governance, political economy, institutional development and economic regulation

Archive for January, 2018

Sustaining growth in an unfriendly world

unfriendly

Put it down to the heavy snow in Davos or to a rare case of blunt honesty by an international agency. Whilst sharing the good news of the revival of the world economy in 2017 and its expected continued growth till 2019 at 3.9 percent, Christine Laggard – the IMF Managing Director, cautioned that 20 percent of the developing world was not part of that revival, tempering the WEF celebrations with sobriety. Latin America and resource dependent economies, had suffered negative growth, even in 2016.

India’s growth angst

India’s angst is real with growth dropping to 6.5%, versus the 7% plus real growth of recent years. We are new to this business of high growth. The two decades from 1980 to 2000 only had a growth rate of 5.7 percent per year. It is only post 2000 that a growth rate of 7 percent per year become part of our expectations. In comparison, China’s high growth period of 8 plus percent per year – with minor annual deviations – began in 1977 and continued for over three decades till 2011.

Trade liberalisation and world growth – China timed it right

The 1970s and 1980s were a good time to grow. Under the General Agreement on Trade and Tariffs (GATT) the Kennedy, Tokyo and Uruguay rounds of negotiations (1963 to 1993) reduced average tariffs from 22 percent to 5 percent. World exports as a share of world GDP increased by 40% between 1972 to 1982 (from a level of 14% of world GDP to 19%). Over the next two decades, till 2002, world exports further increased by nearly one third to a level of 25% of world GDP. The bulk of Chinese growth happened during this period of trade liberalization.

India – a growth laggard, got the timing wrong

India lost the favourable two decades from 1962 to 1982 to domestic political headwinds. We liberalized, tentatively, from 1985. But reform put down roots only from 1992. By then world growth had tapered off. During the quarter century after 1992 till 2016, only in four years, did the world grow at 4% per year or more. In the quarter century before 1992 there were 14 years when growth exceeded 4% per year with 1964 being the high point at 6.7%. India has struggled against the declining trend in world growth to pull itself up. Fresh challenges can be expected over the next decade.

Can India replace the broken “open economy” model

The world grew rapidly using the “open economy” model over fifty years till 2008. Is it now broken? And did rising inequality within economies kill it? And are we now left only with the long, dark alley of “directed Chinese capitalism”, as a viable “growth model”?

Yes it can, if only we collected more tax revenues

India can offer an alternative model aligned with the “open economy, freedom, democracy” matrix, if we can boost our tax to GDP ratio to generate the resources required for “sharing growth”. The combined revenue receipts, in India, of governments at all levels is 22% of GDP.

Meanwhile public outlays are critically short in health by 4 % of GDP; education by 3% of GDP; infrastructure by 3% of GDP and defence by 2% of GDP. This adds up to 12% of GDP.

Around one third of the additional fiscal resources could come from continuing to grow at 6% per year – an achievable target. Another one third could be met from non-tax receipts like from privatization and savings on pro-poor subsidies by targeting and distributing them better, including digitally. But we cannot escape increasing our tax to GDP ratio (all of government) to 26 % of GDP.

The broad anti-corruption framework offers hope

The drive against corruption; stricter adoption of banked transaction norms and the increasing popularity of digital transactions and online marketing are expected to ensure that tax collection in fiscal 2018 meets the budgetary targets of Rs 19 trillion (including state share of Rs 6.7 trillion).

This is despite a reduction in the budgeted nominal growth of GDP over last year from 11.8% to 9.5%. This buoyancy gives hope that continued rationalization of tax rates; improved assessment and review processes and fairer and faster settlement of tax cases will induce better tax compliance.

Specific incentives for officials can seed growth filters in local decision making

We should learn from China how to devise local incentives for enhancing revenues. 99% of the 50 million Chinese officials are locally recruited and are never transferred away. They are truly a “permanent” bureaucracy.

Secondly, a significant part of their pay is linked to the fiscal health of their local unit. A healthy unit means higher bonuses and benefits for employees. Fiscal downturns bring austerity even in the take home benefits for employees. This close and sustained identification of officials with local offices and the localities where they exist, creates a shared bond between citizens and the officials – all of whom sink or swim, together.

