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Bimal Jalan reflects

Jalan book

 

exercises the writer’s privilege to box his reflections between three inflection points. The first is 1980, ostensibly because 1977-79 was the first time the Congress lost power at the Centre. The second is 2000, being the start of a new millennium. And 2014 is the bookend when the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) formed a majority government.
Obscure inflection points
Of these, the choice of the first two years as turning points is not immediately obvious. Conventional wisdom regards 1991 to 2014 as a near continuous development period, barring the fractious interregnum of 1997-99. In the 1980s, it is 1984 that dominates, as the end of an era with the assassination of Indira Gandhi and the beginnings of Rajiv Gandhi’s brief “Camelot” phase. The year 1980 is significant only because Sanjay Gandhi died in an air crash in June and Mrs Gandhi aged visibly. The choice of 2000 is similarly obscure, except for broadly coinciding with the start of Atal Bihari Vajpayee’s NDA government.
Dr Jalan – man for all seasons
But this is mere quibbling. The book is unconstrained by structural rigidities. It provides reflections, spanning Dr Jalan’s seven earlier publications since 1992.  It can’t get better. Dr Jalan was in the Rajya Sabha (2003-2009); the longest serving governor of the Reserve Bank of India (1997-2003) since 1992; finance secretary; secretary banking, chief economic advisor and India’s executive director to the IMF and the World Bank.
Seven key reflections
Readers would choose their own favourite reflections. But this reviewer was intrigued by the following seven.
Low public savings retard investment 
First, Dr Jalan favours the conventional view that the persistent gap between India and the fast-growing economies of Asia during the last four decades of the 20th century is explained by our low levels of investment. For this he squarely blames our ideological decision to invest in public sector industries, which failed to generate savings for future investment and instead bled scarce tax revenue to fund financial losses — a familiar story even today.
Colonial style administration ill equipped for challenges
Second, he red flags the fact that from the 1970s, we did very little to enhance the competence and efficiency of public administration. We still lack the required composition of skills and experience in the public space to provide 21st century results.
High expectation, poor execution
Third, he bemoans the fact that we unfailingly adopt best practice priorities — take the national priority for agricultural growth. But we fail miserably in making supportive policies and rules. We have throttled agriculture by ignoring the interest of the farmer to serve the interest of the consumer. Similarly, we prioritise a progressive fiscal policy. But the revenue from direct taxes stagnates while regressive indirect taxes are buoyant.
Sustained, high growth misaligned with political incentives 
Fourth, Dr Jalan’s term in the Rajya Sabha convinced him that deep political reform is the key to change India. And who could disagree? But some caveats apply. Decentralisation, as flagged by Jalan, is certainly desirable for enhanced effectiveness and public participation. But, it will not, by itself, serve to reduce the size of government. In fact, employee numbers and expenses are likely to increase as scale effects disappear.
Union government muscularity erodes state government autonomy 
In a similar vein, it is true that the Union government tends to erode the federal structure by misusing governors for narrow political ends. But constitutionally, we are a “Union of States with a centrist bias”, per political pundits, and not a federal state. Parliamentary norms and conventions are routinely subverted — a self-goal, since this reduces Parliament’s credibility.
Dysfunctional parliament erodes its own credibility
Dr Jalan cites 2006, when the budget was passed without discussion, illustrating political expediency of the worst kind. But it is open to question whether the existing process for annual Budget presentation and examination remains a productive exercise or has become mere form without substance. The cabinet system of decision-making, underpinned by the principle of collective responsibility, was undeniably subverted during the United Progressive Alliance government, since political power was dispersed beyond the government. But this was poor practice rather than a structural flaw. And it appears to have healed itself after 2014.
Judiciary – safeguarding the constitution 
Fifth, the judiciary, rightly, comes in for high praise, for progressive jurisprudence, safeguarding the principle of separation of powers, and the primacy of the Constitution. But entrenched territoriality in the judicial appointments process remains contentious.
Public sector banks – out of control
Sixth, Dr Jalan recounts, financial reforms after the Narasimham Committee report of 1998 enhanced the resilience of Indian banks. But he leaves the reader begging for more on what went wrong over the last decade to inflate stressed loans to crippling levels. Are not politicised leadership and boards the problem in public banks? And given the stakes, can UPSC selection – as Dr Jalan suggests – really be an effective bulwark? Would not ramping up private shareholding, with the government holding only a “golden share” be a more effective solution? More generally, how effective are the existing prudential norms, for limiting exposure to sector, corporate or currency risk?
Tax reform – only half done?
Seventh, Dr Jalan’s view that it is unnecessary to reopen the constitutional scheme for inter-governmental division of taxes is curious. Tax pundits advocate that GST be extended to alcohol and petroleum.
jalan 2
It is a broad canvas on which reflects, as befits one who has helmed public policy since the 1980s. Readers will look forward to his take on the more recent developments — that is, since 2014.

 

Adapted from the authors Book Review in Business Standard, September 18, 2017 http://www.business-standard.com/article/beyond-business/bimal-jalan-reflects-117091801405_1.html

 

Will NITI get it’s hands dirty?

Rajiv-Kumar-NITI

Rajiv Kumar, the new vice-chairman of the Niti Aayog, has made development of an organic, Bharatiya model of development as his mission. He is likely to encounter three problems in this endeavour.

A new, local model of development is doomed from the start in a globalised world 

farmer 2

First, in a post-ideology world, marked by rapid technological transformations, economic models become outdated even before they can be tested. In these uncertain times, feeling the rocky river bed with one’s feet carefully, while crossing turbulent economic and social currents, seems the wisest option.

Second, isn’t this what Bharat has always done. We have been obsessive about the “uniqueness” of India, which seemingly requires all international experience to be adapted for use locally. This is not necessarily a bad thing, though it has its downsides.

Scaling up rapidly more important than localisation

school lunch

Consider that in the five decades after Independence we have stuck, like leeches, to the Nehruvian development model of ersatz socialism based on a massive industrial public sector accompanied by the outrageous neglect of agriculture, private enterprise or international quality education and health facilities. This, when most other emerging countries, in East Asia, Southeast Asia and Latin America, switched over to a modified Anglo-Saxon, neo-liberal strategy from the 1970s and reaped the benefits of rapid growth.

To be sure, even after 1991, the reform model we followed was Bharatiya. Its core ingredients were incremental rather than big-bang reform — a strategy Russia followed with disastrous results — and careful sequencing of sector reform to minimise the pain from reforms.

It is unclear, however, whether Bharatiya incrementalism helped the poor. Chancel and Picketty (July 2017) estimate that over the period 1980 to 2014 the share of growth accruing to the bottom 50 per cent of adults was 11 per cent in India; 13 per cent in China and only one per cent in the United States. Meanwhile, the top one per cent of adults garnered 29 per cent of the growth in India. China did better by containing the share of this segment at 15 per cent, while the US did worse at 34 per cent. More worryingly, the next nine per cent of adults, from the top, garnered 37 per cent of growth in India, significantly more than in China (29 per cent) and the US (32 per cent). Where we failed spectacularly was in protecting the middle 40 per cent of adults, who got only 23 per cent of the growth versus 43 per cent in China and 33 per cent in the US.

