Ourview | Coming soon: a taxing time

Is finance minister P. Chidambaram preparing the ground for tax hikes?

His first official statement since he took back charge of national finances makes all the right noises—restoring confidence levels, creating a new roadmap for fiscal consolidation, the need to maintain price stability and get investments in new projects back on track. One statement is very interesting (it was pointed out to me by Nitin Pai of the Takshashila Institution, a think tank): “I would like to make it clear that the burden of fiscal correction must be shared, fairly and equitably, by different classes of stakeholders. The poor must be protected and others must bear their fair share of the burden.”

That part of the statement could be read as an indication to Indians higher up the income ladder that their pockets will be picked soon. One way to do so is to slash subsidies that benefit them. The other way is to increase tax rates.

Neither is an untouchable option. Why should car owners get subsidized fuel? And why should budgets be balanced by cutting social spending rather than increasing tax revenues? Taken in isolation from recent policy choices, what Chidambaram has said makes sense.

But this statement should not be seen in isolation. In a column written in January, I had asked whether higher tax rates would be the natural endgame of the United Progressive Alliance policy. “I often wonder whether the economists and activists who are part of the National Advisory Council are implicitly trying out a mirror strategy—feeding the beast to create conditions that make tax hikes inevitable... The only way the Indian government can deal with a fiscal crisis is by raising tax rates.” (See Feeding the beast)

Feeding the beast is an implicit strategy that mirrors what the Reaganites did in the US in the 1980s. Their strategy was called starving the beast. The Ronald Reagan administration had the grand ideological dream of rolling back the state. It slashed tax rates. The budget deficit soared. Reagan gambled on the fact that the average American would, when faced with a crisis in public finances, prefer to let government spending wither rather than let taxes go up again.

What this means is that tax hikes are the inevitable result of the politics of the alliance headed by Sonia Gandhi, not just a response to a cyclical challenge. Chidambaram is not your classic class warrior. But let us not forget that he gave advance warning a few weeks ago, when he asked why people who spend Rs 20 on an ice cream get so agitated by a small rise of Rs 1 in prices of food that benefit millions of farmers.

India has seen a 27-year cycle of tax reductions, with Chidambaram doing his bit in his 1997 budget. Is he telling the beneficiaries of the tax cuts that it is time they paid more? We can only wait and watch.

Is a new round of taxation in India now inevitable? Tell us at views@livemint.com