Recruit officials locally & keep them there, for better identification with local needs

In India, officials are birds of passage, even at the village level. Their take home pay and benefits are completely unlinked to the fiscal health of the local office or the locality they serve in. It is no surprise then that rent gouging is widely prevalent with no concern for making the locality or the employing organization fiscally healthy.

“Authoritarian” China is effectively more decentralised than “democratic” India

The Chinese government does not habitually, bail out bankrupt local governments. They must work themselves out of the holes they dig for themselves. At the same time, the government does not hesitate to formally allow policy departures, at the local level, driven by exigency. Ironically, this makes “authoritarian” China, extremely decentralized and participative, whilst India – part of the “free world”, looks hopelessly rigid and centralized in general. We must build up the bright exceptions.

PARAM IYER

 

No job is too dirty for me

Parameswaran Iyer, Secretary, Government of India, a sanitation specialist, recruited from the World Bank,  walks the talk, by demonstrating that composted pit latrines are no longer dirty. Commitment to field level results and competence in action.

 

Resilience to overcome future challenges comes from open-order economies, promoting innovation and flexible structures

The WEF has cautioned that the near-term future is full of security, climate, technology and economic risks. They advise that resilience is the best antidote to risk. For complex organisations, enhancing resilience means embedding flexible, modular structures and business relationships, which allow the freedom to alter the scale of operations to fit demand and to cultivate innovation and the capacity to work at “the edge” of the frontier. Tellingly, none of this is aligned with a heavy top down, centralized, cookie-cutter, approach. Change is upon us. We must bend lest we break.

Adapted from the the author’s opinion piece in TOI blogs, January 28, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/sustaining-growth-in-an-unfriendly-world/

Fiscal 2019 -what the tea leaves foretell

Jaitley Adhia

The four years since 2014 have been chock-a-bloc full of fiscal and financial reforms. India needs a rest from such frenetic reforms. It’s time to take a deep breath, consolidate and pull all the loose strings together. One hopes that fiscal 2019 (April 2018 to March 2019) is devoid of breaking news, dull as ditchwater but fulsome in terms of outcomes.

Full marks for restoring fiscal stability

The most successful reform of the Narendra Modi government has been the restoration of fiscal stability. The Union government’s fiscal deficit is down to the targeted 3.2 per cent of GDP this fiscal (2017-2018), from a high of 6.5 per cent in fiscal 2010, post the 2008 financial crisis. The revenue deficit has similarly trended down to 1.9 per cent of GDP. Consumer price inflation has been tamed at sub four per cent. This achievement burnishes the credibility of the government’s fiscal management.

State governments get a bigger share in revenues, now also spend more

Significantly, fiscal discipline was enforced despite a reduction in the net tax resources. The 14th Finance Commission had enlarged the share of state governments, in the divisible pool of Central taxes, to 42 per cent from 32 per cent effective from Fiscal 2015. State government expenditures have consequently increased rapidly.

State governments now collectively spend 87 per cent more than the Union government (Mishra and Singh, NCAER 2017) compared to just six per cent more in 2011. Some of the increase was due the UDAY scheme for restructuring electricity utility by state governments absorbing their debt of around Rs 1.4 trillion, in 2016 and 2017. The collective state government fiscal deficit ballooned from less than two per cent in 2012 to nearly 3.5 per cent of GDP in 2016.

Tax receipts have been stagnant at 11 percent of GDP

Tax receipts have been a traditional fiscal Achilles heel. Union government tax receipts are near stagnant at around 10 to 11 per cent of GDP. State governments additionally collect six to seven per cent of GDP as taxes. But there is a silver lining now. The Goods and Services Tax is likely to disrupt this placid tax regime, because it introduces positive incentives for paying taxes via the tax credit provisions. Honing the multiple GST rates to the specificities of India’s political economy will remain an ongoing exercise. Once the tax revenue stabilises, the government could consider reducing the multiple tax rates, thereby harnessing the efficiency gains of simplification.