Be shrewd and businesslike not ideologically shortsighted

One Bharatiya innovation which succeeded spectacularly was the phased introduction of currency and capital convertibility. This modified-market approach was validated by India escaping the ill-effects of the 1997 East Asian currency crisis. It is significant that Malaysia followed our innovative approach, endorsed by Jagdish Bhagwati, by reimposing capital controls after 1997, and Iceland did similarly in 2008.

Similarly, our choice of shying away from “big bang” privatisation of the public sector, unlike Latin America in the 1980s and Eastern Europe in the 1990s, worked well. We chose instead to liberalise controls over private investment, thereby enabling private companies to grow and compete with the public sector. This strategy has paid dividends in civil aviation, telecom, minerals and electricity generation. Incremental private sector investment now dominates these sectors and a competitive market-based economy has emerged.

Simultaneously, we contained the social cost of reforms. But a similar policy has not worked in banking. We were too hesitant to give up the political power which comes with the government owning public sector banks. Private banks today account for just one-third of banking assets. The massive economic problem of stressed loan accounts, amounting to around 14 per cent of publicly owned bank assets, is a consequence of our not following through by liberalising the financial sector. Bharatiyata has, unfortunately, become synonymous with crony capitalism in banking.

Aping the turtle gives time to pull a reform coalition together

The GST is operational today due to a strategy of incrementalism, driven by the need for building inter-government consensus. Early indications are positive both on the increase in revenue collected and the enhanced compliance by taxpayers. But the jury is out till the final results come in by April 2018.

In a nutshell, Bharat’s economic policies have always been unique and contextual. Some observers would even say we obsessively reinvent the wheel. It will thus be a tall order for the Niti Aayog to evolve a new Bharatiya model of development, which is completely unknown to us, or the world.

Don’t fix what isn’t broken

Third, do we need a new model of development? The existing model has served us well. The areas for deeper reform are well known and agreed. Indeed, many are already on their way. Hopefully the 15th Finance Commission will continue the task of decentralising fiscal resources, by increasing the share of devolved resources from the 42 per cent existing today towards 50 per cent. This would push the Union government to be more selective in its interventions based on the time-tested principle of subsidiarity — not doing anything that can be efficiently done at a lower level of government. The government is already allocating more resources to agriculture, education and healthcare, which had fallen through the gaps earlier, while also stepping up allocations for defence and infrastructure.

Avoid the temptation to centralise functions – There is enough to do for all.

At the helicopter level of grand plans and policies, there is no gap which the Niti Aayog can address. In fact, it would do well to exercise forbearance in areas where individual ministries are better equipped to take the lead. Where Niti can add value is in addressing the root causes of poor implementation. Tony Blair’s Service Delivery Unit did this to marvellous effect in the UK. Malaysia and Tanzania thereafter copied the template.

Check the plumbing in government. Massive efficiency gains are low hanging fruit

dirty

Niti should focus on the nitty-gritty of getting the plethora of good intentions, embedded in policies, implemented on the ground. This goes beyond close monitoring of targets or punishing laggards. The devil lies in clogged delivery chains, poor metrics to measure results and misaligned incentives, all of which need to be painstakingly mapped and then innovatively declogged. It’s a plumber’s job that needs to be done. Is the Niti Aayog willing to get its hands dirty?

Adapted from the authors article in The Asian Age, September 7, 2017  http://www.asianage.com/opinion/columnists/070917/is-niti-aayog-willing-to-get-its-hands-dirty.html

 

Privacy – an elite fantasy

privacy

Elite concerns are usually disconnected from the ground reality. For the 1 per cent of Indian who live privileged, cocooned lives, the judicial right to privacy created by the Supreme Court yesterday will add yet another layer with which they can insulate themselves from the “barbarians at the gate”. So, here is what the rich may now be able to do which they couldn’t earlier.

Is the right to euthanasia next?

First, they may now be able to refuse medical treatment and die in their beds, peacefully, instead of being compulsorily hooked up to tiresome, life-saving machines in hospitals. But try explaining this “right” to the millions of poor Indians for whom just getting admitted to hospitals is still a dream and refusing treatment would be unimaginable.

Deletable past lives

Second, the well-heeled may now be able to press for being judicially forgotten – all traces of their past lives and identities expunged, giving them a fresh start without having to flee to distant London or arid Dubai. Contrast this with the Herculean efforts the average Indian makes to become part of a database and have an officially recognized identity – a voter card, a passport, a PAN card, anything which proves that she exists.

LGBT sex may become legitimate

Third, those with alternative lifestyles – the Lesbian, Gay, Bisexual Transgender (LGBT) community might now hope to be free of the notoriously archaic Section 377 of the Indian Penal Code, which criminalizes everything other than straight sex. But would this give them the right to marry a partner of their choice; adopt children or be socially accepted?

Evidencing crime will become harder

Now ponder the downsides. Law enforcement agencies struggle to manage terrorism, Naxalism, urban mafiosi, drug pushers and armed rural gangsters even today. “Privacy” concerns will provide a legal shield to undermine information collection, crime detection and investigation. Nothing less than the over-the-top, draconian Armed Forces (Special Provisions) Act – used today only in the “disturbed” areas in Kashmir and parts of the North East – would be effective. Since gangsters can afford to hire the best lawyers, the violation of their fundamental right to privacy in the process of enforcing the law, will now become a favourite ploy to keep these worthies free to wreak havoc.

How intrusive is the Indian State anyway?

Will this fundamental to privacy help the 200 million slum dwellers or the unknown millions who sleep under the stars on urban streets? Is not our fear of the “big State” overblown? The India I know is under policed, under governed and under regulated. There is a plethora of agencies, laws and rules to bind down anyone and yet very few – mostly the timid, those mindful of their public image and the law respecting middle class get intimidated by the legal spaghetti. The rich buy their way out of any mess and the poor are so inured to danger and risk that it is second nature for them to live with uncertainty.

Biometric targeting of beneficiaries to be abandoned?

Take the case of Adhaar for verifying the identity of those using the Public Distribution System (PDS). Recent studies in Jharkhand by responsible social scientists – Jean Dreze and Reetika Khera – found that 15 percent of the eligible PDS beneficiaries were excluded because of technical glitches or access problems in using Aadhar as a test of identity. But 85 percent of the beneficiaries were targeted correctly. If the right to privacy eliminates the use of Adhaar, we will be back to what Rajiv Gandhi famously called the 25 percent approach to poverty reduction – where 75 percent of the funds are siphoned-off by intermediaries. How and why would a reversion to a system which has huge inclusion errors (ineligible people getting benefited) be any better?

Big data to be throttled?

