Don’t levy tax on diesel cars: Montek Calls For Price Adjustment On Fuel, Says Monsoon Delay Not A Big Problem

Deputy chairman of Planning Commission Montek Singh Ahluwalia is a long time aide of PM Manmohan Singh. He has now once again taken over the mantle of assisting Singh in running the finance ministry, a job that the duo did two decades ago. Ahluwalia talks about reviving animal spirits and delayed projects apart from assuring investors that the India story is here to stay. Excerpts: 

The PM has talked about reviving investor sentiment, but what is needed to revive the economy? 
The area that the Planning Commission is directly involved with relates to efforts at ensuring that infrastructure projects, especially in energy and transport, are speeded up. We have adopted a much tighter process of fixing targets and monitoring progress in this area. Where there are problems, which require inter-ministerial resolution, we have an explicit problem resolution mechanism. An effort will be made at the level of the principal secretary (to the PM) to see if these can be resolved at the official level. If they can't, the matter will be raised to the PM's level. 
What about the manufacturing sector because 
even if things improve now there is no capacity so, you are staring at another round of inflation? 
The performance of the manufacturing sector has not been good but I don't think the problem is lack of capacity. In any case, lack of capacity in some sectors is not a problem because you can import. Many initiatives such as the National Manufacturing Policy have been taken. The rupee depreciation will also give a boost to Indian manufacturing because it makes domestic manufacturing more competitive. Depreciation helps not just exports, but also import competitiveness. Improvement in infrastructure and reviving investment is what will give a boost to manufacturing, especially capital goods. There is a large capacity in autos and chemicals. 
But still there is a long waiting period, especially for 
diesel cars… 
The demand for diesel cars is just a reflection of the price distortion between petrol and diesel. If diesel prices are adjusted, the demand for diesel cars will come down. A lot of people are arguing that either you raise diesel prices or tax diesel cars. 
But the government chose not to increase taxes on diesel cars in the Budget… 
The correct thing to do in my view is to adjust the diesel price and not impose a tax on diesel cars. There are two distortions. Petrol is priced more or less the way it should be to the refineries but it has a very high tax on it. Diesel is priced too low, but has much lower taxes. As a result, a lot of people who should buy petrol cars are buying diesel. I remember 
the old days when people had Ambassadors and retrofitted them with diesel engines! You want to avoid that. 
How are deficient rains going to affect the economy? 
The monsoon is late in northern India, but a delay by itself is not a big problem. Much of northern India is well served with ground water and agricultural production may not be much affected. We also have very large stocks of foodgrains. In any case, the ministry of agriculture is taking steps to ensure that the matter is effectively handled. 
How have the concerns on the tax front affected investments? 
The tax structure as a whole is more or less which it was three years ago. The investment slowdown is therefore not due to the tax structure but to what the PM described as dampening of animal spirits. There are many reasons for this. One is the state of the world economy, which has an impact on foreign as well as domestic investors. Availability of capital for investment becomes a problem. I am not saying all our problems are because of global developments. There are domestic problems to tackle. The most important domestic problem is that several large projects have been held up and that has had an impact on investment. 
    On the tax front, the main thing is to create an environment where uncertainty is removed. Many FIIs were concerned about certain aspects of the GAAR guidelines. The previous finance minister (Pranab Mukherjee) recognized this and postponed the application of GAAR by one year. 
And, there is controversy over the PMO clarification… 
Some sections of the media have presented this as reflecting differences between the PMO and the finance ministry. The clarification only says that what has been published is an official level draft, and a final decision will be taken based on feedback. It's a good arrangement where you decide on an issue at the highest level only after getting feedback. 
Was the government also late in acting on some of the concerns such as Vodafone or GAAR? 
The government was very swift on GAAR. I have already said the former finance minister himself postponed application by a year, which was a positive response. We now have to ensure that the problems raised are addressed. 
How long is the PM going to hold on to the finance portfolio? 
I honestly don't know. We can only speculate, which I don't want to do. 
PLANNER'S TAKE 
ON TAX CHANGES | The tax structure as a whole is more or less what it was three years ago. The investment slowdown is therefore not due to the tax structure 
ON SLOWING GROWTH | The most important domestic problem is that several large projects have been held up and that has had an impact on investment 
ON GAAR | The government was very swift on GAAR. I have already said the former finance minister himself postponed application by a year, which was a positive response