Direct tax collection over the first three quarters of 2017 grew at 18.2 per cent over the previous year, versus a target of 15.7 per cent, courtesy the clampdown on cash transactions. India’s direct tax rates are not extortionary. There is little scope to provide tax breaks. In fact, existing tax breaks could be ended, like those for capital gains on equity held for just one year. The stock markets are defying gravity. So, this is a good time to tax capital gains.

A tax on capital gains in equity offers revenue potential

It is nonsense to argue that taxing capital gains on equity is double taxation because corporates already pay tax on income. Yes, taxing dividend distribution is double taxation and wholly unjustified without allowing credit on the corporate tax already paid. But capital gains relate to the market value of a share – which has many more determinants than the book value of the share. Taxing capital gains on equity also aligns with reducing inequality.

But more generally, a consistent rules-based, capital gains regime across asset classes is required. The current tax rate on long-term gains, other than equity, is 20 per cent. Short-term gains are taxed at the applicable income-tax rate. The case for taxing capital gains at a lower rate than income, is sound — it provides an incentive to take risk and invest. Inflation indexation of the capital gains and a common tax rate of say 10 per cent — across asset classes, would be eminently sensible.

We could step up social sector expenses if only private investment built infrastructure

India spends very little on education and health. While throwing money at either is not guaranteed to improve services, low allocations are a serious constraint. More fiscal space could become available for social sector spend, if private investment and management could do the heavy lifting in infrastructure and manufacturing. State-owned enterprises are strewn across transportation, telecommunications, power, coal, oil and gas, steel, metals and other minerals. Nearly all could usefully be privatised and the capital receipts utilised more gainfully in core sovereign areas. But India’s political economy has, for long, enshrined the perks and patronage, derived from public ownership of industries, as the fruits of being in power.

What about the quality of expenditure? Capital expenditure lagged, and revenue expenditure surged during the period 2010-11 to 2014-15. Under the Modi government this trend has reversed. Capital expenditure has increased from a share of 12 per cent till 2014-15 to 14 per cent. Simultaneously, the Central revenue deficit has decreased from 3.1 per cent of GDP in fiscal 2014 to 1.9 per cent in fiscal 2018.

But private investment has dried up from fiscal 2016. Plagued by 14 per cent of stressed loans, banks focused on damage control adversely hitting new lending. The “twin balance sheet problem” of banks and their defaulting borrowers needs faster summary resolution for results.

Solutions must be found for alleviating poverty — one-fifth of our citizens remain poor and another one-fifth are vulnerable to poverty from shocks. Inequality is increasing. This reduces aggregate demand in the economy. Demonetisation and the attack on corruption has subdued consumption and investment, till businesses adjust to the new operational constraints.

80% of the poor live in rural areas – income support can increase demand

There is a general expectation of sops from Budget 2018-19 in view of the impending elections. Finance minister Arun Jaitley is sure to resist this temptation. However, he might be tempted to withdraw subsidy benefits from urban areas, where incomes are higher and employment more easily available. The subsidy burden on food, cooking gas and fertiliser is an unsustainable two per cent of GDP — principally because it is badly targeted and inefficiently spent.

Rural distress and poverty far exceeds that in urban areas. Indeed, entrepreneurial rural folk access urban areas for employment, medical help and higher education. In rural areas, a phased switchover to direct cash transfers for BPL families is required. This will stimulate rural markets, provide flexibility to the beneficiaries and reduce the deadweight loss of high transaction costs.

whale spout

The finance minister is fiscally bound this year, not least because the GST is performing below expectations. He should frankly admit that the economy needs breathing time, before the numerous reform steps deliver results. In the meantime, keep breathing, if you can.

 

 

Adapted from the author’s opinion piece in The Asian Age January 22, 2018 http://www.asianage.com/opinion/columnists/220118/reading-the-tea-leaves-as-fiscal-2019-looms.html

Supreme Court – between a rock & a hard place

supreme-court

Chief Justice of India Dipak Misra and the four judges who went public  Justices N. Chelameswar; Ranjan Gogoi; Madan B. Lokur and Joseph Kurian.  Photo courtesy Freepressjournal.in 

 

………will bear true faith and allegiance to the Constitution of India as by law established, that I will uphold the sovereignty and integrity of India, that I will duly and faithfully and to the best of my ability, knowledge and judgement perform the duties of my office without fear or favour, affection or ill-will and that I will uphold the Constitution and the laws.