Finally, consider how retrograde is the fight by “right to privacy” advocates against big data. It is big data – the billions of pieces of information on human behavior and preferences linked to specific human demographics, which enables algorithms to predict trends, thereby aligning products and services with customer needs. This is what makes big data commercially valuable. In price sensitive markets like India, telecom and e-commerce penetration is being driven by the potential to monetize big data. Putting brakes on this process means putting brakes on the rolling out of technology services which will become more expensive if the actual user is to pay for them.

India lost an opportunity in 2014 when facebook- Bharti Airtel wanted to roll out free internet services on mobiles. TRAI regulations ensured that this venture never took off, thereby slowing down internet access for all except the 300 million people in the upper most income segments who can afford it.

Tilting at windmills

Nandan Nilekani is now an evangelist against “digital colonialism” in the context of tech majors like Google and Amazon aggressively expanding their presence in India. We should be wary of tech industry insiders playing the “anti-foreign” card. Similar attempts were made by the infamous “Bombay Club” to scuttle the 1992 economic liberalization. Their contention was that liberalizing the domestic market was fine but Indian industry should continue to be protected from foreign competition. We are fortunate that the government of the day paid no heed to this self-serving agenda.

Keep India open for competition

India is a big economy with very shallow industrialization. We need to remain open to all economic actors – domestic and foreign who want to invest in India. It would be a huge mistake to emulate the xenophobia of the United States and draw up our bridges. Data is the new oil. Data security needs to be ensured, irrespective of whether data is stored in India, or overseas. But generating anti-foreign hysteria is not in our interest as we try to integrate into global supply chains and become a part of the global value creation eco-system.

It is easy enough to legislate rights. We have many notional rights. Creating a level playing field for all citizens to enjoy these rights, equally, is another matter altogether.

Also at http://blogs.timesofindia.indiatimes.com/opinion-india/privacy-an-elite-fantasy/

Indian Railways: Slow and unsafe

suresh prabhu

It seems to be raining rail accidents these days, with two in swift succession. The hapless Suresh Prabhu is a good general but an unlucky one. He made sweeping changes in Indian railways (IR) since November 2014 when he became Minister. Most dramatic was his willingness to diminish his “empire” by merging the rail budget with the national budget. Similarly, far reaching was his delegation of financial powers for purchase and contracts away from the moribund Railway Board to the General Managers of the sixteen different railway systems which manage operations. Good management practise, yes. But more importantly it severed the ministerial potential for graft. Not many ministers have done similarly elsewhere.

Suresh Prabhu – a good but unlucky minister

Mr Prabhu has offered to resign owning up moral responsibility. Prime Minister Modi may have to let him go, reluctantly. Such is the dharma of politics. Having another accident on his watch would be unacceptable! Of course accidents are unlikely to stop merely by replacing the minister. Data collected by the National Crime Records Bureau records that in 2014 IR suffered 28,360 accidents or 78 accidents per day. So the chances of an accident happening, anytime, are high.

IR is low on transparency 

IR would have us believe otherwise. In a document titled “Transforming Railways, Transforming India” issued in 2016, reviewing achievements since 2014, the number of accidents over the period 2009-2014 is mentioned as an average of 135 per year which resulted in 693 deaths. The National Crime Record Bureau data puts the number of deaths from railway accidents in 2014 as 25,006, with an additional 3,882 people injured. The discrepancy between the IR and the NCRB database is due to creative use of data by IR, which reports only “consequential” accidents involving derailments or collisions. The NCRB data is comprehensive and based on the First Information Report filed with the police for all accidents connected with rail travel.

IR not to blame for 62 percent of accidents

To be sure, not all the 25,006 railway accidents in 2014 were due to the fault of IR. 62 percent of these accidents occurred due to “people” error – travellers walking negligently on railway tracks and getting run over or falling from over full trains. But even around 11,000 accidents  year is worrisome.

Rail still safer than road transport

To be fair to IR, their safety record should be compared with the other option available to travelers – road travel. The safety record of road travel is even worse. NCRB data for 2014 records 450,900 road accidents in that year with 141,526 deaths and 477,700 injured. The combined length of the National and State Highways, which carry the bulk of the traffic, is around 220,000 km or twice the length of rail track. The number of accidents however is 16 times more; the number of deaths is 6 times more and the number of injuries is 123 times more. Whilst the safety of road travel is a poor metric to use, it does provide a perspective of the objective conditions, in which IR operates.

Other than the likely moving out of Suresh Prabhu and the resignation of the the Chairman of the Railway Board, the other – more worrisome fall out – is going to be a typical short-term, defensive response of putting safety above all else. No private utility could have survived without doing as much, routinely. Consider,how tangled the Nuclear Power negotiations became when government legislated to put the onus of criminal and civil liability for accidents on the private sector suppliers of nuclear power equipment. But government service providers have more leeway in avoiding criminal action against them for safety lapses.

Safety or speed – a false binary

But the fact is that choosing between fast, modern trains and safe travel is a false binary. The populist, Luddite approach of slowing down the speed of trains, to avoid mishaps, is like asking car owners to go back to Ambassadors to reduce the risk of accidents by traveling slower. Technology allows you to travel both faster and safer. Air travel is for example both faster and safer than road travel. The Hyper Loop, when it arrives, is expected to boost both safety and speed at lower cost. The Indian Railways compete with other means of transport like road and air. It must provide the expected level of speed, convenience, comfort and safety which comparable transport options already embed. It has failed to do that, thereby losing marketshare to road transport over the last two decades.

Just as high-speed highways and the growing network of air routes has changed the way Indians travel, the Railways must also offer a bouquet of services to suit the differentiated needs of specific routes and category of customers. High-speed, premium railway transport on high-density routes radiating out from the hubs of Delhi, Mumbai, Kolkata and Chennai can transform travel by rail. Similarly, the rapid expansion of metro lines is a smart option to reduce the urban carbon footprint and road congestion.

Both speed and safety are a function of reliable track infrastructure adequately insulated for unregulated traffic ingress and suitable rolling stock. The planned high speed, dedicated, rail traffic corridors intend to achieve precisely these objectives – much like expressways do in highways.

Sans investment, neither safety nor speed is possible

None of this — speed, safety or security — is possible, unless we step up investment in Indian Railways. We cannot manage the 108,000 km of track and 11,000 trains which run daily, by jugaad, penny pinching, dodgy maintenance schedules and techniques, antiquated rolling stock, poorly trained and equipped personnel and management systems, which have not changed since the first train ran in 1853.

Corporatize IR for efficiency enhancement

Indian Railways must be corporatized so that it can shine like other public-sector companies like National Thermal Power Corporation, Indian Oil Corporation and Steel Authority of India. This is impossible as a government department because the administrative and financial rules are unsuited to the dynamics of running a business.

rail repair

Shun politics – Let IR become commercially viable

Railway tariff cannot be subject to politics. The same passenger who has no problem paying Re 1 per km for bus travel between cities pays just 28 paise per km of second class, rail travel and 45 paise per km in reserved sleeper class. Suburban rail travellers pay just 18 paise per km. This is an unsustainable and unnecessary subsidy, undeservedly enjoyed, mostly by the middle class. Rail tariff for non-AC travel must be increased to remunerative levels, thereby generating funds for improving the quality of services.

