Parliament which dealt with land acquired for the purpose of atomic energy, highways, national highways, mining, railways, metro etc., were exempted from the Act. The 2014 ordinance did away with this distinction, which meant that land being acquired under these Acts will also be compensated at the same rate as promised in the 2013 Act. Doing away with this distinction is a step in the right direction.
Prime minister Modi in his address pointed out that maximum land is acquired under these 13 acts. “If we hadn’t approved this amendment, then the farmer would have continued losing land to projects with low compensation,” he said. He also put a rhetorical question to the people of this country: “Tell me if what we did was wrong?…Can someone tell me if this improvement goes against farmers?”
As per the 2013 Act, for rural areas the minimum compensation promised is anywhere between two to four times the market value of land along with the value of the assets on that land. For urban areas the minimum compensation promised is two times the market value of land along with the value of the assets on that land. So, land acquired under the 13 Acts of Parliament will also be compensated at the same rate as the land acquired for other projects.
Modi in his address clarified that the “ordinance does not change the compensation legislated in the 2013 Act one bit.” He also addressed the genuine concern of people that more than the land that is required for a project is typically taken on. He assured them that in the days to come there would be a proper assessment of how much land will be required for a project and this will ensure that excess land is not acquired.
Indian corporates over the years have acquired land through the government and become lazy in the process. Also, many of them started to see themselves as landlords and wanted land just for the heck of it. This can be said from the inefficient use of industrial land in India. If Modi follows what he has said that will be another step in the right direction. It will also do a lot to rebuilt the trust required for the process of land acquisition to work efficiently.
Agriculture, forestry and fishing form around 18% of the total economic output of the country. Data from the India Brand Equity Foundation, a trust established by the ministry of commerce and industry, points out that agriculture “employs just a little less than 50 per cent of the country’s workforce”.
If nearly 50% of country’s workforce is engaged in an activity which produces only 18% of its economic output, there is something that is not quite right about the entire scenario. What this clearly tells us is that too many Indians are dependent on agriculture and this number needs to come down. The situation gets even worse once you take into account the fact that most people who work on farms don’t totally depend on income from the farm. Only 17 percent of them survive entirely on money from their farm.
Modi addressed this issue as well by saying: “In every household, the farmer wants only one son to stay in farming. But he wants other children to get out there and work because he knows that in order to run a household in this day and age different endeavours need to be made.” He then went to say that given this scenario what is wrong with the government acquiring land for building an industrial corridor and ensuring that jobs are created in the vicinity of where farmers live. This was another important issue that Modi addressed in the programme.
To conclude, economic reforms in this country have also been carried out through stealth. No government in this country has ever made an effort to explain economic reform to people. This was the first time since the process of economic reform started in 1991, when someone has made an effort to explain it in simple layman terms to the people of this country. In fact, what Modi has started needs to continue. Other leaders of the Bhartiya Janata Party now need to take this forward by talking to the people of this country directly.

The column originally appeared on www.firstpost.com on Mar 23, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Express your ‘mann ki baat’ Modiji: BJP needs to go all out on land acquisition act debate

