Finance Minister Pranab Mukherjee's Budgets, otherwise broadly reformist, have been fairly criticised for being stuffed with sector-specific exemptions and subsidies. Sector-specific measures of this sort have two major problematic consequences: they do not aid in the rationalisation and simplification of the tax code that is an essential first step in increasing voluntary compliance; and they are active inducements to rent-seeking of the worst sort, leading big business and industry confederations to conclude that profits will accrue from sitting patiently with begging bowls in the finance minister's ante-room rather than in searching for innovation, allowing markets to function, and cutting their own costs.
Both those faults are magnified when the finance minister does what he did on Thursday: announce modifications in the Finance Bill that are obviously in response to intense lobbying by individual sectors (and, disturbingly, their associated ministries). After all, if an industry is struggling, the best way to handle it is industry-specific rule changes, not fiscal tinkering through a favourable word in the Union Budget. Doing it this way discourages the only real way to energise struggling sectors and prepare them for greater openness — greater reform. And conceding industry demands weeks after the Budget was introduced is a fairly transparent message that petitioning the government works. Nor are the individual changes necessarily justified.
For instance, there is no real need to set a maximum level for service tax on air travel; not only does this militate against the theme of harmonisation of service taxes in the run-up to a uniform Goods and Services Tax, but it legitimises pushing of the sort that the civil aviation ministry did on behalf of airlines, another step on the road to Union ministries becoming little more than pressure groups for industries within the cabinet. In fact, the airline sector, like real estate, has recovered from the lows of the recession. Indeed, at this time we should be looking to exit stimulus measures.
