When the country is going through a crunch like this, additional taxation may be the answer: Mythili Bhusnurmath

"I would not be averse and none of us who are in the better off parts of the country, should be averse to paying a little bit higher tax. Look at the kind of money people have made from the stock market. Why don’t we tax those who have those stocks," says Mythili Bhusnurmath, Consulting Editor, ET Now.

What is your take in terms of the steps the government has taken so far to fight inflation? Saturday’s fuel excise cut was expected to reduce inflation by 20 to 40 bps. Do you think the current moves will add to this figure significantly?
While it is good that the government is trying its best to cool prices, we must understand that today inflation all over the world including in India has been caused by excess liquidity. Now whatever the government does, one cannot do something that the RBI should have done. The RBI was way behind the curve and today we are paying the price for that.

So when the government does these things like imposing export taxes and cutting excise duties on petrol and diesel, remember that even if inflation comes down momentarily, there is a cost and that is the government’s fiscal deficit rises. When the government’s fiscal deficit rises, it has to borrow more. Meanwhile, interest rates will move up. The basic problem is the government cannot fight RBI’s battles, just as RBI cannot fight government battles.

In the past, the RBI was persistently trying to push growth by keeping monetary policy excessively loose, as a result of which today we are in the sorry state that we are in. There is almost runaway inflation and growth is not very much better. So, the problem arose because RBI was trying to fight the government’s battles with little or no success and with grave consequences. Now the government is trying to fight the RBI’s battles.

The problem has been caused essentially because of excess liquidity. You may say it is because of supply disruptions; if indeed it is supply disruptions, then why is RBI raising interest rates now? If it feels that in the past supply disruptions could not be tackled by interest rate hikes, today it is doing precisely that and so there is a contradiction in RBI’s action.

So the basic problem is because of excess liquidity. Let us remember that in the US and in the EU and UK, inflation is a relatively new phenomenon. But we have had high inflation from FY21 and so it is not a new phenomenon for us, number one.

Number two, we have a little over 20-25% of the population below the poverty line. Inflation hurts them the most. The advanced countries do not have these kinds of numbers. What is sauce for the goose is not sauce for the gander. We are paying the price for RBI’s excessively loose monetary policy and being behind the curve. The government can at best apply some balm, but we will have to live through this pain. All the government can do is try and ease the pain for those who are hurt the most, the poor.

I just want to come on the point that you have made about how 25% of our population is below the poverty line and how food inflation can hurt them. But look at the robust food security scheme that we honed during the Covid-19 pandemic and that has continued and perhaps extended also. That explains the attempts at quelling the prices of sugar or edible oil. Do you think that the food security schemes will help buffer this part of the population?
That is perhaps the only thing that the government can do but there is a price to be paid for the food security scheme which the government has done by cutting excise duty. What is happening is the government’s expenditure is rising at a time when RBI’s dividend for the government came in perhaps at almost at a 10-year low of Rs 3,0000 crore as against Rs 99,000 crore last year.

So while the government’s tax revenue has held up, let us remember that tax revenue is a function of growth and if the economy is not going to grow as well as we envisage, the disinvestment revenue is not going to be as good as what it was, then fiscal deficit is going to boom.

RBI is now trying very hard but monetary policy acts with a long lag. So overall, what the government can do is try and ease the pain, not for people like you or I who do not have to worry about our next meal, but for the vast numbers of poor in the country who are going to feel the pinch and are going to get hurt where it hurts the most in their stomach.

Your take on wheat export ban?
We criticise other countries when they impose bans, but every country looks after its own interest and every country pontificates to others and does something quite different when it comes to itself. On wheat ban, it is not that we should give a damn what the rest of the world says. The problem is that when we impose a wheat ban, it hurts our farmers. Let us be very clear that we have promised doubling of farm income and the moment prices of farm products go up, we start putting the consumer first and do not allow the farmer to get the benefit of the higher prices. That’s what bothers me about the wheat export ban.

What next? What is going to be the impact of measures taken so far? Do you think things like DBT need to double down?
As I have said, inflation hurts the poor the hardest and one really needs to have a much more focussed support for the poorer classes to ease the pain. Given the way the government’s fiscal deficit is going to increase, the government should seriously think maybe in terms of imposing an additional tax. We never had a Covid tax. But if you look at our corporate tax rate, if you look at our maximum tax rate, look at our tax to GDP ratio, why won’t better off people agree to get taxed a little bit more?

In the US, in Europe you hear the very rich say that look, we are willing to pay more tax but is this tax revenue being used for the right purposes? So my view is going to be very unpopular but I seriously think that when the country is going through a crunch like this, maybe taxation is the answer?

Some states imposed a Covid cess. There was a Covid cess on petrol and diesel as well…
Not on income tax, not on corporate tax...

Some may argue that if you increase tax rates, you are going to cut things like discretionary spends and you will have an overall chilling effect on growth on investment and on that longer virtuous cycle?
Let us be very clear, it is not the rich who spend. The rich spend on air conditioners, BMWs, Jaguars. The poor spend on mass consumption items. Today many of our factories are functioning below full capacity – way below 60%, 70% – because the poor who consume are the ones who do not have the income to consume. So if you tax the rich more, it is not really going to affect your consumption.

Ultimately you need private investment to come in, led by government investment. Government capex must not get cut because the government does not have enough revenue. It is important to protect government revenue if necessary. Ideally disinvestment should be pursued better. The government has done well with LIC. Air India was a significant move and one must give due credit.

Sowe need disinvestment and asset monetisation and at the same time. I would not be averse and none of us who are in the better off parts of the country, should be averse to paying a little bit higher tax. Look at the kind of money people have made from the stock market. Why don’t we tax those who have those stocks?