The spate of accidents has focused public attention on the need to restructure IR. What needs to be done is well known – using technology across the service delivery chain – track development and maintenance; signaling; rolling stock; communication; disaster relief and management systems. But none of this will happen unless Indian Railways is set free from the bureaucratic constraints which bind down its management cadres today. We can save lives, reduce the fiscal burden, improve rail services and make the economy more efficient by corporatizing IR.  Time to walk the talk on good economics also being good politics.

Adapted from the author’s article in The Asian Age, August 24, 2017 http://www.asianage.com/opinion/oped/240817/making-trains-safer-and-faster.html

Is hubris slowing down Modi?

Hubris

So when does hubris — the corrosive comfort of undiluted power — overtake a government? Conventional wisdom points to three early red flags. First, when routine tasks are ignored for grand ambitions. Second, when party cadres act out of entitlement rather than commitment. Third, when rant replaces reason as public outreach. Has this already happened to the BJP government?

Ignore routine tasks at your peril

Venkaih

First, consider the recurrent trail of routine lapses. Take the embarrassment in July of being unable to get the non-controversial bill to give constitutional status to the Other Backward Castes Commission passed in the Rajya Sabha because BJP MPs did not even bother to attend in sufficient numbers. There is no glory in floor management. Ergo, it gets overlooked. Next, consider the election of Ahmed Patel to the Rajya Sabha from Gujarat. The strategy to keep him out was brilliant. But shoddy execution, or worse, deliberate sabotage, let down the BJP. Finally, the mass death of children in a Gorakhpur hospital. The hallmark of the RSS has been effective management during emergencies and disasters. That oxygen cylinders couldn’t be swiftly organised speaks volumes of how low the cadres have sunk.

Rulers can’t ignore the Rule of Law

Second, consider contempt for the rule of law. Mohan Bhagwat, the RSS supremo, violated the law in Kerala by unfurling the national flag, on Independence Day, at a school in Palghat, contravening a restraining order by the district collector. The order was perverse, based on pique and politics rather than prudence. The manner of its service — just prior to the occasion — was hurried and amateurish. But it was a legal order and anyone violating it is liable to be arrested. Mohan Bhagwat got away. But the lesson he taught the schoolkids and party cadres was that no law is sacrosanct if you are powerful enough.

Gandhiji would not have approved. Disobedience of an unjust law is fine, if followed by submission to its consequences, under the rule of law.

Gandhi

This contempt for the law is visible in the cadre vigilantes protecting cows, supporting unruly, disruptive religious yatras and the demonisation of alternative voices. Add to that, the raging testosterones of a BJP “princeling” in Haryana and you have party cadres which align more with gaali (abuse) and goli (bullets) rather than the galle lagana (hug) that Prime Minister Modi has espoused as the leitmotif of New India. Third, let us consider why no one came away inspired from Red Fort this year.

Outreach by high decibel rote no substitute for passion

The Prime Minister’s speech was a prime example of zombie behaviour, where the mind is elsewhere but the motions are acted out. The wide ramparts of Delhi’s historic Red Fort have set the stage for Prime Ministers to grandstand every year since 1947. Two (Lal Bahadur Shastri and Morarji Desai) barely had a chance to give a second speech before they were gone.

Four others (Charan Singh, V.P. Singh, H.D. Dewe Gowda and Inder Gujral) were even more transient, managing not more than a single speech each from Red Fort. One — Rajiv Gandhi, a young, stunning-looking charmer — was suddenly elevated to the position but never quite unbuckled the pilot’s seat he used to occupy earlier. Manmohan Singh had a decade to hone up his act. But he knew that he was a mere seat-warmer for the Nehru-Gandhi dynasty — having been taught his lesson earlier, when party workers sabotaged his election bid to the Lok Sabha. P. V. Narasimha Rao — a friendless, private man was not given to making big public gestures from the Red Fort. His political games were deadly effective, but played entirely in privacy.

Nehru, Indira Gandhi and Narendra Modi are the only three Prime Ministers who have had the mandate and the charisma to use the ramparts to strut their act. Mr Modi thrilled us in 2014 with his energy and his earthy enthusiasm at reaching out to people — quite a change from the taciturn Manmohan Singh or the imperiously distant Sonia Gandhi. In 2015, he filled in the vacant spaces in his act with data, slogans and acronyms. We were impressed. In 2016, we were still agreeable to look kindly on him, given that the economy was racing along and government performance was projected as trending sharply upwards.

By 2017, the act was flat as yesterday’s soda. This is remarkable considering that Indian testosterones are racing at the government effectively holding off the Chinese muscle-flexing at Doklam and now in Ladakh; Pakistan is reduced to being a mere vassal of the Dragon and economically hollowed out Western powers are fawning at our doors for Indian business.

Modi 2017 Red Fort 2017 (3)

International acquiescence has bred much-needed confidence. But it is disquieting that in domestic policy it has led to complacence, drift and distance from the public. Mr Modi’s speech was rambling, glib, unnecessarily argumentative and just plan stale. The turban was way too shiny to be classy. The stance too casual to be purposive. The look too staged. Very confusing was the discrete use of the terms — Bharat, India and Hindustan.

Bharat, India or Hindustan?

Hindustan was used in the context of pledging support for the victims of the irresponsible Muslim practice of triple talaq. Bharat was referred to as the mata (mother). But it is New India that we seek to build. Meaning?

Bharat, India or Hindustan, all three remember earlier episodes of hubris — disconnects between reality and rhetoric — which ended badly for us. In 1964, we discovered, too late that India needed the world, not the other way around. In 1975, we realised Indira needed India, but we didn’t need her. In 2017 (Delhi municipal and Uttar Pradesh elections), a shallow social revolution met its downfall. In 2004, we tired of using the stock market as a metric of progress. The metrics proposed for New India are similarly flawed. Corruption, poverty, filth, early death and unemployment are long-term outcomes, unachievable by 2022.

Child India

Focus on the essentials, Mr Prime Minister: Ending poverty by providing jobs and social security; improve results in education and health; build infrastructure for the 21st century and professionalise your government. We supported you in 2014. We want to do so again in 2019. But is your party up to this task?

Adapted from the author’s article in The Asian Age, August 17, 2017 http://www.asianage.com/opinion/columnists/170817/is-a-sense-of-hubris-slowing-down-modi.html

Well begun is half done

BOOK REVIEW
India Transformed
25 years of Economic Reforms
– edited 
Penguin Viking 
670 pages; Rs 999

 

India Transformed
Curating 31 essays into a story on India’s economic reforms can be a giant yawn. But Rakesh Mohan, a videshi economist and a veteran of four major government committee reports, is up to the challenge. 
THE PLUMBING WHICH CHANGED INDIA
Indians believe that the actions of civil servants determine the future of India. This is an abiding fallacy. The truth is, starting from Jawaharlal Nehru to Narendra Modi, it is politics and political leaders that set the tone, whilst civil servants dutifully follow with the plumbing. This book is not about the broader political economy of reforms. Those stories have been told elsewhere. Instead, this book examines the practices and processes — back-office stuff — that achieved reform objectives. Expectedly, therefore, essays by civil servants and public intellectuals dominate this compilation. 

