Thursday, Nov 27, 2014

Will the new India please arise

The prime purpose of fiscal policy is to maximise revenue and minimise expenditure. The prime purpose of fiscal policy is to maximise revenue and minimise expenditure.
Written by Surjit S Bhalla | Posted: May 31, 2014 2:30 am

Chhodo kal ki baatein/ Kal ki baat purani/ Naye daur pe likhenge/ Milkar nai kahaani/ Hum Hindustani

Expectations abound for a naya daur. There are several loose ends on the macro side that need to be sorted out. More than the bureaucracy, the thinking is entrenched in old boxes. Narendra Modi has promised change; the delivery time is now.
The RBI: A new relationship must evolve between the prime minister, ministry of finance and the RBI. There are several small steps involved. Recognise that the RBI is independent of the ministry of finance (MoF) in name and blame. Recognise that the incumbent, Raghuram Rajan, has the ability to be not only the finest RBI governor we have ever had but also, potentially, to be one of the finest in the world. Thus, comments like we will change the governor, or he will toe our line, or that interest rates must be lowered because the MoF thinks so, do not belong in a new India. Nowadays, such comments should be considered trash and deleted from the recycle bin.
So what actions will constitute the writing of a nayi kahaani? Monetary policy to be made by the RBI, and true independence accorded. Interest rates will be determined by the RBI as it sees fit. In exchange, the RBI governor will make twice-a-year appearances before a joint session of Parliament, where he will be grilled, questioned and if need be, “cooked” over his/ her policies. There is no direct or indirect linkage between the RBI governor and the finance minister, but the two hold at least once-a-month meetings to discuss monetary and fiscal matters facing the country. The meetings, and stature, should be one of equals.

Fiscal policy: A lot of work has already been done with regard to indirect taxes and it is encouraging to note that implementation of the GST has been accorded top priority. But a lot remains to be done. The prime focus will temporarily shift to the presentation of the Union budget in early July. It should be a vision document, but must contain the following features. Most importantly, that taxation is not a morality play, not a conscience keeper for left-liberals or bureaucrats/ economists weaned on Nehruvian economics. The thinking that hey, I paid my moral dues at the community temple by asking for increases in dividend tax, capital gains tax, corporate and income tax is so day before yesterday. The excuse that the government did not collect money because people did not comply with your morality will not wash away any sins any more.

The prime purpose of fiscal policy is to maximise revenue and minimise expenditure. The former involves the plugging of loopholes, as does the latter. Corruption is present in the loopholes. So how does one maximise tax revenue? By maximising growth continued…

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