It took eight days for the United Progressive Alliance government to change its mind. On February 16, its finance minister, Pranab Mukherjee, refrained from announcing tax rate changes because the government thought it was improper and incorrect to present such proposals in an Interim Budget.
On Tuesday, in his reply to the debate on the Interim budget, Mr Mukherjee surprised even his ardent followers by announcing a cut in the Cenvat rate and the service tax rate by two percentage points each.
The state of the economy did not deteriorate so sharply in the last eight days that the principles behind not announcing changes in tax rates in an Interim Budget had to be set aside. Nor can it be argued that the demand from industry and members of Parliament for some stimulus measures became so irresistible that the finance minister had to announce the tax rate changes in his reply to the Interim Budget debate.
Nobody would have even bothered if the Interim Budget were passed without any change in the indirect tax rates. In fact, Mr Mukherjee's argument that announcing tax rate changes in an Interim Budget would be improper was understood and even appreciated.
The significance of announcing the reduction in the tax rates as part of the finance minister's reply to the Interim Budget debate should not be underestimated.
The tax rate changes are now part of the Interim Budget exercise. Governments in the coming years will undoubtedly use this as precedence to justify many more changes in the tax rates through interim budgets.
In his Interim Budget in 2004, Jaswant Singh stopped at reducing the import duty on passenger baggage. Now, changes in excise and service tax rates have been introduced through the Interim Budget. Who knows the next Interim Budget may introduce some direct tax rate changes?
The UPA government, of course, had a simple way out to prevent the volte-face. Nobody can question the logic of some more fiscal measures to stimulate the economy. But why introduce those measures through the finance minister's reply to the Interim Budget debate?
Once the Interim Budget was passed by Parliament, the government could have notified the changes in the indirect tax rates. This course would have been neither improper nor incorrect.
What could have been the government's logic behind announcing the changes at the end of the Interim Budget debate?
In retrospect, it is pretty clear that the UPA government had no idea of the expectations that had been built around the Interim Budget, thanks largely to the media's speculative reports on likely tax rate changes and the economic experts' views on the urgent need for another fiscal stimulus package. No attempt was made to play down or temper those expectations.
On the contrary, cabinet ministers were allowed to make statements on the absence of any Constitutional bar on the government to introduce tax rate changes in an Interim Budget.
Not surprisingly, the stock markets and industry were disappointed when the Interim Budget did not contain any fiscal stimulus package. The Sensex fell by over 300 points. Purists complimented the finance minister for honouring the convention.
Many others, however, wondered why in an extraordinary economic situation, like the one that prevailed now, the finance minister did not seek recourse to unusual measures even if that would have broken the convention. Finance ministry officials stoutly defended their minister's line as explained in his Interim Budget speech.
They argued that at no stage in the formulation of the Interim Budget did the government ever consider or even contemplate introducing tax rate changes.
So, what brought about the change in approach, first noticed in Mr Mukherjee's intervention in the Interim Budget debate a few days after the presentation of the Interim Budget last week? The finance minister dropped clear hints that in his reply to the debate he might make some announcements on what measures the government would take to stimulate the economy.
Which is what he did on Tuesday. It was clear that the government was afraid of being seen as unresponsive to an economic crisis. Little did it realise that such a situation would not have arisen if it had taken early steps to manage industry's expectations of a stimulus package in the Interim Budget.
All the goodwill that the UPA government might have earned by flaunting its respect for Parliamentary conventions and Constitutional propriety might now be lost.
In retrospect, the government may also be realising its grave mistake in not appointing a full-fledged finance minister immediately after the last ministerial reshuffle in December 2008.
The finance ministry is too important a portfolio to be either looked after by the prime minister or by another Cabinet minister who has an equally onerous responsibility in the government. Nor can it be run by proxy.
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