narendra_modiThe spin-doctors of the Bhartiya Janata Party(BJP) are normally very good at spinning things. Nevertheless, the entire debate on land acquisition seems to have gone out of their hands.
No government in this country has ever made an effort to explain economic reform to people. Economic reform has always happened by stealth. This is something that needs to stop.
Prime Minister Narendra Modi
 has asked his party MPs to go to the people and explain to them that the new land acquisition law is in their interest. This, if executed well will be a great move. The BJP can also use the prowess of its back-room boys to explain to its MPs in a very simple way what the issue is all about and how it should be communicated to the people. The trick is to make things simple but not simplistic (as often happens when politicians take over).
Prime Minister Modi should also explain the entire issue to the people of this country directly on his radio programme 
mann ki baat. If required there is no harm in speaking to the people directly on Doordarshan as well.
It is important that the BJP does not back down on the The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Ordinance, 2014. It needs to go directly to the people and explain why this legislation is in the interest of the nation. If the party backs down here, it will become more and more difficult to push any economic reform in the days to come.
Before we go any further, it is important to go back a little. Until 2013, land acquisition in India was governed by the Land Acquisition Act, 1894. This Act survived all the years of socialism as well as socialists that governed the country.
 A 1985 version of this Act stated: “Whenever it appears to the [appropriate Government] the land in any locality [is needed or] is likely to be needed for any public purpose [or for a company], a notification to that effect shall be published in the Official Gazette [and in two daily newspapers circulating in that locality of which at least one shall be in the regional language], and the Collector shall cause public notice of the substance of such notification to be given at convenient places in the said locality.”
In simple English, this British legislation allowed the government to seize any land that it wanted to. It survived for close 66 years in independent India. Governments often used this Act to acquire land and then sell it on to crony capitalists who made a killing in the process (and so did the politicians). Farmers lost out.
This has led to a scenario where people are skeptical about selling their land. The trust required for such a transaction to take place has totally broken down and will not be easy to repair. The Congress party ruled India for a large part of this period and they are basically responsible for the mess that prevails. The 1894 Act was eventually replaced by The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act 2013,
 which went to the other extreme and bought all land acquisition to a standstill.
One of the major provisions of the Act was that private companies acquiring land would require the prior consent of at least eighty percent of the affected families. In case of public-private partnerships(PPP) the prior consent was required from at least seventy percent of the affected families.
This has brought all land acquisition to a standstill. Companies have till date been used to governments arranging land and handing it over to them on a platter. They are still trying to get used to this new way of doing things. The BJP government brought in The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Ordinance, 2014, which made a few changes to the 2013 Act. The ordinance was signed by President Pranab Mukherjee
 on December 31, 2014.
In the ordinance the requirement of getting prior consent from those affected has been done away in certain cases. Anand Ranganathan in a brilliant column on www.newslaundry.com writes that: “Projects relating to national security or defence, including preparation for defence, defence production; rural infrastructure including electrification; affordable housing and housing for the poor people; industrial corridors; infrastructure, social infrastructure and PPP projects where government holds the land, there is no longer any need to obtain prior consent of 80% (for private projects) or 70% (for PPP projects).”
This is clearly a step in the right direction. Land required for the defence, electrification, affordable housing, industrial corridors etc., needs to be made available as soon as possible.
The trouble here is with the phrase “social infrastructure,” which wasn’t there in the original 2013 Act and has been inserted only in the ordinance. This phrase needs to be clearly defined to tell the people  that it hasn’t been introduced to provide a back-door entry for corporates.
Further, the 2013 Act had clearly stated that “no irrigated multi-cropped land shall be acquired under this Act.” Such land could only be acquired “subject to the condition” that it was “being done under exceptional circumstances, as a demonstrable last resort.”The 2014 ordinance does away with this. This is another thing that the BJP needs to explain to the people of this country. In a country where half of the land area is arable, it is very difficult to get hold of non-agricultural land, close to the cities, most of the time. Further, there is no shortage of land for agriculture in India, even if some of it goes towards urbanization and industrialization. (As I explain in this piece).
Further, the general impression that has been communicated about the 2013 Act (as well as the 2014 ordinance, given that there has been no change on this front) is that those affected will be paid a compensation by the appropriate government of four times the market value of the land that is being acquired. This is not actually true. This was first done by the Congress when it was in power. And is now being done by the BJP over the social media.
The 2013 law(as well as the 2014 ordinance) is slightly more complicated than that. For rural areas the minimum compensation promised is anywhere between two to four times the market value of land along with the value of the assets on that land. For urban areas the minimum compensation promised is two times the market value of land along with the value of the assets on that land.
This is to be determined by state governments. Hence, state governments are in a position to pay only twice the market value of the land that is being acquired in rural areas. In fact, this has already happened.
As a report on NDTV.com points out: “at least two BJP led states – Haryana and Madhya Pradesh – have fixed as compensation of two times the market value of the land for both rural and urban areas.” But there are other states which are paying more. Nevertheless, this is an anomaly that needs to be set right. If land is being acquired for a certain purpose, the government should be following a similar ratio throughout the country.
The BJP is on a strong wicket in this case. It needs to bat accordingly. It needs to tell the people of this country that it was the Congress party which forcefully took over their land over the years. It also needs to tell the people that more than a million Indians are entering the workforce every year. Jobs need to be created for them—and how will jobs be created without the creation of more physical infrastructure and new industry.
In fact, Arun Jaitley made a fantastic speech in the Rajya Sabha yesterday defending the land acquisition ordinance. “Don’t create an environment where infrastructure and industry become bad words,” he said.
More such performances are required for the BJP.

The column originally appeared on www.firstpost.com on Feb 27, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)  

Budget 2015: Goodies only for corporates. Why no personal tax cuts, Mr Jaitley?

