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No more economic bandaids

There are expectations of bold reform that will shift India to a high-growth trajectory. But better implementation of socialist policies or mere announcements of projects will not deliver results. The reforms that matter are deeper institutional changes — we need high-performance government organisations, necessary in a mature market economy. Such reforms would threaten discretionary power, laziness […]

Written by Ajay Shah |
Updated: February 19, 2015 12:00:30 am
Putting more money into Sarva Shiksha Abhiyan isn’t the point. We need changes in how government works. Putting more money into Sarva Shiksha Abhiyan isn’t the point. We need changes in how government works.

There are expectations of bold reform that will shift India to a high-growth trajectory. But better implementation of socialist policies or mere announcements of projects will not deliver results. The reforms that matter are deeper institutional changes — we need high-performance government organisations, necessary in a mature market economy. Such reforms would threaten discretionary power, laziness and corruption, and will be opposed. Nehruvian socialism was an intellectual construct. Replacing it with a market economy requires intellectualism.

There are expectations that the Union budget will be the moment when the BJP delivers bold reforms. The interim budget last July might have come too soon for it to formulate such reforms. But what constitutes “bold reforms”? Announcing a Mumbai-Kolkata six-lane expressway? Single-window clearance for foreign investors? A good place to start thinking about this question is tax terrorism. India has a crisis of low tax revenues. And there is near universal hostility towards the tax administration. Everyone agrees reforms are required for better tax revenues and to put an end to tax terrorism. But just giving tax inspectors instructions to be nicer or setting up an IT system that encodes present processes is a superficial solution. Neither will yield big results.

We must recognise that, just like everyone else, the individuals working in the department of revenue or the Central Board of Direct Taxes are essentially honourable. Tax policy and administration did not get run into the ground because we hired the wrong people. We’re in trouble because we have the wrong structures and frameworks.

Policemen should not have a say in drafting the CrPC or the IPC. They would be tempted to make their own lives easier and trample on rights. That’s why there is a separation between legislative and executive power. But in tax matters, we have handed over some legislative power (the drafting of the finance bill) to tax administrators. This has created a bias in favour of convenient ways to get revenue. Further, tax administrators do not know economics and are unable to build a sound tax system with an eye on GDP growth.

Tax policy in India requires a sensible and fair approach that generates the requisite revenues with minimum distortions. Large-scale changes are required: replacing all indirect taxes with the GST as well as all direct taxes with something close to Version One of the Direct Taxes Code. A newly designed tax administration based on the principles of rule of law, accountability as well as checks and balances is needed. These large changes will be unpopular with tax evaders and resisted by the tax administration. Are we bold enough?

We need fundamental changes in the working of the government in the health and education sectors. These changes will be resisted by the existing health and education bureaucracies. Are we bold enough? Because why should schoolteachers in India fail to show up at school? And when they do, why do they fail to teach? Why do doctors working in government hospitals deliver bad healthcare but perform so much better in their private practices on the side? Putting more money into the Sarva Shiksha Abhiyan is not the point.

The infrastructure sector was not undone by a few bad people. The foundations of policy were wrong. A field orientation will not solve this. Asking people to work harder is not the answer. An understanding of policies and public administration structures is required. Are we bold enough to reform the objectives, accountability and organisational structure of the Indian Railways? Or will we ask a broken organisation to deliver a high-speed train from Mumbai to Delhi?

For 20 years, we have attempted financial-sector reforms but scored only one victory: the equity market. The FSLRC has looked deeply at the foundations — objectives, accountability and organisational structure — of the financial system. But the RBI runs a central planning system and resists change. Are we bold enough to reform finance?

It is seductive to institute a “single-window system” for foreign investors without understanding the obstacle course they are forced to go through. The system of central planning, where the government controls the myriad details of how foreign investment takes place, has to be dismantled. This will threaten the power of the people who man this system. Are we bold enough?

What is required is the hard work of diagnosing problems, drafting new laws, designing new organisational structures and building new public agencies. Nehruvian socialism was not built in a day. It was a complex of state structures and laws through which control of the economy was put into the hands of politicians and bureaucrats. Nehruvian socialism was an intellectual construct and we will need comparable capability, and boldness, to replace it with state structures for a modern India.

The writer is professor, NIPFP, Delhi.

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