Page 362 - DECO502_INDIAN_ECONOMIC_POLICY_ENGLISH

Indian Economic Policy

Notes been argued that marginal tax rates on higher incomes should be reduced, there should be
liberalisation of tax laws regarding depreciation and writing off of capital; there should be
complete exemption of savings from taxation, direct taxes should be indexed to cost of living,
etc. If one closely analyses all these suggestions made by Federations of Chambers of Commerce
and Industry and some economists who are votaries of more freedom for the private sector,
then one reaches the conclusion that all these suggestions are aimed at reducing rates of direct
taxes or providing more and more legal avenues of tax avoidance so that the overall burden on
the business classes is considerably reduced. The argument of indexation to cost of living is
fallacious because inflation by its very nature distributes incomes in favour of business classes
and cost of living index is mainly associated with the working class.
The real problem is that even at these modest rates of taxation as obtain today, those in high
income brackets do not want to pay taxes and rather like to evade on a massive scale. It is this
aspect which needs to be attended to. For this purpose, the ‘Soft State’ attitude has to be basically
altered in favour of ‘strong state’ which should be keen to realise tax revenue from persons who
fall in high income ranges. Obviously, this would require gearing up of tax administration to
ensure better tax compliance.
(ii) Removal of controls that are considered unnecessary : A school of thought believes that controls
and licensing procedures are all unnecessary, they hinder productivity, obstruct the free play
of market forces and should, therefore, be withdrawn.
The Government, in pursuance of this reasoning, lifted control on cement and introduced a
dual system of pricing. Even the price of levy cement was raised from ` 28 per bag of 50 Kgs. to
about ` 37. The cement manufacturers fixed the price of open market cement at ` 65 per bag.
But what have the later developments shown ? The price currently is ` 240 per bag and the
Government is considering measures to halt the further rise of the price of cement. The abolition
of controls has helped to remove shortage of cement, but the other result that the forces of
competition in the course of time will lower the price of cement per bag, has not been achieved.
In other words, the benefits of liberalisation have been passed on the manufacturers rather than
the consumers.
In fact, the ineffective use of controls is responsible for the present state of affairs. The absence
of controls creates much worse situations in which businessmen by creating artificial scarcities
carry on unbridled exploitation and thus generate black money. Dagli Committee rightly
diagnosed the problem : “Leakages in the distribution system even where price control, is
accompanied by distribution controls, is another potential source of black money generation. If
follows, therefore, that distribution control should be attempted after making sure of the
machinery of distribution, and price control should not be attempted without control over
distribution.” The logic of the Dagli Committee is not to abolish price controls, but to rationalise
them and support them with an effective system of distribution. To recommend abolition of all
controls in order to speed-up the growth rate of the economy is like the suggestion of removal
of breaks from a car so that it can travel faster. The distortions in investment pattern in favour
of hoteliers, cosmetic manufacturers and other luxury item producers is the direct result of the
manipulations of black money operators, it is not the consequence of statism, but the absence of
effective management by the State over affairs of the economy.
(iii) Appropriation of the gains of investment of black income in real estate : A very significant
outlet for black income is investment in real estate. Speculation in real estate business is rampant
in urban areas. These investments result in very high “capital gains”. A very large proportion
of black income gets congealed in such residential buildings. Dr. Amit Bhaduri suggests that
the most effective way to attack black money system is to appropriate the gains from property
speculation. He, therefore, recommends the setting up of “a Corporation in each state and the
Union territory to deal in transactions in real estate property, where all private buyers and
sellers will have to transact through the corporation for legalisation of urban property
transactions. The basic idea can, therefore, be put in a nutshell : neither nationalisation nor
“ceiling” on urban private property; but nationalisation of all private transactions in urban real
estate.” These Corporations, Bhaduri suggests, can be based on the STC pattern wherein the

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