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 and minimising tax rates. Obviously, the minimum tax rate should not be zero. So what is to be done? New tax policy — zero dividend tax, all capital gains tax at 7.5 per cent (short-term, long-term, property), and zero securities transaction tax. One needs to do a complete rethink in order to achieve a Jupiter-style velocity into the new world. Did you know that the government does not publish or allow publication of data pertaining to income tax returns, which income group paid how much tax? These data were published, albeit in limited form, till a few years back. Until UPA 2 disallowed or prohibited the practice. Time to make such data freely available, so one can actually witness the fact that the rich have the highest compliance rate.
Personal income tax: A complete overhaul of the tax system with only two tax rates — 10 and 20 per cent. This will increase compliance and substantially increase revenue. Corporate tax: This should be restructured according to best practices in the world (which most emphatically rules out the US) and with two goals in mind — maximisation of revenue and global competitiveness. At present, Indian corporations are among the highest effective tax-rate payers in the world, where effective is defined as the ratio of taxes paid over income made. This effective tax rate is, at present, around 25 per cent; it should be closer to 18 per cent. Essentially, what needs to be done is a lowering of tax rates and an increase in efficiency of tax collection. An increase in tax compliance that will accompany lower tax rates will also mean substantially lower corruption.
Expenditure policy: Try surgery. The broad statistics on fiscal deficit are as follows (and it is surprising how many tax experts and policy economists and especially market economists are unaware of the empirical magnitudes of this “identity”). The consolidated Centre-plus-state fiscal deficit is around 8 per cent of GDP; 5 at the Centre and 3 in the states. Expenditure (state plus Centre) is around 30 per cent of the GDP. So revenue is 22 per cent, of which non-tax revenue is 4 per cent of GDP. Implementation of the GST should allow extra revenue of 1 to 2 per cent of GDP; a substantial reduction in welfare or in-the-name-of-the-poor subsidies to only 2 per cent of GDP will save another 2 percentage points. Linking the subsidies to cash transfers and Aadhaar will mean that the bottom third of the population will get nearly five times the money they presently receive via misguided Nehru-Gandhi socialist programmes like PDS
A rationalisation of welfare expenditures will allow for substantial increases in expenditures on infrastructure and public health, especially on water and sanitation (including cleaning of the Ganga and other rivers). This will allow the Central fiscal deficit to be less than 3 per cent in two years, and less than 2 per cent in three. That is the nayi kahaani, and we have not even begun to talk about the positive effects that will occur from increased GDP growth.
This new tax and expenditure policy is win-win, stupid. You will only recognise it to be such if you leave your pretentious morals at home.
PS: There is some disturbing news. If reports are to be believed, the BJP government (or old Nehru-Gandhi bureaucrats out to stump Modi ?) has stated that they cannot act now on the draconian retrospective tax legislation until they hold “widespread consultations with the stakeholders”. Is Modi’s BJP the new Congress? So soon? The ink on the oath is not even dry yet.
The writer is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Zyfin, a leading financial information company