The IIPM Think Tank - Musings

In the past few years, when it comes to the generation of additional resources, the only word that has overwhelmingly captured the imagination of our honourable Finance Minister is ‘cess’. In fact, the argument to justify cess has been overwhelmingly rhetorical. Vouching for the fact that the social sector in India, particularly education, is in dire straits and additional financial resources are required to invest in the sector, the ministry had been burdening the Indian citizens by leving cess after cess. So after the ‘spectacular’ success of two percent cess on elementary education which was imposed two years ago (collection was to the tune of Rs 13,000 crore), this year our honourable Finance Minister has increased the burden on the citizens by enhancing the cess by a further one percent for secondary and higher education. But as our FM and the mandarins of the South Block pat the backs of each other on their success in milking the middle class, one issue stares directly at their face, leaving aside the painful fact that the cess collected over the last couple of years still lies unutilised!

But the issue here is whether the Ministry of Finance can ever come out with innovative and radical means by which resources could be generated, without burdening the middle class? Like many other innovative alternatives, one of the answers to this question, as suggested by the experts lies in the burgeoning forex reserves in the country.

No wonder that Indian policy makers, having braved the foreign exchange crisis of the early 90’s, still live in a time warp. The Nehruvian middle path, envisaging the taking of no risks and even minimal enterprise, has affected the burgeoning foreign exchange reserves in the country. This ‘enterprising’ mindset has ensured that even after a phenomenal $199.18 b forex reserves (as of April 2007), India manages to earn a miniscule return of 3.1% per annum (after depreciation) on the same. For the uninitiated, it can be elaborated simply that the foreign exchange that the Government of India holds in reserve, lies virtually unutilised due to the sheer fear that some untoward turn in the economy may lead to a flight of capital. Though the fear is not completely unfounded, as it is based on the fact that even with the vast forex reserves, India still has a deficit on its current account. On the contrary, one may compare this lethargy and perpetual apathy to the enterprise and enthusiasm displayed by the island city state of Singapore. Holding a forex of $140.2b (January 2007), Singapore has delegated the responsibility of managing their reserves to the Government Investment Corporation (GIC). Remarkably, with each of the 28 years since its inception, the GIC has managed to post an annual return of a whopping 9.5% in dollar terms. Working professionally (without government interference), GIC invests their corpus in a pool of equity and bond markets of the developing and developed countries, thereby having a minimal dependence on US government securities. The successful Singapore model is fast catching up in other developing economies like China and South Korea, though, unfortunately, India lags behind.

It is high time our Finance Minister looked beyond the imposition of cess. After all, had India followed the Singaporean model, the national economy would have earned a staggering 6% more a year. Roughly, a 6% increase would have converted to around Rs 50,000 crore. Am I required to buttress my argument that this feasible corpus is much higher than what our Finance Minister collects from the ‘cess’?