governance, political economy, institutional development and economic regulation

Posts tagged ‘industry’

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

Gov. Rajan gets it wrong this time

Gov Rajan

(photo credit: economic times.com)

RBI Governor Raghuram Rajan got it horribly wrong when he amended PM Modi’s “make in India” program by adding a “make for India” byline in his FICCI address yesterday.

What on earth could he have meant? Was he implying that the domestic economy should be further insulated from foreign competition? That is the only way domestic industry can be induced to make only for India, rather than for the World, including India?

How does this “home centric” approach fit with his view, reiterated in the same FICCI event, that the economy needs to be more open. In an open economy business “makes” for markets worldwide because production and value chains are transnational and product standards, designs and prices converge across the globe squeezing out fat.

Indian industry did “make for India” pre the 1991 liberalization. The result was a small, fat big-business set; high prices; shortages and shoddy goods. The biggest achievement of liberalization is a convergence of product standards towards international levels because of import competition and the ample and ready availability of goods- except where government erroneously continues to believe that fixing maximum prices for goods and services can work. It does not, as we can see in electricity supply and now in drugs and pharma where shortages are resurfacing.

Exhorting Indian industry to restrict itself to the domestic market is an ominous sign of the export pessimism rampant in the pre-liberalisation period. Does this also mean that Governor Rajan will keep the INR unreasonably strong to keep imports (petroleum products) cheap at the expense of export competitiveness?
Surely the defence manufacturing we are initiating is not just meant for domestic consumption. Unless Indian armaments are in regular use in conflicts and wars internationally, how can we possibly be sure of their quality or get the “consumer” feedback for quality enhancement?

Maybe Rajan’s “rock star” status as an economic wizard got the better of him. After all, PM Modi’s penchant for acronyms and by-lines has now become national mania, rendering intelligible conversation impossible, littered as it now is, with 3AAA and 5Cs. But trying to best the PM can be fatal, even for an outstanding, independent regulator. Even the US President would look askance at the Fed. Chair speaking, out of turn, outside her circumscribed official ambit.

But on matters more related to his current charge, he got things right, as usual. In a downturn, especially with inefficient and wasteful government machinery, it is a better to leave income in the hands of the earner rather than transfer it to government via higher tax rates. The “income effect”, enhanced by the low inflation target of Gov. Rajan, induces consumers to spend and feeds into demand led private investments which is good for jobs and growth.

The conundrum, if tax rates are to be relaxed or if tax exemptions for savings enhanced, is how to balance the budget?

Here is a list of the “low hanging fruit” available.

First, our traditional expertise in going around with a begging bowl is best. PM Modi is prescient in aggressively seeking external grants and concessional funding from the word go. The challenge now is converting pledges into cash flows.

Second, ruthlessly cut revenue expenditure, particularly on general administration. This is a necessary “evil” to show that the government means business.

Third, our annual public investments are barely 12% of total expenditure. This requires stopping gold-plated construction and using the existing space better. Witness the new, palatial External Affairs Office complex in Delhi, which remains underused because it is far from the South Block-located-PMO. Anyone housed in the new office attracts the unwelcome tag of being farther from the powers-that-be than even the mother ministry.

Using the available space rationally, simply by squeezing government servants together can help. Today, senior officers occupy office rooms often much larger that the living room of their government allotted homes. Notice how even mid-level government officers do not work in “row cubicles”, as in private firms and there are no common-use spaces for work meetings. Every office is designed to accommodate a “durbar” suitable in size for the concerned officer – this is reminiscent of the hierarchy of “Princes”, established by the “Raj”, based on the number of guns fired in salute of a Prince.

Slashing perks like liberal use of office provided phones and cars and a cut on travel budgets are also necessary, albeit symbolic measures, for flagging the need for economy.

Fourth, more substantively, using the existing government investment in State Owned Enterprises (SOEs) more aggressively can help. For starters, increase the dividend payout ratio from 44% to 66%. This adds around Rs 25,000 crores to revenue – only 1.4% of the total budgetary resources – but sufficient to increase the central plan expenditure by a hefty 25%.

Higher payouts and consequential constrains on accessing internal resources will also force SOEs to become leaner and look for alternative PPP models for financing operations and investments. Listing more SOEs on the stock exchanges and launching an aggressive privatization program can leverage the economy; attract foreign and domestic private investment and create more fiscal room for Greenfield public investments.

Governor Rajan in right in predicting strained economic circumstances in the near term. But hiding behind the default option of producing only for our huge domestic market and hapless domestic customers, is not the answer – nor is tight market segmentation between the domestic and overseas markets possible. God save us from anyone advocating a back-to-the-future strategy of turning resurgent India into a fortress.

Land Bill: political gains, future losses.

The Land Bill 2013 is backward looking and shortsighted. Coming  119 years after the predecessor legislation in 1894, it fails on four counts.