The Oath of Affirmation for Supreme Court Justices 

The Supreme Court is a solemn place, as if in mute recognition, of the enormous faith reposed by 1.3 billion Indians in it’s 25 Justices to safeguard democracy.

But last week it was thrown into a tizzy, as four senior-most Justices of the Court, adopted Gandhiji’s tactics of “direct action” and went straight to the people of India with their anguish. So deep was their despair that they bared their anguish in public at a press conference and released a letter they had addressed to the CJI, adding that they had tried to settle the matter internally, by talking to the CJI, who apparently gave them short shrift. The cause of their worry is that the Chief Justice was using his traditional discretion in allocating cases amongst judges, to direct “politically sensitive” cases to judges who could be expected to rule in favour of the government.

Prising open the clannish Supreme Court of India

Indian Supreme Court is notoriously clannish. A “collegium” of the CJI and four senior-most judges, recommend new judges for appointment to the higher judiciary. The process is opaque. The President of India -ergo the government of the day – must formally approve the appointment. This provides an opportunity to the Government to hold up an appointment. But it cannot appoint a judge by itself. This system dates back two decades when the Supreme Court ruled, in 1993, that the power of appointing a judge was inherent to its ability to safeguard the basic structure of the Constitution – its key mandate.

Failed attempts to democratise the appointments process

The earlier UPA government and subsequently the Modi government sought to substitute the “collegium” with a Judicial Appointments Commission comprising the CJI and two judges of the Supreme Court, the Law Minister of India and two eminent persons appointed by a committee consisting of the CJI, the Prime Minister and the Leader of the opposition in the Lok Sabha. The act was approved in both houses of the Parliament and by a majority of state legislatures, as is required for a constitutional amendment and notified as the National Judicial Commissions Act 2014.  However, a five-member bench of the Supreme court struck down this amendment to the constitution on October 16, 2015, thereby restoring the “collegial” appointments” system.

Justice J.S Kehar who led the bench striking down the Act went on the become the Chief Justice of India under the Modi government, as observers hailed the victory of the rule of law, constitutionality and the preservation of the fundamental principle of separation of powers in a democracy. The Modi government silently licked its wounds. But recompense was not long in coming.

The “collegium” system is not fail-safe

CJI Kehar retired on in September 2017 and the senior most Justice Dipak Misra was sworn in as the CJI on August 28, 2017 per precedent in the “collegium” system. On Friday last, the earlier supporters of the collegial system of judicial appointment were on their feet again, this time praising the four judges, who had saved democracy and lauded them for their courage and resoluteness in coming out in the open against the CJI chosen by the very same collegial system.

This just doesn’t square. So, lets assume, for arguments sake, that the CJI was sending “sensitive” cases to judges, whom he felt would decide them in a particular manner. What were the possible options available to the four judges?

Hierarchy and faux seniority rules the Supreme Court, rather than genuine collegiality

Clearly the first was to have a chat with the CJI and apprise him that they took a dim view of what he was doing. The judges say they did do that. But when nothing changed they decided to go public with the amorphous charges.

It is pertinent to ask, why they never sought to rally around them, their brother judges. There are 25 Judges in the Supreme Court. Why could they not convince the 18, or so, other “uncommitted” judges, that something needed to be done? Surely, if the four judges had managed to get an additional 10 judges around to their point of view and had they put up a common viewpoint to the CJI, the outcomes could have been different.

Why did only one, of the five Justices, who, are slated on seniority, to become CJIs till 2024, speak up?

One of the four judges, who went public, is Justice Ranjan Gogoi, who is set to take over as CJI, once the present CJI retires, in October 2018. Why did they not similarly try and get the four other Justices who can become the CJI all the way till 2024 converted to their cause? Sharad Arvind Bobde – due to become CJI in November 2019; N.V. Ramana – due in April 2021; Uday Umesh Lalit – due in August 2022 and D.Y. Chandrachud – due to become CJI in November 2022. Was it because these judges did not feel similarly oppressed? If this be the case, it significantly takes away from the bite of the allegations voiced by the four judges.