 

INDIA TAKES CHARGE OF MACRO ECONOMIC STABILITY
C Rangarajan marks 1991 as a watershed moment in the  Montek S Ahluwalia agrees and debunks the J Bradford DeLong (2001) and Dani Rodrik Arvind Subramanian (2004) proposition that the 1991 reform process was overhyped; that merely becoming business-friendly would have been sufficient to yield the maximum value; that external liberalisation was merely genuflecting to the Washington Consensus. He asserts that the reform architecture responded to the local context and was designed for medium-term results. Y V Reddy deconstructs the role of fiscal federalism in stabilising state budgets. Laveesh Bhandari evidences this by citing best-fit policies and programmes innovated by states using these additional devolved resources. Jaimini Bhagwati reviews the process of capital market liberalisation that was key in enabling competitive industries to grow. 

 

USING THE GROWTH DIVIDEND
Top diplomat Shyam Saran traces the post-cold war, benign, unipolar world that gave India breathing room to grow till the 2008 financial crisis. His successor in the foreign office Shivshanker Menon establishes how economic growth engendered new foreign policy options for India — a view endorsed by Martin Wolf, who advocates even greater proactivity in world affairs. Sanjaya Baru links the recalibration of India’s security matrix to the new-found confidence from successful reform. Tarun Das points to the quiet success of Track II initiatives in forging defence and nuclear cooperation. Harsha Vardhana Singh, details how substantive tariff rationalisation opened domestic industry to competition. However incomplete, domestic factor market reform shackled export growth and enhanced the trade deficit. N K Singh and Jessica Seddon illustrate how public and private roles moved from mere co-existence to co-evolution, especially in infrastructure development. 
THE MARGINALISED 
 
rural India
But the benefits from economic reform did not accrue symmetrically. postulates that domestic labour market and regulatory rigidities continue to dull the growth potential in small manufacturing. Ashok Gulati argues that liberalisation of the exchange rate, lower industrial tariff and private investment norms never benefited agriculture due to institutional rigidities. Devesh Kapur documents that enlarged access to education was not accompanied by quality enhancement. Naushad Forbes rues the stagnation of Indian R&D spend as a proportion of gross domestic product and the skew towards science research, rather than technology development, which can constrain innovation. Nachiket Mor et al are sceptical that stepping up private investment alone can result in catching up on health outcomes. Sarwar Lateef argues for deeper governance reforms to benefit the disadvantaged. Vinayak Chatterjee laments that the PPP (public-private partnership) model died because of unrealistic asymmetric expectations between government and private developers. 

 

LISTENING TO THE “ANIMAL SPIRITS”
The voices of the intended beneficiaries from reforms — consumers and domestic suppliers — are jammed into the last segment of the book. Rama Bijapurkar caricatures the new Indian consumer, cannily devouring cheap Chinese goods and luxuriating in retail therapy, financed by the deep pocket of e-commerce start-ups. Gita Piramal points to the churn in private business league tables as illustrative of the competitive forces unleashed by reforms. Omkar Goswami adds that the concentration of business accelerated as companies sought scale economies. Services benefited disproportionately, being less constrained by the continuing hurdles in acquiring land or access to quality infrastructure. 

 

Deepak Parekh narrates how HDFC seized new opportunities in banking and insurance using its core competence in customer-friendly financial services. For Mukesh Ambani, economic reform was instrumental in fulfilling his father Dhirubhai Ambani’s dream of a global scale of operations. Kiran Mazumdar-Shaw — a first mover — lucked out. With just Rs 10,000 in her wallet, Biocon grew into a $1-billion listed company by 2004. Sunil Bharti Mittal, a spunky, first-generation entrepreneur, seized every opportunity available to establish India’s first multinational telecom company. If every second American truck has a Bharat Forge axle, Baba Kalyani has economic liberalisation to thank for it. For Narayana Murthy, liberalised import of hardware and current account convertibility alone were enough to make Infosys fly. R Gopalakrishnan recounts how storied firms, like HLL and the Tata group, also restructured and diversified. 

 

INDIA – THE QUINTESSENTIAL REFORM DEBUTANT
shy
T N Ninan describes navigating reforms in India as the impossibility of cooking an omelet without breaking the egg. Vikram Singh Mehta similarly recounts the broad consensus but only for shallow reforms in the petroleum space. Some of this reticence was because of the dharma of coalition politics. This constraint no longer exists. Will the consensus deepen now? And will it now be our time to eat?

 

Adapted from the author’s book review in Business Standard, August 17, 2017 http://www.business-standard.com/article/beyond-business/well-begun-is-half-done-117081501123_1.html

 

FM Jaitley, aim for the sweet spot

Manmohan Jaitley

Former Prime Minister Manmohan Singh, recently released a book titled India Transformed — 25 years of Economic Reform, edited by Rakesh Mohan, at the appropriately historic Nehru Memorial Library. After the obligatory photo-op, Dr Singh turned to finance minister Arun Jaitley and with a beatific smile, handed the book over to him, as if, symbolically, he was satisfied that he could hand over trusteeship of the economy, to the three-year-old NDA government, and walked off, disregarding the speech he was scheduled to deliver.

The reform baton passes on

It was indeed a poignant moment and well chosen, for the economic baton to be handed over. The high-decibel criticism by Left-oriented, liberal public intellectuals of the economic vacuity of the BJP government’s economic policies continues. But the fact is that we are now at a cusp, an inflexion point. In all likelihood, we shall do substantially better on inclusive growth. This may sound incredulous at a time when growth, industrial investment and exports have fallen from the earlier upward looking trend line. But a dip in the industrial investment and growth rate are natural short-term consequences of the BJP having finally walked the talk on corruption.

Pressing the economic accelerator is not enough

Over the first three years, the NDA merely pressed the accelerator harder on the positive legacy of the UPA — rural unemployment support, fast-forwarding Aadhar, digitisation of commerce and banking, financial inclusion, space technology competitiveness, making electricity surplus, making access to telecommunications even more affordable, better transport and urban infrastructure, disinvestment of minority shares of state-owned entities, ensuring fiscal stability and progressively higher financial devolution to sub-national governments, including local governments.

Burying past negativities is good but not enough

It also did very well to bury the negative legacy of the UPA. The biggest achievement is in fast forwarding of expenditure programmes without the viral outbreak of corruption scandals seen earlier. More positively a three-pronged action plan is in place to make public systems resilient to corruption.

