Potholes in the economy.

Indian roads are generally full of potholes and as one section gets repaired potholes appear in another section. This is because most of the money is stolen by officials in municipalities so the work done is stopgap, with poor materials. Now it seems that the central government has decided to take its share of the loot. Seems that the Finance Ministry has decided to pocket Rs 27 billion from the money collected from road cess and tolls paid on highways. TOI 26 January. Cess is an additional tax of 2% on every liter of petrol or diesel sold in India, the excuse being that additional money is needed to improve conditions of  our roads. This tax is collected even though highways are constructed by companies with private finance which are then allowed to collect toll from all users for 30 years. A few years back companies were paying premiums to be awarded contracts for construction in the hope of making windfall profits from monopoly toll collections over 30 years. No longer. All these companies are making huge losses and want to exit their contracts and recent auctions produced no bidder. Why does the government tax us on fuel when it is not paying for road construction? Because the government is desperately trying to keep its fiscal deficit below 5.3% for the financial year so as not to be downgraded to to junk status. Not just that, the Finance Ministry has also pocketed money raised from toll collections. Between October and December Rs 19 billion was raised from cess on fuel while Rs 8.75 billion was raised from toll. In the current year the National Highway Authority has received Rs 64 billion from a total of Rs 102 billion which is estimated to be raised from cess and Rs 18 billion from a total of Rs 38 billion estimated to be raised from toll. So the present shortfall is running at Rs 58 billion. The Road Transport and Highways Ministry wants the money to be paid immediately and has reminded the Finance Ministry that this is earmarked for specific projects and cannot be treated as general tax collection. Meanwhile a report by India Ratings has warned that banks are raising money through short term loans but lending long term for infrastructure projects which will cause financial stress on banks and lead to interest rates remaining high. Since most of the large banks are owned and controlled by the government we wonder if they are being pressured to do so. The Reserve Bank is under intense pressure to reduce interest rates and newspapers have been predicting a decrease of 25 basis points everyday for weeks. Politicians are hoping that most loans will be restructured at the lower rate thus relieving pressure on banks. But 25 basis points is too little to help bad loans but large enough for depositors to look at different assets as inflation is still at 10%. To stop people from turning to gold the government has raised tax on gold from 2% to 6%. Try to fill one pothole in the economy and a hundred new ones appear. What a circus!