Justice Gogoi- a profile of passionate courage or a lightning rod of deep dissent?

Justice Ranjan Gogoi has certainly put his neck on the line by disrupting the placid exterior of the Supreme Court. He has also certainly riled the government. Readers may recollect that Justice Khehar, the previous CJI had also riled the government, by heading the five-judge Justice bench which totalled the NJAC Act. He became CJI nevertheless. The Judiciary and the Bar have aligned view-points which are penetrable only by insiders.

It is unlikely, that, Justice Gogoi would have gone public without consulting with and getting the support of his brother judges and the Bar. Even Supreme Court Justices are human and are allowed a touch of self-preservation. More important they are expected to be rational, sans emotion, with their heads ruling their hearts.

Does this imply that dissatisfaction, with the administration of the Supreme Court, runs deep within the brotherhood? Also does this not show that the judiciary needs to change with the times?

Good governance is about narrowing discretion, even in the Judiciary

Specifying the procedure for case allocation narrowly, rather than leaving it to the discretion of the CJI, would be a good start. Cases can be randomly allocated, using a specially designed algorithm, since all the Supreme Court judges have the same status and come to the court after years of experience. Most importantly, if the “collegial” system is not fool proof in selecting judges true to their salt, why not try the collaborative approach of the NJAC. After all, Justice N. Chelameswar, one of the four judges, wrote the dissenting judgement supporting the NJAC. No one arm of the State has a monopoly on virtue.

 

Also available at TOI blogs January 18, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/the-supreme-court-between-a-rock-and-a-hard-place/

Modi@Davos – Jawboning the future

Davos

Even as Prime Minister Narendra Modi will be winging it to frosty Davos for the World Economic Forum’s annual meeting next weekend, his bete-noire — Congress president Rahul Gandhi — has decided to be different and spend the coming week in his parliamentary constituency of Amethi, in rural Uttar Pradesh. Both seek inspiration and support. But from very different sources.

A shared future less likey than a dystopian nightmare

famished

As usual, bombast is expected to rule at Davos. Consider the title of this year’s meet — “Creating a Shared Future in a Fractured World”. It completely obfuscates the fact that everything the world has done over the past 40 years has conspired to keep the majority share of the fruits of development within the elites. The rising inequality and congealing wealth at the very top is witness to the failure of the open economy model to deliver growth benefits across the population. China’s President Xi Jinping contested this proposition in his address at Davos last year. Yes, China has lifted 700 million people out of poverty — more than any other nation. But relative poverty has increased even in China.

As if this was not enough, automation and artificial intelligence shall, over the next two decades, push ever greater masses of unfortunates outside the virtuous cycle of income enrichment. This is a prime concern for India, with 60 per cent of our current population less than 31 years of age.

It doesn’t end there. Once we create this dystopian world in which the few, engaged humans work within an insulated eco-system of high tech, the large mass of humanity will be on the outside looking in. They would be fed by subsidies thrown at them. Consider that block chain if applied widely to everyday transactions can scupper the employment of auditors, accountants, lawyers and judges — all of whom earn a living out of the problem of authenticating facts. Possibly, the efficiency benefits of automation may be high enough to finance generous handouts to the losers. But it would be a sorry society surviving on aid, rather than individual effort. We know already how debilitating aid dependency is.

This model of growth is not sustainable and needs to be junked. But it is unclear what should replace it. Davos is unlikely to help in that direction. There is never time at Davos to get beyond the breaking news.

The silver lining – WEF exaggerates the fear of a fracturing world

Consider also the assertion that the world is a more fractured place today that it was a few years ago. Nothing could be further from the truth. Just last year at Davos, China, a habitual outlier, took the lead to reinforce the need for world integration. Compare this with the China of just 40 years ago — which was not even a member of the World Bank, and which joined the World Trade Organisation only in 2001. The rapid increase in the share of domestic GDP exported today is another indication that the world has shrunk, not fractured.

Show me the money

Davos is more about striking deals than philosophising about the world order. Prime Minster Modi is a consummate deal-maker. So, expect some significant commercial action at Davos. After all, Davos is not the United Nations, where nations talk at each other. It is a forum for leveraging business opportunities through public-private partnerships.

