Just do it

The Fiscal Responsibility and Budget Management (FRBM) Task Force proposals are creative and path-breaking. The recommendations for tax reform include rationalisation and simplification of direct and indirect taxes. Its radical proposals include a goods and services tax — a single nation-wide VAT on goods and services that replaces central excise, service tax, state sales tax, octroi, stamp duties, etc., and is administered by one single IT system. This sounds like a dream to most Indians, accustomed to innumerable forms, multiple tax authorities and inefficiency and corruption at all levels. But will the UPA find the courage to implement the recommendations? If it does not, projections show that the non-interest expenditure of government will be squeezed out, falling by over 1 per cent of GDP over the period ’04-’05 to ’08-’09.

The reforms proposed are very challenging. The cooperation of states is essential. Opposition by chartered accountants and tax lawyers, whose jobs depend on complicated tax systems, could be bitter. The average person who stands to gain, may not have the clout to push in favour of reforms. But, despite the obvious criticism and lobbying that comes from losers every time, it makes sense for the Congress to take the plunge as early as possible. In Manmohan Singh’s last stint as finance minister there was a realisation that India had landed in a crisis in ’91 because of fiscal indiscipline in the previous decade. Singh had to focus on fiscal consolidation without a blueprint for tax reform. In the five-year period starting in ’92, non-interest expenditure of the central government went down by a dramatic 2.5 percentage points of GDP. This was acutely painful, politically speaking. If the reforms are taken up, the government can manage smoothly an increase in its non-interest expenditure by 1 per cent of GDP over the next four years.

Vijay Kelkar’s proposals for tax reform and removal of the ‘exemption raj’ were not implemented by the previous government. But perhaps that response came at a time when FRBM was far away and elections were near. Now we have a government which has a few years to go before the next election, that may feel the heat of living up to FRBM numbers every year, but can reap the fruits of the efforts. If the CMP is to be more than rhetoric, then the UPA needs money, and without a major new effort — such as the Kelkar report — there will be no money. Hence, if the UPA government fails to change course on matters of fiscal policy, they are likely to be in a fairly difficult position by the time the next elections come. The path laid out by the Task Force could be the road map for the tricky terrain ahead.