governance, political economy, institutional development and economic regulation

Posts tagged ‘Trade’

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

“Tweak” the process transparently to deliver PM Modi’s “Big Things to Small People”

Obama Modi

(photo credit: article.wn.com)

Charismatic leaders can mould crowds like putty. Bill Clinton’s March, 2000 “US and India are natural allies” address to the Indian Parliament; Barrack Obama’s University of Cairo “New Beginnings” address to the Muslim world, June, 2009 unleashed a Tsunami of optimism and “feel good”. In much the same way, PM Modi-the man with an agenda of Big things for Small people- in his recent Madison Square address, won over the hearts and minds of a “massive” (by US standards) crowd of 18,000 Indian-Americans in New York and an even larger audience back home in India.

For many Indian expatriates, including us in India, it is a relief to have a Prime Minister who radiates strength, speaks extempore and from his heart. It also helps that he is a consummate performer, who draws energy from the crowd and returns it to them magnified many-fold.

Those looking for suave wit and a sophisticated exposition of geo-political gyan were sorely disappointed. Modi was deliberately folksy and simplistic. He capitalized on his strengths magnificently, just as Indira Gandhi, the last Indian PM with an international stature, used to do more than three decades ago.

Of course, it helps if one can live on water endlessly and still have the physical ability and mind space to go through a deliberately, whirl-wind program. By doing so Modi has become a live bill-board for the low carbon footprint potential of solar energy. His eschewing food altogether, through the trip, was akin to the Mahatma wandering through the London chill in his sparse loin cloth, protected only by the churning energy generator in his mind.

Till now the West has been wowed by India’s IT skills, thanks to our Silicon Valley diaspora. Next, we are likely to be branded as Yoga maestros all and expected to perform never-before feats of physical endurance.

But it was not all plain sailing.

Three areas where plain speaking-PM Modi’s forte, would have helped, are listed below.

First, what exactly is our stand on joining the fight against Islamic Terror and the linked approach to Afghanistan? The message coming through till now is fuzzy. It seems India is likely to carry on in much the same muddled way we have done till now; remaining visible in Afghanistan, but primarily as well wishers, bringing development to the people of Afghanistan. This is clearly dissatisfactory and unrealistic in the context of the impeding US withdrawal and the likely security turmoil courtesy the unresolved political contestation between the Ashraf Ghani and Abudullah Abdullah groups. National governments are prone to fail. Similar recent experiments in Nepal, Zimbabwe and South Sudan illustrate the illusive nature of such options for “externally enforced” stability in the face of unresolved local contestation.

Our interest lies in clearly establishing that we view the Taliban, the Pakistan Army and Militant Kashmiri jihadi groups as part of the same set of Islamic Terrorists, which are a direct and existential threat to us and our secular, plural democratic system. We must be willing and able to take the most effective action in our near abroad to crush Islamic Terror. But where Islamic Terror is not a direct threat to us (as for example the ISIL) whilst any UN endorsed initiative will have our support, we do not have the resources to join a plurilateral initiative against global terror. This is strictly for the big boys; the US, its NATO allies and China.

PM Modi has been at pains to explain that on this trip that whilst he has been trying for more than the last two decades to get the US to recognize the global consequences of Islamic terror, they took cognizance only after 9/11, when it hurt them directly. The fact is we must be similarly discriminating in unbundling Islamic Terror into immediate and distant threats and not be distracted by the enormity of global threats and ignore focusing on managing immediate threats, closer home.

Plain speaking about our threat perceptions, our limitations and our determination not to be cowed down by terror would have helped.

Second, the message on trade and investment needs to be distilled better. The economic opportunities in India are well known. The demographics; the steady economic growth and resultant demand and our democratic architecture.

Unfortunately most foreign investors live in the present. No international manager has a business perspective beyond a decade-even if they draw up beautiful thirty year perspectives. What big business looks for is leadership level facilitation to get their specific project up and running quickest with commercial and political risk minimized.