India a leader in frugal innovation

Frugal

India has already thrown its hat into the ring of frugal innovation in space technology, with our Mars mission. Davos would be a good opportunity to emphasise the peaceful development of missile technology by India — in stark and sharp contrast to China, Pakistan and North Korea.

Unparalleled deep fiscal and institutional reform

No country has taken steps, on the scale we have, to root out corruption using digital technology, banked transactions and the Goods and Services Tax. These have together negatively impacted economic growth in the short term. To be sure, there have been glitches along the way. But steadfast remedial action is delivering financial inclusion for all. This is more than just an economic revolution since it goes to the heart of culture and social practices.

Conquering terror

Mr Modi was one of the first to warn the developed world that terrorism was a hydra which strikes rich and poor alike. India has for long suffered cross-border terrorism, which seeks to incite an alternative religious reality to Indian Muslims, who are a significant minority. India’s foundations are secular.

India is quintessentially liberal and entrepreneurial.

India was a secular country even before the term “secular” was inserted, somewhat unnecessarily, into the preamble of our Constitution in 1977, during the Emergency, by then Prime Minister Indira Gandhi. Also, despite the term “socialist” having been inserted into the Constitution at the same time, India has never been a Socialist country.  Land ownership has always been personal in India. The concept of property rights is deeply embedded into our culture. The state-owned industrial monoliths — the visible outcomes of “socialism” and the entire employment in the government sector, has never exceeded around five per cent of total employment. If there is one thing India is known by it is the spirit of entrepreneurship. The government is trying to liberate “animal spirits” through light touch regulation, the rule of law and supportive infrastructure.

Can POTUS & Modi queer President Xi’s, 2017 play as “leader of the world”

POTUS

US President Donald Trump seems to have upset Prime Minister Modi’s moment at WEF. The ebullient and volatile POTUS is likely to garner all the sunshine. But Mr Modi is sure to use their joint appearance at Davos. He will fashion events and his remarks in a manner which point to a genuine partnership between the United States, Europe, Japan, Southeast Asia and India. Together, these economic actors contribute nearly two-thirds of the current world GDP. More important, they share some institutional and cultural attributes, which even by the jaded standards of today, can be called morally superior — like due regard for citizens’ rights and a commitment to enhancing the transparency with which the State functions.

Some homework may show that India walks the talk on shared growth

sharing

Davos will be a tough challenge for Prime Minister Modi. He needs a credible story to explain why growth — the holy grail of the Davos crowd — has lagged in India even as growth has picked up world-wide. It would be great if he could substantiate that while headline growth has lagged, shared growth has increased, particularly if the 116 backward districts (out of 593 total districts in the country), identified by NITI Aayog have, contributed more than their share in GDP to growth.

That, after all, is the growth model the World Economic Forum is looking for.

Adapted from the author’s opinion piece in The Asian Age January 13, 2018 http://www.asianage.com/opinion/oped/130118/modidavos-a-new-kind-of-challenge.html

Fiscal 2018-19: Revive shared hopes

shared growth

Normally, the fate of the next fiscal is sealed even before the year begins. Barring windfall gains, the economic engines of value addition are quite stable — business keeps running and salts away its surplus; the government similarly keeps churning out public goods; and individuals — particularly us Indians — keep squirrelling away something for a rainy day, even out of our meagre earnings. But who can predict shocks?

But India is vulnerable

oil 2

India remains very vulnerable to external shocks — changes in the price of oil, the monsoon, the cost of guarding against external aggression, the state of the world economy and domestic events — more specifically elections, as these take away whatever mindspace the politicians have for sustainable development.

Fiscal 2019 will be election fodder

Fiscal 2018-19 is littered with state-level elections followed by the national general election in the first quarter of the next fiscal. Consequently, expect “plug the hole” type of fiscal tactics to be rampant in the government. Borrowing from banks to invest back in them is one such tactic to stick to the targeted fiscal deficit. Borrowing long but promising to liquidate short-term liabilities is another. This is great fiscal accounting. But that’s where it ends.

