governance, political economy, institutional development and economic regulation

Posts tagged ‘Nandan Nilikeni’

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

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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

Make your vote count

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In the 2009 Lok Sabha elections, only 60% of the 714 million voters bothered to vote. We don’t know how many, who did vote, were aware that the direct and indirect cost of each vote was at least around Rs 7500. Had voters been aware of the value of their vote, they might have given more thought to their vote. After all this is equal to the monthly salary of an aam admi.

This back-of-the-envelope valuation is based on the Rs 150 billion directly spent on the election plus 1% of the GDP over five years which is the conservatively assumed economic leeway available to a government. This means we assume that good governments can enhance GDP and bad governments can reduce GDP, by at least around 1% per year over five years.

This time around, more than ever before, we need to think before we vote. We cannot afford a rerun of the previous five years of lost opportunities and drift.

Unfortunately, bad news comes in triplicate. It seems our luck has run out.

Our new warships and submarines are sinking into the sea; our air-force falling out of the sky and our generals focusing on electoral politics.

Our government is so desperate for revenues that it will raise a tax demand retrospectively or inflate the demand unreasonably on hapless corporates and citizens, thereby enhancing regulatory uncertainty. The ongoing salary review of public officials (7th Pay Commission set up suspiciously close to the elections) will add to the existing fiscal burden of a fat and unaccountable public sector by at least 1% of GDP. More money for them means less money for us.

Pink slips in industry are on the rise. Spending on consumer durables is down. Housing stock lies unsold. The rupee see-saws between an artificial strengthening on the back of returning Indian hot money stashed abroad, partly to finance the estimated Rs 300 billion (US$ 5 billion) election expenses and the counter pull of a likely body blow as the US treasury reverses its easy money policy over the next six months.

At home, elections and the prospects of a Khichdi Sarkar (coalition government) raise the specter of continued executive indecisiveness and policy paralysis.

With two weeks to go for the first votes to be cast, the prospects of a clear winner are dwindling. Modi, the long-time favorite, faces incredible odds with lukewarm support from the BJP/RSS brass and in the face of a growing coalition of political parties with a single objective: block Modi from winning. His meteoric rise within the BJP; his charisma; his flair for independent rather than “group think” and finally his executive effectiveness make him a perfect target for the crabs to pull him down…and they are pulling mighty hard. Of course, it does not help that Modi has been unable to dissipate the ghosts of Godhra and reach out to the Muslim voter. For all the smiles, Modi is running now on only a single leg and it is likely to show.

Meanwhile, the ray of hope for the aam admi, on which Kejriwal rode to power in Delhi, has dimmed. The mechanics of electoral politics has polluted the freshness of Kejriwal’s appeal. Party infighting will mar his prospects. The speed with which his government started working in Delhi was breath taking. But like an inexperienced marathon runner, he spurted too early and lost speed in the first lap itself. His voluntary capitulation from governing Delhi has diluted his credibility and commitment to stay the course; deliver on his mandate and solve governance problems. Voters expect solutions for their every-day problems from a government, not more legislation and protests.

It is a sorry political spectacle out there. But are there things the politically aware voter can do to help pull India out of this morass? Yes there are.

First, in a parliamentary democracy like ours, please vote for a party not a particular candidate for MP. Nandan Nilikeni is a spectacularly good MP candidate and would make a great Minister for IT but vote for him only if you want to return the Congress to power. You may find Modi iffy on inclusion and social conscience, but vote for the BJP if you think the party works best for you. Nitish performed well in a Bihar, systematically degraded by Lallu, but does he have a party to support him? In our system individual candidates matter less than the party. A lone, brilliant individual in the Lok Sabha cannot achieve substantive change.

Second, India is deeply concerned about the criminalization of politics. The Mumbai based, Association for Democratic Reforms (adrindia.org) is doing signal service by sharing information on the declared assets and pending criminal cases for each candidate in a KYN (know-your-neta) format. Many voters may find themselves faced with a conundrum if their favorite party has put up a candidate in their constituency with pending criminal cases. Apparently around 15% of candidates, in the first phase of polling, are in this category. What should one do? If you have personal knowledge of the crime the answer is self-evident. Shun such netas. If your favorite party makes a habit of fielding criminally disposed netas, you need to think again about your party affiliations.

But remember often pending criminal charges are not an adequate indicator of criminality. Conversely, a clean record does not confirm probity. Consider that lodging an First Information Report (FIR) can be extremely easy or horrendously difficult depending on who you are. Ditto for getting the police to investigate your FIR and lodge an appropriate charge sheet in court. Lastly, getting the court to frame charges and start proceedings can be an uphill battle for the poor and poorly connected, but easy for a more forceful litigant, especially if the accused is a marginalized person.

Third, please remember MPs are not responsible for cleaning drains. That is the job of your Municipal corporator. Please do not vote on the basis of who built your neighborhood road best. MPs are meant to approve national policies and enact supporting legislation. Vote for the party whose track record in your State government, or in the National Government, has served your interests best.

The national government actually has a fairly narrow role. Be aware of the limitations of the national government. Consider that if the national government was so critical for outcomes at the local level, there should not be that much difference in the growth and development indicators of different states. After nearly seven decades of independence, inequality across states has grown, not decreased. In our system, despite the hoopla, it is the state government which matters most for your well-being.

National policies are crucial for determining (1) the rate of economic growth; (2) the cost of loans; (3) the availability of banking services; (4) the price of food and basic commodities; (5) the availability of jobs; (6) the quality of inter-state infrastructure (highways, ports, airports, railways, electricity, petro products and irrigation); (7) national defence and (8) promotion of our trade and investment interests overseas.

National policy is also key for ensuring the integrity of India and the right of every Indian citizen to travel, migrate or live securely in any place in India and access public services at their choice of residence. Around 25% of Indians do not live in the place of their birth and there can be no better indicator of nation building than the choice to migrate within India.

Assess the record of your favorite party against this simple metric because this is all that the National government can reasonably do for you. The rest is all done by your State Government, including implementing the rule of law, ensuring your personal security, protecting your property, educating your children, curing the sick, providing clean water and sanitation and developing markets, workplaces and habitats.

Make your vote count. Just think how much market research and soul searching you do before buying a microwave, planning your week-end or buying a present for your khas-am-khas friend. Your vote is at least as important.

Please don’t waste your vote by not voting or by adopting the NOTA route. Life is a forced choice exam. Do well and make sure the ink doesn’t run.

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