MARCH 10, 2015

By Naresh Minocha, Our Consulting Editor

NDA Government is wedged in a piquant situation. Its Prime Minister Narendra Modi is a reforms visionary, a dream merchant and a calculated risk-taker. His most important Cabinet colleague, from the growth standpoint, on the other hand, believes in real politik. Finance Minister Arun Jaitley is also averse to taking political risks as is evident from his pre & post-budget reactions to the idea of big-bang reforms.

His cautious approach towards reforms is evident in his decision to defer a call on recommendations of four reports of tax administration reforms commission (TARC), first report of Expenditure Management Commission (ERC) and non-binding recommendations of 14th Finance Commission (FFC).

Mr. Jaitley had set up ERC for seeking guidance on urea pricing reforms, an issue his two predecessors talked loud in their respective budgets. Both, however, did not dare to bite the bullet.

The dichotomy between the styles of Captain (PM) & the Lieutenant (FM) is constraining the pace and depth of economic reforms. Add to this the lack lusture performance of certain ministers. The resulting picture of NDA's overall performance would turn out to be modest. This, in turn, has subdued the optimism that the nation exhibited in May 2014 when BJP won the Lok Sabha polls with stunning majority that no one dreamt.

To fulfil the public's core expectation that BJP-led NDA Government would be different from UPA regime, Modi Cabinet would have to take bold initiatives including unpopular ones and implement them well.

Before suggesting a few big bang ideas that Mr. Jaitley claims no one has given him, consider first Mr. Modi's crucial statement on reforms.

At the Economic Times' Global Business Summit held in mid-January, Mr. Modi wondered why we can't dream of increasing the size of Indian economy to USD 10 trillion from the present USD 2 trillion. There are countless Indians including jobless and poor citizens who would plug for his vision for speed.

He stated: "We are cutting down on multiple clearances that choke investment. Our complex tax system is crying for reform which we have initiated. I believe in speed, I will push through change at a fast pace. You will appreciate this in times to come."

Mr. Modi's statement itself is a big-bang idea. Alas, its spirit is missing in the Union Budget for 2015-16! His vision is also not reflected in the working of several ministries, if policy delays and project hold-ups are any indication.

The Budget is otherwise best, politically-shrewd budget prepared under ideal conditions that dodged Mr. Jaitley's predecessors for more than decades. It is certainly far better than the ones presented by his predecessor P. Chidambaram.

What is politically wise for Mr. Jaitley might not be an adequate mechanism for realizing PM's visions for speedy and inclusive reforms. This brings us to the idea of big-bang initiatives.

A new wire report from Davos on 23rd January 2015 quoted Mr. Jaitley as saying "I am not going to be swayed by these phrases that are used in television studios. If you take the sum total of all the steps we have already taken, it will be much more than the big bang. Even big bang looks small in comparison."

At the post budget press conference on 28th February, he countered a reporter's query on absence of big-bang initiatives by asking "What is missing from this Budget".

When the correspondent reportedly fumbled for a reply, he stated: "That is exactly how industrialists behave when I ask them to come up with that big-bang reform idea that we don't have."

Mr. Jaitley added: "How do you define Big Bang reforms? You tell me what that means."

One can consider an initiative a big-bang if it marks a radical departure from the present and heralds a paradigm shift in the system. Several such ideas have been proposed over the years by different entities both within and outside the Government.

Now that Mr. Jaitley has challenged the stakeholders of national development to suggest big-bang ideas, it is time to list and articulate them. Some ideas might look outlandish, politically suicidal or contentious to some persons particularly from the ruling class. This is because the networked ruling classes believe in perpetuation of their existing cosy ecosystem on which they are perched.

Big-Bang 1 : Don't pay lip service to tax reform. Act. Announce reduction in Corporation Tax, Excise, Customs and Service tax to the corresponding effective tax rates with simultaneous withdrawal of all exemptions and concessions. Merge all imposts including surcharge and cess on products into a single tariff in keeping with similar recommendations of various expert panels released over the last few decades. The more than half a dozen imposts on imported goods, viz., basic customs duty, additional duty of customs, special countervailing duty, education cess, secondary and higher education cess, national calamity contingent duty (levied on specified items) should, for instance, be consolidated into a single rate of customs duty.

Keep the revised direct and indirect tax rates unchanged for next five years.

Such an initiative would catapult India into top league of countries that are known for ease of paying taxes. It would improve revenue buoyancy. It would ensure easy tax compliance. It would minimize scope for tax evasion and avoidance. It would help avoidance of revenue holdups through innumerable litigation over admissibility and availing of tax incentives.

The initiative would also usher in stable tax regime, which is essential for proper evaluation of viability prospects of any business especially start-ups. One can conservatively assume that simple and stable tax regime would increase GDP by at least one-two percent. Five-year freeze on tax changes would enable the Government to dispense with the economic slow-down for almost two months - one month before the presentation of the budget and one month after the presentation.