GST – the corruption buster

First, getting the GST is the biggest legislative and operational achievement to dampen corruption and enhance value addition by integrating the national market. Glitches remain due to poor drafting of rules which burden the small, honest taxpayer. Many such are the obsessive dedication to maximising revenue, even at the expense of simplicity. As usual the pain is being most felt by those least able to bear it — ragpickers — at the bottom of the urban food chain – their daily income have halved because the “kabadis” (junk yards) they sell plastics and glass to, are playing safe on the likely new tax liabilities. Small individual consultants or homeowners,  who live in one state but get work or rent from another, re similarly caught in a bewildering tax reporting spaghetti.

Bankruptcy & NPA resolution – The crony capitalism killer app

Second, is the frontal attack on crony capitalism — identifying the borrowers who have defaulted on Rs 12 trillion owed to banks, getting the Bankruptcy Act operational and signaling public sector banks that there will be no more “Mundra scam (1950s)” type telephone calls from the government. Reaffirming that sensible lending shall be rewarded and inept or corrupt lending punished.

Big brother must watch use smart analytics

Big data

Third, the proposed use of “big data”, including data from social media, to zoom in on potential tax evasion and crime. Taken together, these actions lay the systemic capacity for reducing corruption.

Aim for the sweet spot

cricket sweet spot

Whilst perfecting its drive at real sector reforms, here are the four “tests” the government must pass.

Defang the trade Unions

First, the unleashing of genuine privatisation (offloading of majority shares in a state-owned entity) as proposed in the long-delayed case of Air India is the winner. It sends the signal that India is open to efficiency enhancing financial restructuring. That it intends to free up existing public capital to create new public goods — jobs, physical infrastructure, improved social services, like health and education, whilst fresh private capital gets infused into the commercially viable supply of private goods — air and rail travel, steel, metals, petroleum and electricity. The Labour Unions are up in arms. This is where privatisation flagged in 2003 under Minister Arun Jaitley and Prime Minister A.B. Vajpayee. Can the Modi-Jaitley team de-fang the inward looking, protectionist, labour “aristocracy” comprising the Trade Unions – the bedrock of the moribund CPI(M)?

TU

Grow private banking rapidly

Second, financial sector restructuring to make state-owned banks commercially viable. Uday Kotak, of the Kotak Mahindra Bank, surely over-stretches when he advocates the  wholesale exit of loss making public banks and their substitution by private banks. But clearly, the strategy of incremental privatisation, as done earlier to enhance telecom, aviation or electricity generation, will pressure state-owned banks to become competitive. This should also circumscribe the ability of the government to use banks like ATMs for populist goodies.

Nail large. serial loan defaulters as criminals 

Modi nail

Third, the strong action proposed for making collusive default on bank loans a criminal act is commendable. It brandishes a big stick for potential defaulters. The intention is virtuous. But experience shows that criminals, especially rich ones, find it easier to evade the law than poor innocents. To avoid this perverse outcome, criminal powers should not be delegated outside the judiciary. The record of tax tribunals and quasi-judicial agencies is not sanguine enough to empower them with criminal powers in addition to their economic mandates.

There is no option except to reform the judiciary through incentives and structural changes in judicial governance. This is a tough nut to crack, but shortcuts will give rise to the miscarriage of justice, vigilantism, and massive public resentment — specially in the middle class, which will be the most impacted in cases related to property and small business.

Remain a classic, fiscal fundamentalist

Lastly, the finance minister’s determination to maintain macro-economic stability has been amply demonstrated. This resolve must not weaken even during the run up to the 2019 general election. This will be the biggest economic win,lo if achieved. The report of the N.K. Singh Fiscal Responsibility and Budget Management Committee 2017 embeds too much flexibility to provide credible guidance for the future. Fiscal fundamentalism is better.

cricket defense

Good politics must also be good economics. There is an appetite now amongst voters for hard reform. This, by itself, is a tribute to the credibility of the NDA government. A populist pre-election budget would be seen by the voters as an early admission of defeat. That is not the winner’s way.

Adapted from the author’s article in The Asian Age, August 9, 2017 http://www.asianage.com/opinion/columnists/090817/hard-reforms-vital-nda-needs-to-shun-populism.html

Rooting out perverse incentives in GST

Hasmukh Adhia Masterclass

Muscular tactics are paying-off in the Income Tax system. The number of assesses went up by an astounding 25 percent from 37 million in March 2016 to 46 million, by March 2017 and to 63 million by mid-July 2017. The linking of Aadhar-PAN card to bank accounts; the campaign against cash and now the GST, together create desirable institutional incentives for individuals and business to bank their transactions. This provides the “push” factor for enlarging the income tax base of potential assesses.

Transformative GST  

The GST is even better designed to provide desirable incentives for enlarging the indirect tax base. Unlike, Income Tax where “push” factors compel assesses to pay tax on the income revealed via bank transactions, the GST uniquely also has “pull” factors for better tax compliance. The biggest being the facility to set-off GST paid on purchases against GST payable on sale, which reduces the net tax payable. This induces both buyers and sellers to bank their transactions – which is also good for income tax collections.

Transformative, as the GST is, glitches have inadvertently crept in, which go against the grain of positive incentives to prefer banked to cash transactions; increase value addition and boost tax revenues.

But design glitches remain

One such, relates to small service providers with annual revenues of up to Rs 2 million. Those providing services within the state are exempt from both registration and payment of GST up to this limit. But the moment they provide a service across the state borders or to a client abroad, they are compelled to get a GST registration; submit the mandatory three returns per month and much worse, pay GST on their entire revenue stream.

Killing the small cross-border service provider

Individual IT professionals writing code or designing websites routinely get contracted over the internet to provide services to overseas clients or to clients across state borders. Each contract may be as low as Rs 20,000. But all these professionals will need to get registered and incur the transaction cost on submitting monthly GST returns. For these small service providers, the price points are highly competitive. It is unlikely that clients will be willing to part with the 18 percent GST for out of state providers. They will be pushed to get registered and pay the GST themselves or absorb the tax in the price they charge with the GST paid on the purchase by the client.

The net result will be that out- of-state small service providers will become uncompetitive and may stop seeking work outside their states, reducing competition. GST which was meant to create a Pan Indian national market will instead, end up creating intra-state silos for small service providers.

The negative impact is fiscally marginal but it rankles

This design flaw will also impact income tax revenue. Service providers whose annual billing reaches Rs 1.6 million within a state, will refuse out-of-state work of less than Rs 0.5 million because, by increasing their out-of-state billing by up to Rs 0.4 million they end up paying the entire incremental amount as GST.

If 2 million small service providers, ranging from civil contractors, designers to business consultants, refuse additional work due to this reason, the government loses Rs 18 billion as income tax. This calculation assumes a tax rate of 20 percent and the underlying taxable income lost at one half of the amount of work refused.

