The nation had already been warned of a tough budget by the prime minister and the FM even before the Pokharan blasts and its economic fall-out. The FM also indicated in one of his speeches that he did not propose to change the income tax rates. He would do well to stick to from demoralising the large segment of middle class in the population consisting of salaried people and fixed income earners it would once again aggravate the problem of tax evasion.Given the human nature of avarice and greed there will always be tax evaders even if the tax rate were to be reduced to 50 per cent. Money is one commodity where if something is good more is even better!

Broadening the tax base is often cited as one way of raising the income tax collections. The number of income tax assessees is expected to have gone up to about 3 million by the end of March 1998.

This is, of course, a small proportion of the households. But, given the highly skewed nature of income distribution, that is, a small proportion of the households accounting for a very large proportion of total income generated, the figure of 3 million is good to work with for the Income Tax department. "Tax base" as a concept needs to be redefined. Instead of meaning the proportion of income earners caught in the tax net, it should refer to the percentage of income covered in tax collection. In other words, the IT department should concentrate its efforts on those rich sections of society that are prone to taxevasion. The department is aware of them. Concerted efforts in a few metropolitan areas could be expected to pay a huge dividend.

It is time the government to think of introducing the flat tax, such as, one tax rate for all incomes. Progressively income tax has already lost its teeth over the years and certainly the present government need not carry the ideological baggage of socialism. Along with the flat tax, the various exemptions provided for at present need to be drastically pruned down. It is a moot point whether savings really increase because of tax concessions. People save for various socio-economic reasons like saving for the rainy day, providing for posterity, etc. Even the interest rate mechanism, as an instrument for promoting savings, is suspect. It is more likely to reallocate the existing savings among different avenues rather than augment them. Saving is basically a function of income. There is thus a need to have a look at the savings-related deduction and rebate for tax purposes.

Thelimit for the exemption of income tax could then be fixed at a fairly high level with a view to concentrating on the tax base in the manner indicated earlier. These suggestions will need a discussion and debate in the country to understand their ramifications and hence cannot be proposed in the next budget. But certainly the matter could be raised at an appropriate time for a general discussion.

The Reserve Bank of India (RBI) is going to face a situation in the coming year as tough as the one it faced during the Gulf crisis although it would be of a different type. The large amount of foreign exchange reserves should not lull it into a complacent sense of comfort. It is said by some commentators that there is already a net outgo of debt service payments and hence the discontinuance of aid from any country should not matter much. But the point to be noted is that in the absence of fresh inflows the net outgo of debt service payments and hence the discontinuance of aid from any country should not mattermuch. But the point to be noted is that in the absence of fresh inflows the net outgo would be even more than it is now.

Fortunately, at present, economic sanctions against the country are not as widespread as feared earlier. And even in the case of the USA it seems that private imports and exports will continue to take place. Commercial interests of developed countries will eventually prevail. After all for every Boeing there is an Airbus.

The RBI should hang on to its foreign exchange reserves as closely as possible and not embark upon any adventures of market intervention and lose them. The scenario is one of depreciation of the Indian rupee. The time is ripe for the central bank to give up its habit of riding three hobby-horses, such as, money supply, rate of interest and exchange rate, simultaneously.

It should concentrate on the domestic sector and leave foreign exchange to market forces. Till such time that markets are developed to transmit interest rate impulses it has to work on money supplyas its focus.

(The author is a former officer-in-charge of the Department of Economic Analysis and Policy of the RBI)