First, it does nothing to assure citizens that it shall rein in wilfull and unnecessary acquisition of property by the State, as has been happening in the past.  Consider that there are many Public Sector Undertakings which own land far in excess of their needs, as do the “new age” power plants which have been given coal mining licenses. The Bill actually skirts around the issue of “when and how much” is it justifiable for the State to acquire property. It focuses only on the process and amount of compensation to be paid in the event of acquisition.  It is curious therefore that it is being lambasted by industry as anti-industrialisation, not because of the higher amounts they may have to pay for land, but on account of the anticipated delays and increased bureaucracy now proposed in the process. The Bill proposes to artifically enhance the price paid for acquisition to give the disposed a fair compensation and possibly also act as deterrent to “deep pockets” from acquiring and holding large tracts land. The deterrent is over estimated. Land ownership has an average ROR of above 25% per annum which will continue to attract investments on account of its scarcity value. The provisions for enhanced acquisition price are populist and are likely to be ineffective in ensuring that only minimum volumes are acquired. The only way the volume of acquisition can be rationalized is by severely restricting the definition of public purpose to the needs of Defence and Security. The Right to Property is an essential part of empowering the ordinary citizen versus the State, which is ignored by the Bill.  Opposition should have come from the BJP and other rightist parties but “industry wallahs” typically like an interventionist State (like China or Vietnam) if it intervenes on their behalf. it is election time and all are wary of upsetting either the “poor”, “industry” and “real estate” wallahs. The pro-poor “lobby” essentially has a “left leaning” mindspace. For them, owning property is equivalent to being an oppressive, extractive, arrack swigging, landlord cum money lender.  This is a politically attractive stereotype, which all parties publicly bow to, never mind that atleast 90% of the population owns land and property. Why not use the Bill to define this Fundamental Right better and proscribe the powers of the State? We are losing a historical opportunity.

Second, the Bill displays an unerring faith in the bureaucracy and its ability to protect the rights of the poor, manage a complicated acquisition, participation, resettlement and rehabilitation process efficiently, despite all the evidence to the contrary.  Citizens today want a simplification of administrative procedures, not additional miles of red tape. The more the red tape, the more time it takes to get things done and higher the transaction cost, for getting files moving. The Policracy must rise above its class interest and declog administrative processes, not add ever more onerous procedures. Current estimates for completion of the new land acquisition process is a full five years! Only a policracy with a faith (or a vested interest) in an “interventionist” bureaucracy could impose this on citizens.

Third, the Bill shows the medieval mindset of the “policracy” under which industrial and infrastructure development and service delivery were a preserve of the government or of public sector undertakings. Hence land acquisition for private educational institutions, private hospitals and private hotels are all excluded from the definition of “public purpose”. The very same institutions if owned by the government or a PSU would be eligible. This approach runs completely contrary to everything the government has said about the criticality of private investment in infrastructure and service delivery. It confers on government the near unique ability to aggregate land in industrial volumes and then to use this leverage to enter into Public Private Partnerships with industry. The opportunity for extracting “rents” is obvious with the well known downstream consequences of fraud and corruption.  Medievalism is also evident in the requirement that there should be no change in ownership, post acquisition of the property, without the approval of government. Presumably, this is to discourage businessmen, who are “fast track approval getters”, from becoming middle men, in the real estate game. However this is a very restrictive condition for the genuine, medium level, private investor. An investor wants “full” ownership over what she has bought. This includes the right to transfer when considered appropriate. Having to go back to the government, cap in hand, just perpetuates the “license permit raj”. Once the Socio Economic Assessment and the Expert Group are satisfied with the “public purpose” and reasonableness of the project, it hardly matters who the owner is.  Despite all the high sounding support for the private sector, and the bon homie with government in CII and FICCI events, businessmen continue to have the stereotyped image of exploitative, manipulative, stingy but high living, low thinking, self seekers. This Bill reinforces that image. 

Lastly, the Bill is well intentioned in recognizing that the alienation of land can result in hardships for a larger group than just the owners. These are those whose livelihoods were dependent on the land continuing to be used for the purpose it was, till the time of acquisition. Whilst unquestionably appropriate, from the equity perspective, the problem here is the implementability of the proposal. The low ability to identify those eligible, with the robustness required, in the absence of records of informal labour  and the potential for flagrant misuse and cost inflation are obvious deterrents to efficiency and effectiveness in implementability. Are we creating an unenforceable entitlement here for workers, which may actually dissuade farmers from using labour as in the case of industry?

It is tragic that a well intentioned Bill is turned ineffective and counterproductive because of the timing of its introduction. This is a part of the pro-poor pre election bonanza that no party can afford to distance itself from. It is consequently ill intentioned, disruptively regressive and anti-poor by being pro-bureaucracy, anti-efficiency, anti-investment and anti growth.

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