Protection for local service providers breeds inefficiency

The “infant industry” proposition can be used to justify discouraging cross border services and thereby encouraging small local service providers to ramp up their capacity and fill the gap. This may well be true. But it rankles against the pan-Indian tax framework objective of promoting efficiency and competition. It is also, against the logic of digital India which is meant to enable seamless work across state and international borders.

Whence the pan-Indian market and digital India?

Admittedly lost income tax revenue of Rs 18 billion is small change, in an income tax kitty of around Rs 4 trillion. But it is personally frustrating for small service providers who can see the cross-border opportunity to expand their business but are blocked by the “deadweight” amount of Rs 0.4 million of billing, which equals the GST they would pay by increasing their billing to Rs 2 million, if some part of it coming from cross border contracts.

Have a common GST exemption limit irrespective of location of the client

Is there a way of getting away from this flawed design? Yes, there is. The first option is to extend a common GST exemption limit to all service provision, irrespective of whether it is within state, across state borders or overseas. This immediately removes the “deadweight” of GST becoming payable, the moment a cross border transaction, no matter how small, is made.

Tax only the incremental revenue above the GST exemption limit

However, this still leaves the problem of expanding billing above Rs 2 million and thereby losing the exemption from GST on the initial Rs 2 million. Adopting the principle of taxing only the incremental amount, as used in the Income Tax, can effectively avoid the perverse incentive for opting for cash based transactions to avoid losing the tax exemption above a billing of Rs 2 million, till billing expands substantially beyond Rs 2.4 million, at which point it would neutralize the additional GST paid and yield a net income increase for the supplier.

Harmonise tax exemptions under IT and GST to reduce reduce the compliance cost 

The best option is to harmonize the exemption limits under GST and income tax. The current income tax regime presumes taxable income at 50 percent of billing, unless shown otherwise. A billing of Rs 0.5 million corresponds to a net taxable income of Rs 0.25 million which is also the maximum limit for income exempt from income tax. Hence the exemption limit for GST could be reduced to Rs 0.5 million from the existing limit of Rs 2 million. But rolling back exemptions is tough. Alternatively, the exemption limit in Income Tax could be increased to Rs 1 million. Enhancing the income tax exemption limit is the preferred option.

The number of income tax assesses increased by 25 percent in 2016-17 over the previous year. In comparison the revenue from Income Tax increased by 18.4 percent. Tax yields are lagging increase in assesses. Efficient tax collection practices would point towards focusing on high value targets rather than cluttering up the system with marginal yield assesses until tax filing systems are vastly more simplified and easy to follow for the average citizen.

This article is also available at http://blogs.timesofindia.indiatimes.com/opinion-india/end-perverse-incentives-for-small-service-providers-in-gst/

Retribution – the missing R for resolving bad loans

Courtesy Arvind Subramanian, India’s Chief Economic Advisor, the 4R (reform, recognize, recapitalize, resolve) approach to manage the corporate bad loans problem, has captured public imagination. But he soft peddles a fifth R, that of retribution. The big stick must be wielded for reform to be credible.

jail2

Public sector banks – flabby, politicised ATMs providing easy money to elites

Banks are flush with money. But “liquidity” for borrowers, even those who have a “special relationship” with banks, is low. The shadow of stressed loans – missed loan repayments and interest payments- makes the usual, clubby way of doing business suspect. Banks operate on big margins – between interest paid on deposits and interest received on commercial loans – of up to 5 percent, in our cartelized banking architecture, dominated by publicly owned banks. But, despite high margins, public sector bank ratings suffer. The more loans they give, higher is the volume of bad loans.

Bad loans are an outcome of shoddy risk appraisal followed by poor loan account oversight. The ugly habit of kicking the can down the road by rolling over bad loans has been the norm.  On average, only around 26 percent of bad loans and accumulated interest are recovered. Using this metric, banks stand to lose around Rs 9 trillion (6 percent of our GDP) by recognizing and resolving bad loans of around Rs 12 trillion.

If corporate loans were recovered like consumption loans for cars, there would be no problem

Once a loan becomes stressed there is little a bank can do, except to recover as much as it can from the borrower; divert the proceeds to a better borrower and black list the delinquent borrower. But Indian banks rarely operate on this “sunk cost” principle. A long history of covert support to keep diseased loans and borrowers alive, under the guise of retaining jobs, has not helped. The spectacularly unsuccessful, Board of Industrial and Financial Reconstruction was still alive till January 2016. Unfortunately, so were hundreds of companies ripe for corporate euthanasia. We now have a new Insolvency and Bankruptcy Act, January 2016. But its effectiveness remains to be established.

RBI oversight of banks comes up short

Disappointingly, the Reserve Bank of India, instead of taking the bull by the horns and directing banks to start bankruptcy proceedings for bad loans, has taken the soft approach – giving banks time, till the end of 2017, to resolve the stressed loans themselves. Amusingly, to nudge bankers into doing unfamiliar, unpleasant things, extraordinary measures are being taken, to provide them administrative cover, from ex-post facto audit, vigilance and CBI investigations. Clearly, retribution against those bankers, who approved and over saw the dud loans, is not contemplated.

Loan waivers without retribution for the complicit create moral hazard

Economists, including RBI Governor caution against the problem of “moral hazard” that loan waivers create in the context of agricultural loans being written off by state governments. Apparently, forgiveness without retribution, is bad for rural borrowers, but ok for corporate borrowers. Sadly, retribution is sorely needed for commercial borrowers too, who account for 75 percent of the bad loans.

80% model borrowers, 20% delinquent addicts of “easy money”

home

The reality is even more nuanced. The bulk of borrowers, across sectors, are gold standard risks. Despite gross mismanagement of large corporate loans, 83 percent of the bank loans, valued at Rs 63 trillion, are serviced on time by borrowers. Moral hazard affects borrowers selectively in India. This is because retribution is also selective. Access to bank finance for small borrowers is cut off if they become delinquent and recovery proceedings are harsh. For large borrowers and the influential, more favourable terms apply.

Are only babus to be held to account?

handcuffs

Last month, a retired Secretary of the Coal Ministry and two other senior colleagues, were convicted for criminal conspiracy, by a trial court. The charge and the punishment meted out was completely out of proportion to their misdemeanors – less than adequate diligence in discharging their duties. Why this double standard for holding public officials to account? Rs 12 trillion of accumulated stressed loans against annual loan approvals of between Rs 3 to 5 trillion, indicates a deep rooted “conspiracy of silence” within public sector and co-operative banks; their patrons in government and the borrowers themselves.

These stressed loans, whether in industry or in agriculture, must be taken off the books of banks. But the concerned loan sanctioning and account oversight chain, whether present or retired, must be held to account on a standardized, transparent metric to establish active connivance to cheat the bank or lack of adequate diligence. This is the only way to delink quick resolution of the stressed loans from the problem of “moral hazard”.

