The budget could be a joy to behold. For the first time ever, the government will have no excuses for business as usual, sloppiness, inaction and bad behaviour.
As the Modi government prepares its initial budget offering, here is a compilation of some essentials the budget has to contain. Individual recommendations will be discussed in detail over the next three weeks — for a discussion of how corporate tax rates should and must be reduced, see ‘No more bandaid tax policy’, (IE, June 7). Incidentally, that article forgot to include, in the high 30 per cent effective tax rate paid by Indian corporations, the 2 per cent tax via the misguided corporate social responsibility levy.
The budget vision document should clearly emphasise the following. First, that there is a structural change implied in the mandate of the people. The mandate does not involve a shift from Tweedledum to Tweedledee. The mandate is not what happens in George Orwell’s Animal Farm: “The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which”. In short, the budget should be different from Congress budgets.
It is also nobody’s case, least of all mine, that Budget 2014-15 will suddenly make everything right; will magically make the economy grow and provide jobs to the jobless and toilets to those who don’t have them today. But the budget will be misguided, and the voters’ wrath shall descend, if it does not contain a vision and a roadmap of what will be done in the next three years. The budget must also outline the economic philosophy of this new government and how is it different than what the people have just recently, and overwhelmingly, rejected.
Some key policy concerns and initiatives expected in Budget 2014-15 are as follows.
On retrospective taxes, the latest defence of the most retrogressive (Neanderthal?) policy ever initiated by the Indian government is that it cannot reject, reverse and remove this legislation because the CAG will ask for an explanation of the potential litigation-dependent revenue loss. I am not a lawyer, but let me see if I get the argument right. Before former finance minister Pranab Mukherjee introduced this legislation in his reverse pathbreaking 2012 budget, there were no retrospective taxes. Indeed, the government had to introduce new laws in order to invoke the new stupidity. The CAG is just an arm of the government that attempts to ensure that government expenditures and revenue collections are properly accounted for. It is just an auditing agency, definitely no more and maybe even far less. Just as the retrospective law was introduced, so can it be removed. What does the CAG have to do with it? The government must not, cannot, use the CAG fig-leaf for its refusal to act — especially not the Modi government.
As for welfare expenditures, does the government believe in the philosophy and economics behind the several bad subsidies that it has inherited? The bad subsidies together account for more than 2 per cent of the GDP, and belong to the following three broad categories — food, fuel and employment. Not only should these subsidies be eliminated, but there should also be expenditure accountability. For example, will the states be responsible for administration of the schemes, or will it be bureaucrats in various Central ministries? If the latter, what is the rationale for continuing with a failed policy? That good things can happen is indicated by the reformist state-led labour policy just announced by the CM of Rajasthan, Vasundhara Raje.
On the question of fuel policy, there is no reason to modify the steady reduction in diesel subsidies; and making them zero by the end of calendar year 2014.
On jobs programmes, specifically the MGNREGA, Both the CAG and Jairam Ramesh, the Congress cabinet minister in charge, have endorsed the claims of many (including myself) that a lot of oddities and corruption are present in the administration of this programme. If there is any scheme that most aggressively represents the world according to Sonia Gandhi, it is the MGNREGA jobs programme. Why can’t the budget announce that this is the last year of the programme, that it will operate in only the 100 poorest districts this year and that expenditures will be reduced to Rs 20,000 crore this year (a saving of Rs 15,000 crore) and zero rupees next year. What better policy to signal that Indian economic policy is beginning to change?
As far as food subsidies and the food security bill (FSB) are concerned, when the bill was passed last year, Congressmen jumped out of their seats and into the streets to proclaim that it had been passed not because it was good, but because it was Sonia Gandhi’s “dream”. Well, the election results suggest that it was the BJP’s dream that the FSB was passed and the Congress’s worst nightmare. Surely the BJP must recognise that the people of India see Centrally administered schemes like the FSB and MGNREGA and diesel subsidies as retrogressive and immensely corrupt; that continuation of business as is with these policies will be seen as not only rejection but also contempt for the people’s mandate; that the people do not expect that all these programmes will become zero on July 16, but do expect that they will be phased out over the next three years — fuel and the MGNREGA by March 2015, and the public distribution system (PDS) of redistributing food to the poor by 2017.
“Oops we can’t do this”, is the most likely refrain of the politicians and bureaucrats in charge of the ministries with expenditure cuts — but that is also Congress thinking. Instead, a policy that reduces welfare expenditures, reduces giveaways to the middle man and politicians and increases income transfers to the poor can also be politically popular. Consider the following set of policies. Eliminate all Central government policies that have the prefix Nehru or Gandhi. Elimination of the above “bad” subsidies and Nehru-Gandhi schemes will release more than Rs 3,00,000 crore each year. If the government uses the post office “banking” system and Aadhaar to effectively and comprehensively target and deliver to the 200 million Tendulkar poor, then these Rs 3 lakh crore will more than double the income of every poor person in India, eliminate poverty and provide generous education and healthcare benefits to the poor.
In India, the strange story is that bureaucratic and vigilante power (and corruption) are also involved in the ministries with tax cuts. While politically popular, even tax cuts policies are opposed by bureaucrats. Why? Because both expenditure and tax cuts involve a reduction in bureaucratic power and influence. Part of empowering bureaucrats is also to make them act to eliminate their own jobs.
The very fortunate reality for the people of India is that Prime Minister Modi and Finance Minister Arun Jaitley have no place to hide. They have, and will have, no excuses for not presenting the most forward-looking and progressive vision and budget in Indian history. I am more than confident that they realise the importance of this budget and that they are up to the task — and they will handsomely deliver. If not, it will be the shortest honeymoon in Indian political history.
The writer is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Zyfin, a leading financial information company
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