ssm@cmu-ri-leg.ARPA (Sesh Murthy) (03/28/85)
Prime Minister Rajiv Gandhi, in a notable break with past policies, has
proposed a sweeping program to cut taxes for businesses and wealthy
individuals and reduce government regulation of key parts of the economy.
The prime minister's program bears more than a passing resemblance
to some of President Reagan's ''supply side'' initiatives.
Consciously or not, Gandhi seems to have borrowed a page from
Reagan's textbook in an effort to shake up the Indian economy.
The program, introduced in his government's budget last week, has
drawn praise from several quarters, including some associated with
the political opposition.
Business groups and trade associations are hailing it as the most
important budget proposal in years. But others have attacked the
budget as ''against the common man.''
Perhaps most reminiscent of Reaganomics is the basic theme that the
proposed changes are aimed at increasing savings, investment and
productivity in a free economy.
Unlike Reagan's tax cuts, however, Gandhi's proposed tax reductions
would affect only a small part of the population, portions of the
middle and upper classes, the only people who pay income taxes.
In fact, there is a debate here, similar to the one on Reaganomics,
over whether the benefits will extend to the vast majority of
impoverished people in India. ''Unless the large masses have
purchasing power, they cannot take advantage of these steps,'' said
A.L. Nagar of the Delhi School of Economics.
The Gandhi program falls short of an attempt to revamp the economy,
which remains highly regulated and heavily taxed. Yet the budget
offers the clearest indication so far of Gandhi's apparent
determination to liberalize an economy almost universally described
as strangled by taxes and government regulations.
The program is also aimed at reducing rampant tax evasion, which has
been a fact of life here for years.
''What is important is that the government is changing direction,''
said a Western economist. ''It used to be that the government had its
finger in every piece of the pie. Now it is stepping back a bit and
giving the private sector a chance to allocate. They're letting the
marketplace in a little.''
Among other steps, the government wants to drastically increase the
amount of assets a corporation is allowed to have before it comes
under regulation as a monopoly enterprise. Under current rules, a $20
million corporation falls under an interagency government committee
that reviews every major decision. This has discouraged much private
investment. Under the new rules, the committee would not have
jurisdiction unless the company were valued at more than $80 million.
The government has also proposed removing its licensing requirements
in 25 industries, including scientific instruments, electronic
components, diesel generating equipment and other categories of
instruments.
Taxes on salaried income would be lowered sharply in several ways.
The progressive income tax's top marginal rate is to be lowered from
62 percent to 50 percent, and there is to be an increase in the
amount of income a person may earn before he has to pay taxes. Estate
taxes are to be eliminated altogether.
Import duties, lifted on computers last November, are to be lifted
on other electronic equipment, too.
To help close a budget deficit of $3 billion in a budget of $37
billion, the government is raising taxes and fees on such commodities
as imported petroleum and petroleum products, cement, commercial
vehicles and soda water. A proposal to increase railway fares has
sparked protests.
Some of the changes Gandhi proposes can be ordered unilaterally.
Most are expected to be enacted by the parliament, where Gandhi's
Congress Party commands an 80 percent majority.
The changes were put forward by V.P. Singh, the finance minister,
one of a small group of market-oriented economic advisers to Gandhi.
This group began assembling almost immediately after Gandhi took
office last November upon the assassination of his mother, Prime
Minister Indira Gandhi.
For months, the 40-year-old prime minister has talked generally of
the need to modernize India's economy. In spite of the talk, many
wondered whether he would break away from the Socialist tradition of
both his mother and grandfather, Prime Minister Jawaharlal Nehru,
modern India's founding leader.
Some businessmen said in recent days they still question whether
Gandhi has the commitment to stick with his course of action. India's
economic policies in the past have been notoriously erratic.
Economists note further that India has experienced satisfactory
growth rates in recent years. The economy expanded more than 5
percent last year. But some people have expressed concern that if
there is an economic downturn, Gandhi's experimentation with market
solutions could come to a quick halt.
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