Blacklist actively negligent founders

Second, deals need to be urgently struck with borrowers to resolve loans without access to the lengthy judicial review process. These can only happen if the big stick of sanctions is available to the negotiators. Founders, actively negligent in servicing loans, should be made to exit management positions, as a precondition for future access to bank finance. Delinquent individuals, who have been given opportunities earlier, to reform, via “greening” or rolling over of loans, should be debarred from access to bank finance.

Hold banks to account for bad loans

The argument against sanctioning bankers is bogus. It is feared bankers will stop taking decisions if sanctioned, thereby freezing the lending cycle. Till two decades ago, bank trade unions, routinely used the threat of striking work, to stop computerization or extract better wages. It was the Supreme Court which defanged them in 2003 by ruling that the right to strike is not absolute, particularly in the case of public services. No need to turn the clock back.

Stringent action against the bureaucracy has not adversely affected the functioning of government. Enshrined bureaucratic safeguards are most often the refuge of the incompetent or the corrupt. Those working transparently, in the public interest, rarely need such support. There is no reason why banks should be different.

Needed an empowered financial sector, “clean up” champion, to wield a long broom

Jaitley grimace

“Moral hazard” in bad loan resolution becomes a problem, only if we do not deal equitably and transparently. Elitist cliques, spanning politics, business and agriculture, must be weaned-off, the vice of bank financed “easy money”. Swift, impartial, standardized resolution of bad loans, with judicious retribution, can drain this vicious whirlpool, which saps national wealth and reeks of inequity.

Adapted from the authors article in TOI Blogs, June 23, 2017 http://blogs.timesofindia.indiatimes.com/opinion-india/retribution-the-missing-r-in-resolving-bad-loans/

 

Can GST make Hasmukh Adhia smile?

Hasmukh

Hasmukh Adhia, India’s revenue secretary, is finance minister Arun Jaitley’s chief aide for rolling out the Goods and Services Tax. Contrary to his first name, he never smiles, at least not in public. But even he can now take a break and smile. The GST juggernaut is careening ahead. In just over a week, India would have leapfrogged into the league of economies which have walked the talk on rationalising indirect taxes.

Noose tightens on black money generation

card pay

Photo credit: Imagesbazar.com

So what will Mr Jaitley and the GST Council have achieved on July 1, 2017? First, this collegial team of finance ministers, across the Central and state governments, would have fired the first, potent salvo against black money. Demonetisation; tax raids; getting back overseas black money caches — all pale in significance, compared to the institutional impact of GST. Consider, that the most vocal protests against GST have come from dry fruit traders, cloth merchants and jewellery makers. These businesses have been traditionally cash heavy. Of course, the intrepid evader will still have tax leak holes left open. Agriculture, food items and the business in booze remain yawning gaps in the tax revenue security architecture. But the message is loud and clear: the rope is shortening. So watch out!

Lower net indirect tax, lower prices to spur demand

shopping

Photo credit: Imagesbazar.com 

Second, the massive discounts being offered on pre-GST clearance of the stock of consumer durables suggests that prices of these goods will reduce. An entity, empowered to investigate and ensure that net tax reduction benefits are passed on by manufacturers and dealers to consumers, is in the offing. The history of such clunky, intrusive executive action is not encouraging. Due to information asymmetry, determining the cost breakdown of products externally, is invariably inefficient. Either the enforcement agents get compromised or they end up harassing manufacturers and suppliers for trifling results.

But in truth, it really doesn’t matter. Inflation levels are at historic lows — below three per cent per annum; the monsoon is progressing well and global demand remains damp. Babus and their counterparts in the public sector — around 18 million households — have all either been given or will soon get pay revisions. They are itching to spend the windfall.

Clunky “inspector raj” to check price rise – a bad idea

Even if the entire tax rationalisation bonanza is retained by manufacturers and dealers, it will still generate surpluses for private investment — in debt servicing, realty and equity markets. Improving the revenue steam of corporate India is vital for getting over the gargantuan NPA problem, which is bad cholesterol for growth. The good news is that most product markets are competitive. Digital marketers have cut retail margins to the bone. Even the market for services is hyper competitive — think telecom. This makes it tough for corporates to retain extra normal profits.

SMEs & Trade pay the price for becoming accountable – high compliance cost

Also, undeniably, tax rationalisation has come at a cost. The actual transaction cost, for business, to comply with digital GST processes is unknown. But GST provides a huge opportunity to India’s IT developers to innovate low-cost compliance and oversight options — particularly for value segments produced by small and medium industries. These could be perfected at home and marketed worldwide as context-specific solutions for developing countries. In 2013, at a conference in Washington, the World Bank president asked Nandan Nilekani why he wasn’t rolling out Aadhaar across the globe? Mr Nilekani responded that he was too busy at home and had no time left for solving the problems of the world. This single statement projected India’s enormous domestic, digital market potential far better than the glossies, which international consultants and governments routinely produce touting themselves. These digital opportunities have multiplied by several degrees with GST.

Multiple rates align with multiple objectives 

Third, the agreed-upon somewhat clunky architecture for GST reflects compromises made to achieve the twin overriding concerns — protecting the poor and ensuring fiscal neutrality for all governments. In the absence of a direct cash transfer framework, continuing tax exemptions on mass consumption goods and services is a reasonable policy option. Given the federal structure and the plurality of our polity, there never was an option to the consensual approach adopted by the GST Council. Meeting the revenue concerns of state governments has inevitably led to six GST rates. The highest rate of 28 per cent is designed to be used for neutralising any revenue loss for state governments.

Multiple rates result in efficiency loss due to tax leakage from misclassification of goods to a lower tax rate. A good example is the amorphous classification of a storage battery as a computer peripheral (lower tax rate) versus use for backup lighting needs (higher tax rate). Multiple rates also increase the accounting load for keeping track of tax credits and debits. But the economic benefits from early implementation of a less than perfect solution far outweigh the opportunity lost from a prolonged wait for the BJP to come to power in all the states, thereby enabling a best practice single rate template to be imposed from above, China style.

Fourth, GST is good for jobs. It gives a boost to “Make in India” by withdrawing the tax advantage for imported manufacturers. Importers pay Central state tax at four per cent as special additional customs duty. But domestic products are taxed at the rates of state sales tax, which are generally higher. This disadvantage for domestic production will vanish with GST. Imports, in addition to customs duty, will pay additional customs duty at the GST rate applicable for domestic products.

Flexible implementation arrangements – to muddle through the knots

Finally, the finance minister has consistently adopted a firm but nuanced, practical stance on the implementation schedule. Recognising that small-scale industry and traders are lagging in preparations, he has agreed to defer the filing of returns by two months. Assurances have also been given that the GST rates could be adjusted if the net tax burden gets distorted or gets unbearable. A government that is open to negotiating beneficial outcomes for all stakeholders and still retains the will to keep the national interest foremost is quite clearly operating at the tax-related good governance frontier. Smile, please.

Adapted from the author’s article in the Asian Age , June 23, 2017 http://www.asianage.com/opinion/columnists/230617/its-time-to-smile-gst-to-usher-in-a-new-era.html

Jaitley black money

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