Growth data just one metric of government performance

There is a world, beyond the fiscal math, in which we all live. Did you feel the change economically in 2014-15 when economic growth jumped from 4.7 per cent in 2013-14 — the last year of the UPA government — to 7.4 per cent — a jump of nearly three percentage points?

Narendra Modi

Yes, our hopes soared with Narendra Modi’s elevating optimism and high energy. Yes, he made us believe in the future. We felt that we had put a large part of our colonial baggage behind us. But at the ground level, nothing much changed because GDP growth data is just that — numbers which are useful for nerds to track policy impacts and take corrective actions. It’s like the speedometer on your car. It can tell you when you rev up or slow down. But it tells you very little about when you will get to your destination. So please don’t tie your dreams to data. Treat it with the caution it deserves.

Ignore rarified metrics – the stock market & growth, focus on your economic reality

Fiscal 2017-18 will end with a real GDP growth of 6.5 per cent, helped by low inflation, versus 7.1 per cent last year. If you didn’t notice the upswing in 2014-15, you are unlikely to be substantially affected by this year’s downtick. Or for that matter by the uptick to seven per cent growth next fiscal, as the “satta market” for growth (if there is one) would predict. The stock market valuations, as measured by the Sensex, rose by 29 per cent over 2017 with just 6.5 per cent growth. Consider also that the market capitalisation of the top 10 family-owned business groups rose by 46 per cent. Clearly, the business biggies don’t live or die by GDP growth data, so why must you? Far better to hone your own tunnel vision of the economy — real stuff which matters to you, and leave growth rates to the genteel debates between the macro policy wonks.

Telescope 2

If you are one of the 20 million students graduating next year, judge the health of the economy from the availability of jobs. For 118 million farmers, who eke out a living on land holdings of less than two hectares, keeping a lookout for the timing and adequacy of the monsoon means much more than GDP growth. For 21 million large and medium farmers, who account for the bulk of the surplus food grain produced after meeting the needs of the family, it’s the government’s minimum support price for your produce, the cost of fertiliser and availability of water and electricity, which will determine your well-being. The point is that each of us has a specific reality which is only loosely tied to the GDP growth data.

Tying our well-being to the GDP growth rate is seeking false comfort when the numbers rise and equally false despair when they fall. The last two fiscals have been costly. Demonetisation in the third quarter of fiscal 2016-17 and implementation of the Goods and Services tax in this fiscal year were both major disrupters for businesses and their employees. But these are behind us now.

Reduce income tax rates at the lower slabs to compensate for tax reform related pain  

Over time, business entities who survived earlier by not paying tax will disappear. They will be substituted by more efficient, possibly scaled-up substitutes. But all that will take time, well beyond the next two fiscal years. Till the efficiency impacts of tax reforms kick in, the government must take steps to insulate citizens from the pain, just as it held state governments harmless — by insuring them against a fall in their tax revenues.

Paytm

Citizens, particularly those who took to digital payments and bank transactions with gusto, find they now pay, not only the GST, but also the income tax (possibly never paid before) of the seller. Direct and indirect tax rates must be reduced to keep household budgets stable, till the efficiency impacts of tax reforms kick in.A fiscal bridge is necessary.

Overshooting the fiscal deficit target is ok to preserve capital outlay

Reforming governments factor in fiscal turbulence. If reform translates into collateral pain for consumers, it is dead in the water. We are battling a perfect storm of reforms — restoring the health of banks; reforming the tax structure to improve compliance while reducing transaction costs and dealing with the additional costs of mitigating climate change. It can’t all be done painlessly.

This pain must be shared. The government must abandon its managerial instinct to stick to the budgeted fiscal deficit target of 3.2 per cent this year — in fact it already has. For the next fiscal, the “glide path” for the fiscal deficit must be kept stable, as advised by the majority opinion in the N.K. Singh Committee on Fiscal Reform. Even at 3.5 per cent, the fiscal deficit will be 15 per cent (0.6 basis points) less than the 4.1 per cent achieved in 2013-14. When the facts change, one must change one’s opinions and tactics. That’s the way to shared growth.

Adapted from the author’s opinion piece in The Asian Age, January 6, 2018 http://www.asianage.com/opinion/columnists/060118/be-flexible-on-reforms-ensure-pain-is-shared.html

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