SPECIAL PURPOSE BONDS AND FUNDS IN LIEU OF SUBSIDIES.
Subsidies have failed to build the expected environment for effective and productive capital formation. It has only fueled the desire for more and more subsidies. Subsidies continue to drain the resources of the country and contribute towards the widening fiscal deficit.
An Incremental Revenue Generation Model and creation of SPECIAL PURPOSE PERFORMANCE BONDS AND/OR SPECIAL PURPOSE DEVELOPMENT FUND in place of subsidies could be a better option to sustain a double digit growth and generate an effective capital and revenue generation model.
My humble submissions for consideration of such new and dynamic model for growth in the NORTH-EAST are:-
1. CREATION OF SPECIAL PURPOSE PERFORMANCE BONDS &
2. SPECIAL PURPOSE DEVELOPMENT FUNDS
§ All Banks and financial institutions have a statutory obligation towards priority sector landings. However, most banks and financial institutions in the North-East fall short of these targets. Perhaps, the Government could consider some amendments in the Banking and Financial sector Laws to:
EITHER
§ Empower these banks and institutions to float bonds (SPECIAL PURPOSE PERFORMANCE BONDS) which could be graded according to corresponding bank’s and financial institution’s performance in meeting their priority sector landing targets. The better the target compliance higher the ratings. These bonds can also be traded in the bond market to encourage these banks and institutions to better their compliance for a better bond rating and consequent enchantments of their trading earnings and also better bond valuations.
AND/OR
§ Permit the North Eastern Development Finance Corporation Limited (NEDFi) to float bonds which could be subscribed to by such banks and institutions by an AMOUNT EQUIVALENT TO OR A PERCENTAGE OF their deficit in their priority sector landings. These funds (SPECIAL PURPOSE DEVELOPMENT FUNDS) may be made available to industries based on some prequalified and predetermined norms. The interest on such loans should start at a nominal rate with a provision for further reductions based on these predetermined and prequalified performance parameters.
§ The loss in interest earnings by banks and financial institutions IN EITHER CASES (because of trading losses or losses due to the nominal and reducing interest rates) for such development Funds could be compensated by MAKING BUDGETARY PROVISIONS through an intensive scrutiny model during the budget preparation exercise. Such budgetary support would perhaps be a fraction of what the country is now losing from the existing forms of subsidies.
§ GRADUALLY REPLACE ALL FORMS OF SUBSIDIES BY SUCH SPECIAL PURPOSE DEVELOPMENT FUNDS.
Ø The same could also be applied for the non lapsable pool
of funds for the North- East.
3. SUBSTITUTION OF INCOME TAX BY GOODS & SERVISES TAX.
Ø Bring a uniform Goods & Services Tax regime as soon as possible
Ø Perhaps the government could consider introducing a Reducing Rate Of Income Tax Regime and substituting it with a gradual pro-rata increase in the goods & services tax over a period of time. Such a substitution of a direct tax by an indirect tax will exponentially enhance the revenue collection model and also gradually discourage the formation of unaccounted money and encourage channelization of the existing unaccounted money for generating revenue for the country.
Ø Putting this into practical use will initially be a challenge. But a pilot scheme may be started in the north east and gradually extended to all over the country.
Ø These steps if successful and implemented all over the country will invariably reduce the country’s fiscal deficits and make enough capital available internally to propel the country to maintain and sustain the much sought after double digit growth rate.
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