Fostering Public Leadership - World Economic Forum - India Economic Summit 2010Vivek Kaul

As far as goodies for the common man are concerned, there was nothing much there in the budget presented by the finance minister Arun Jaitley today.
The tax deduction allowed on the payment of health insurance premium was increased to Rs 25,000 from the current Rs 15,000. This will lead to tax savings of Rs 1,010-Rs 3,030, depending on which tax bracket you fall into. For senior citizens this limit was increased to Rs 30,000 from the current Rs 20,000 per year.
Also, for very senior citizens of the age 80 years or more, who are not covered by health insurance, a deduction of Rs 30,000 per year has been allowed on expenditure incurred on their treatment. For expenditure incurred towards specified diseases of serious nature, very senior citizens will now be allowed a deduction of Rs 80,000, in comparison to the earlier Rs 60,000.
The one good development has been an increase in the limit of deduction allowed on investing in the National Pension Scheme(NPS) to Rs 1.5 lakh from the current Rs 1 lakh, under Section 80CCD.
In fact, Jaitley has also proposed an extra deduction of up to Rs 50,000 for investing in the NPS, over and above the Rs 1.5 lakh.
Oh, and the transport allowance exemption has been increased from the current Rs 800 to Rs 1600. That should be a huge help indeed.
Hence, net-net the budget does not have much to offer to the middle-class taxpayer. The question that arises here is that why should the budget have goodies to offer to the middle-class taxpayer every year? Ultimately, a stable income tax policy is also very important.
That is indeed a fair point. Nevertheless, when the government is working towards bringing down the tax rate for corporates, why shouldn’t something be on offer to the middle-class tax payers as well? That’s a question worth asking.
The finance minister
Arun Jaitley in his speech said: “The basic rate of Corporate Tax in India at 30% is higher than the rates prevalent in the other major Asian economies, making our domestic industry uncompetitive. Moreover, the effective collection of Corporate Tax is about 23%.”
Along with bringing down the tax rate for corporates, Jaitley also said that “we do not get that tax due to excessive exemptions. A regime of exemptions has led to pressure groups, litigation and loss of revenue. It also gives room for avoidable discretion.” The suggestion here was that along with income tax rates coming down, the exemptions that are allowed to corporates will come down as well. The idea seems to be that at lower rates more corporate taxes can be collected.
Along with the budget every year, the government also releases a document called the statement of revenue foregone. “The estimates and projections are intended to indicate the potential revenue gain that would be realised by removing exemptions, deductions, weighted deductions and similar measures,” the statement points out.
As can be seen from the above table, the revenue foregone number of the central government for this financial year is Rs 5,89,285.2 crore. This is higher than the fiscal deficit of Rs 512628 projected for this financial year.
Nevertheless, it is important to point out that the revenue foregone number is based on certain assumptions. “ The estimates are based on a short-term impact analysis. They are developed assuming that the underlying tax base would not be affected by removal of such measures…The impact of each tax incentive is determined separately, assuming that all other tax provisions remain unchanged. Many of the tax concessions do, however, interact with each other. Therefore, the interactive impact of tax incentives could turn out to be different from the tax expenditure calculated by adding up the estimates and projections for each provision.”
So the revenue foregone figure needs to be looked at with these limitations in mind. Having said that, the government of India is losing out on revenue because of the exemptions and deductions. There is no denying that.
As can be seen from the above table, corporate India is a major beneficiary of all the exemptions and deductions. If one adjusts for personal income tax, the revenue foregone for the central government still comes in at a whopping Rs 5,48,850.6 crore for 2014-2015. While this number maybe notional, there is clearly no denying that corporates benefit immensely out of the deductions and exemptions that have crept into our tax laws over the years.
In fact, bigger the corporate the more deductions and exemptions they take. Corporates which make an operating profit within the range of Rs 0-1 crore have an effective tax rate of 26.89% Those in the Rs 50-100 crore range have an effective tax rate of 24.29%. Whereas those making a profit of greater than Rs 500 crore have an effective tax rate of 20.68%.
The overall rate is 23.22%. Jaitley wants to push up this rate of “actual tax” paid by bringing down the corporate tax rate to 25% from the current 30%, over the next four years. The hope also seems to be that at lower tax rates more taxes will eventually get paid.
The question is why can’t the same logic be applied to individual tax payers? Around 3% of Indians pay income tax. If more corporates are likely to pay more tax at lower rates, can’t the same assumption be made for individual tax payers as well? Further, like the corporates income tax laws, can’t the personal income tax laws simplified as well?
This is something that the finance minister Arun Jaitley needs to answer. May be he will in the days to come.

The column originally appeared on www.firstpost.com on Feb 28, 2015 

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)