Tardy environmental clearances; tax opacity; poor infrastructure and most recently, the extended ambit of judicial review of contracts are big dampeners. Many of these constraints are institutional and require structural change, which is long term. What we need are near tern solutions, of the fire-fighting kind, to establish the enabling business environment. Selective but transparent tweaking of dilatory process is an obvious option but there are challenges even here.

At the leadership level, “successful tweaking of process” requires political credibility that the selective attention is in national interest and not another manifestation of crony capitalism. Consensus building between the executive and the judiciary of the acceptable envelop of “process tweaking”, in national interest, is key for retaining the credibility of the executive and the independence of the judiciary, whilst simultaneously ensuring that the judiciary does not get drawn into settling political scores.

PM Modi is best placed to manage the optics on this score. At the operational level, he will need the support of a highly skilled and empowered team of state government officials working with counterparts from the Union Government, to pilot the tweaking process towards accelerated launch of projects.

What should constitute the government’s decision matrix for determining the “hurdle rate” for projects to be eligible for tweaking the “way we do business”? In such circumstances it always helps to have narrow objectives. “Employment and poverty reduction”, both of which are urgent near term investment related goals, present themselves as excellent “filters” for evaluating and identifying proposals which merit the highest level of facilitation.

50 projects; 5 million jobs; US$15 billion investment can be the rolling target with automatic replenishment by new proposals as projects get launched. Unfortunately, we missed the opportunity to generate the frisson of excitement which the project based approach generates.

Third, plain speaking on our environmental and energy policy would have helped. It is clearly in India’s interest to clean its water bodies and rivers; reduce air pollution and reverse the denudation of forests and degradation of land. Degradation of these natural assets has immediate economic and social outcomes usually with adverse poverty consequences. It is the poor who are impacted negatively when water bodies and rivers become polluted because they use them directly for personal needs and business. The poor similarly suffer the most from atmospheric pollution because they are incapable of insulating themselves and their children, from such ambient pollution. Unregulated deforestation robs the poor of their eco-system and their livelihoods. Combating land degradation, like increased salinity often caused by unsustainable use of ground water and poorly managed large irrigation schemes, is a costly undertaking, which is often beyond the financial ability of the poor.

On energy our big concern is energy security. The use of coal is likely to remain a staple component of our energy profile. Similarly, more aggressive utilization of the hydro potential in India and in South Asia is an efficient option. Embedding passive energy efficiency building design is another significant option. Urbansiation levels are relatively low but there is a big stimulus in the offing under the PMs target of a house for all by 2022.

More generically, India is committed to technology choices which are congruent with our two, often conflicting, goals of reversing the degradation of natural resources whilst ensuring energy security. An increasing share of wind and solar energy is one such technology choice. Increasing the share of public transportation by railways relative to roads is another which the government is pursuing. But capping India’s carbon footprint at an unrealistic level is similar to capping food subsidy at historical prices which India has already rejected.

The mantra for plain speaking on the Indian strategy for managing terrorism; enlarging trade and safeguarding the environment is to rely on the simple rule of first reserving the fiscal and the physical space for the developing world to “catch up”, before providing breathing room for the developed world, who have abetted and often perpetrated all three global problems, by agreeing to hold them harmless.

Spicing the Pak-India “Punjabi Tango” with Gujarati Dandia could yield results.

 

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(Photo credit: outlookindia.com)

The Pak-India affair is almost as tiresome as the Israeli-Palestine impasse.   Neither party can pull apart nor do they live together in peace. Successive governments on both sides start a peace initiative at the beginning of their terms, only to lapse into status-quo near the end-defeated by the inertia of babus and elite interest on both sides.

For most of India, south of the Vindhayas and East of the Yamuna, Pakistan remains a distant and intractable land. For the average Pakistani, India is a bully, growing muscular by the day, bent upon destabilizing Pakistan.

It doesn’t help that for all practical purposes, Pakistanis and North Indians are very alike.  They share the same values and prejudices. The daily “show” of faux aggression at the border post of Attari, near Amritsar, illustrates the brawny culture on both sides. Border guards on both sides face off in a peculiar, mirror image, “Punjabi Tango” of choreographed, muscle and moustache to the accompaniment of lusty words of encouragement of their country people. But the bravado ends tamely, with both sides trotting off to their own quarters, their duty done.

