Economic cost of new budget

“We will bring in equitable taxation system,” had been a consistent line of Asad Umar when he was in the opposition. He would castigate Ishaq Dar for heavy dependence on indirect taxes. His scathing critique of huge tax leakage and soft tax regime for the privileged sectors is also part of the record. Did he address these issues in supplementary Finance Act?

A closer reading of the Act will reveal that he followed Dar policies almost verbatim such as levying more duties on imports, taxed salaried class, and increased withholding tax on cash withdrawal from banks. However, he did all this without applying Dar’s managerial approach. In addition, this Act provides for subsidy on gas to textiles and fertilizers sectors and was followed with increase in interest rates. The stated objectives of these measures are based on the assumptions that sales of gas at cheaper rate will result in the increase of export. Increased tax rates on cash withdrawal will help in broadening tax base and lastly, higher interest rates will control inflation. An objective analysis of this approach may help us to understand his initiative in better perspective.

To begin with, sales of gas at reduced rate of Rs400 M3 to basic textiles and few other export-oriented sectors will boost export and thus help in bridging trade-deficit. Even one influential textile body (APTMA), manufacturers yarn, claimed that this will take export to $30 bilion per annum. Whereas one expert on World Trade Order (WTO) policies pointed out that basic textiles export would not even reach $20 billion as textiles has a miser share of 7% in global trade. Out of 7%, more than 60% shares are of garment in which Pakistan export is marginal. Textiles leaders also claim that this help in restoring the closed units, creating job opportunities to thousands of persons. But this has been contested by another industrialist who argued that it is not gas tariff rather heavy non-performing loans that closed mills got from banks and invested in real estate generally in an ME state that suffered slump and so they defaulted.

Increasing gas tariff might have been a compulsion but the government’s logic that it will not affect common consumers doesn’t make any sense. Will they not increase prices of finished products after gas tariff increase? Moreover, its incidence cost will eventually be borne by the end-consumers of whom 40% are poor people. Already a survey found prices of daily used items going up.

In a wide range of discussion with business community, economic experts and consultants, it was found that gas tariff changes, increasing withholding tax on cash withdrawal and increase in interest rate has added a lot of uncertainty and panic in capital market as well as in industry.

The finance minister, it appears, has not done proper evaluation while increasing withholding tax on cash withdrawal from banks. Many bankers have shared that cash deposit continue to decrease subsequent to this levy in 2016. Enhance rate will now further accelerate diversion to other means as is evident from mad race for the purchase of dollars. Hundi system has added to flight of capital was the consensus of prominent money exchange agents. The increase in gas tariff, raising interest rates and taxes on cash has resulted in free fall of stock exchange due to uncertainty. Economic indicators were hardly stable due to huge circular debt and trade-deficit. The measures taken by this government is accelerating the collapse. Apprehension of double digit interest rate has made investors to adopt “stay away and wait” policy, according to a prominent Karachi Stock Exchange agent. There is a general perception that once panic has struck capital market and crash of stock indexes it becomes difficult even for the stable economies to recover. Due to local industrial instability, foreign investors have gone away.

Many renowned industrialists wonder the finance minister’s logic of fiddling with fragile economy and even some of them attributed to his lack of exposure to fiscal policies. Be as it may, price hike will be haunting general consumers for quite some time. Value depreciation may be good news for FBR for collecting around 40% of differential value due to lesser value of rupees but of what avail if macro indictors start staring at the market. Can government revisit the whole horrible economic start instead of expecting some miracles?

Experts of emerging markets always found the option of easing economic crisis is in paradigm shift is whereby to incentivise value addition products in basic commodities and developing engineering industry. On a query this could be very gradual, answer was still it’s better than persisting with export of outdated basic textile sectors.

Trade deficit is not bad if the investment is being made on human development and attracting educated entrepreneurs.

The finance minister needs to invigorate local industry, as revenue is its product. He must abstain from fiddling economy through tariff measures. Instead, the government should try stopping revenue leakage, strengthening enforcement and lastly don’t go by “FBR brief” rather lead it from front with innovative professional approach.

The writer is former member of FBR management.

Twitter: @Chafqat