The similarities extend to the mirror, comparative advantages of the two countries; near similar human capital development levels, low income levels and low natural resource endowments. Also similar are the barriers to growth, vast inefficiencies in government and elite capture; by the agro-military-industrial complex in Pakistan and by the agro-industrial elite in India.

Both economies have benefited from adoption of the “open economy” model of growth since the mid 1980s. India more so than Pakistan, which has been constrained over the last two decades by its preoccupation with Afghanistan and its own war on terror-albeit some of it, of its own making. As Bhindrenwale was to Indira Gandhi, the Taliban has become for Pakistan; an out of control Tiger.

The first casualty of insecurity is investment-both public and private-especially in infrastructure. Long payback periods are unsuitably risky if revenue streams become uncertain. More importantly, with the world increasingly in the “open economy’ mode, there are easier business pickings elsewhere. The 21st century belongs to growth in Africa and that is where business is rushing to be, both Indian and Pakistani.

It is not surprising therefore, that trade between Indian and Pakistan is minimal and stagnant, relative to the total trade of both countries. Pakistan exports only 1% of its total goods to India and only 4% of its imported goods are Indian. Of course, the official data underestimates the actual trade through third countries and destinations. Both could benefit by cutting out the intermediaries margin and higher transportation cost of acceptable third party destinations. Non-tariff barriers on both sides; poor trade infrastructure and low financial integration make even the best cross border trade intentions die. Cross border investment is yet to be a reality.

Why then bother at all to disrupt the convoluted stalemate of the past five decades? Here are three good reasons:

First, Pakistan estimates (Economic Survey 2013-14) that it loses up to 3% of its GDP due to insecurity, bleeding it of nearly one half of its potential GDP growth. For India, an insecure Western border is expensive. The geo-politics of Pan-Islamic militancy unsettles its domestic, plural aspirations.

More generally, “including the poor” is a common challenge for both countries. The last thing, either could possibly want, is to add the cost of managing terror to that long list of unproductive, resource draining preoccupations.

Second, India and Pakistan both gain by operationalizing the Turkmenistan-Afghanistan-Pakistan-India gas pipeline. This has been on the agenda for the last two decades and 2018 is the new aggressive target. Both economies are deficient in gas, a clean and versatile fuel for power generation, domestic use and industrial purposes. India loses 0.5% of its GDP every year due to shortage of peaking power capacity. Perversely, domestic coal supply shortages and the high cost of imported coal and LNG keeps installed capacity idle. The TAPI pipeline, would meet around 20% of our gas demand till 2030.

Third, the lack of Pak-India economic integration provides a ready opportunity to China; the “big Panda in the room”, to deepen the economic “silos” with each integrated independently to China, but not to each other. This is already happening. Whilst trade between India and Pakistan stagnates, trade between China and Pakistan is booming, as is trade between China and India.

Of course China is the world’s factory. It aggressively supplies price competitive goods, well suited to the limited pockets of developing countries. Chinese trade comes with generous financial outlays to develop and manage strategic infrastructure; Gwadar Port in Baluchistan (linking the Middle East to China in a trade and energy corridor) and the offer to build high speed railways and highways in India.

Both Pakistan and India will accept much needed foreign capital and investment from anyone who offers it. That is the wise thing to do commercially. But it makes strategic sense to also develop alternative trade and investment opportunities in their “near abroad”. Infrastructure development is a great facilitator for growth. But it also has enduring legacy value. It determines the future spatial spread of growth and jobs along economic corridors. It is sobering to remember that Karachi Port is nearer to Delhi and Amritsar than is Mumbai.

Democracy is great for transparency but is a killer for negotiations, strategic deals and moving on, which are best done in privacy. This is a limitation for PakIndia normalization. The history of distrust and animosity extends far beyond the cricket field. Babu led governments become hostage to the “agency problem”. The narrow self-interest of the managers drowns the real interests of those they represent.

Progress can only come from “disruptive innovation” by leaders. It’s PM Modi’s call. A dash of Gujarati Dandia could spice up the frozen-in-time “Punjabi Tango” to produce results.  

 

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