FM would perhaps like to trash the First Big-Bang. Before doing so, he should refer to a few Government documents from which this idea has originated.

Recall the Long-Term Fiscal Policy (LTFP) that was announced by the original tax reformer, Finance Minister V.P. Singh in December 1985. LTFP said: "a time honoured canon of taxation is stability. Too frequent changes in tax structure are a source of uncertainty, which discourages tax compliance, creates difficulties for effective tax administration, and takes its toll of economic growth. In order to provide the necessary stability, the Government intends to keep the present rate schedules of taxes on personal income and wealth tax unchanged for a minimum of five years."

Mr. Singh's tax reforms were torpedoed by successive FMs such as N.D. Tiwari till the Indian economy was rocked by high inflation, high fiscal deficit and empty foreign exchange coffers.

P.V. Narasimha Rao Government revived tax reforms with the setting up of Tax Reforms Committee (TRC) that was chaired by late Prof. Raja J. Chelliah.

In its interim report submitted during 1991-92, "The Government and the tax department (along with their advisors) must begin to look at the tax system as an important determinant of economic efficiency and a factor that has serious implications for the citizens' welfare: It cannot and should not be tampered with lightly or from year to year in the quest of multiple objectives or for increases in revenue far in excess of what can come out of the growth of the economy."

Dr. Manmohan Singh, as Finance Minister, initiated phased reforms as recommended by Chelliah Committee. He, for instance, merged auxillary import duty into basic customs duty.

Successive finance ministers have complicated the tax structures since then. Mr. P. Chidambaram indeed reversed tax reforms by introducing add-on taxes such as special customs duty (SAD) in 1996-97. He also introduced education cess on all taxes and Securities Transaction Tax in 2004-05. He introduced Fringe Benefit Tax (FBT) and Banking Cash Transactions Tax (BCTT) in 2005-06. He also introduced secondary and higher education cess in 2007-08 and Commodities Transaction Tax in 2008-09. If an award for taxes mess-up is instituted, then Mr. Chidambaram would be an obvious choice of tax professionals.

Similarly, different FMs have introduced one cess or the other or hiked existing cess to rake up more revenue for exclusively meant for the Centre.

Mr. Jaitely has also succumbed to cess bug. He not only doubled clean energy cess to Rs 200/tonne of coal but also created an enabling provision to introduce 2% Swachh Bharat Cess (SBC) on certain services.

Instead of SBC, the Centre should provide grants to local government bodies as an incentive to levy littering fine on the citizens who defy the municipal rules relating to cleanliness and public hygiene. India needs wealth-linked penalty for littering. If a poor man litters, he can be fined say Rs 5. If a man sitting in Mercedes throws some waste from the car, he should be fined Rs 5000. The penalty can be waived off if a culprit agrees to instantly take a broom and start cleaning the road. Go for Singapore Model for enforcement of cleanliness.

As for cess-centric obsessive compulsive disorder of FMs, Mr. Jaitely should refer to the report of the Advisory Group on Tax Policy and Tax Administration for the 10th plan. Discussing multiple taxes on indigenous goods, it stated: "separate accounts are to be maintained for each of these levies, increasing administrative and compliance costs. It is difficult to work out effective tax rates since CENVAT credit is not given for all of them. There should be a single levy under the Central Excise Act."

Big Bang 2 : To facilitate implementation of first initiative, roll-out a five-year plan for monetizing idle and unproductive Government assets starting with Lutyens' Bungalow Zone. Shift the entire cabinet to low-rise red-stone apartments that can be built within President's Estate without compromising the colonial charm relished by the ruling elite.

Monetization can be enhanced through aerial growth of multi-use buildings that real estate developers would build on prime land where dilapidated government buildings stand at present. The Government should mandate multi-storeyed apartments for all Government staff as well as the judiciary. This would result in vacation of lot of land, which can be used for public welfare such as building high-rise dormitories for migrant workers such as rickshaw pullers, newspaper hawkers and street hawkers. They should be licensed and allotted subsidized stay at the dormitories. Such an approach would contribute to emergence of smart cities that would be free of slums and squatters.

An imaginative real estate monetization plan should aim at realizing Rs one lakh crore per annum, which should be used to fund potable water supply, healthcare, education and other basic amenities in rural areas.

Unlocking the value of Government land would facilitate massive construction, which, in turn, would generate jobs across several industries from sand mining to manufacture of aluminium and steel. This would be ‘cashless' investment model of generating inclusive growth, work opportunities and wealth.

Tap optimally and wisely all other non-tax revenue streams including outright privatization of sick and non-core public enterprises. The annual target for non-tax revenue generation from assets other than real estate should be at least 50% higher than the present realization.

Big Bang 3 : The Government should give 30-year corporation tax holiday to companies that take high investment risks to develop sunrise and challenging industries. Such pioneering industries can be exploration and production of shale gas, exploration and extract of gas from offshore gas hydrates, production of import substituting potash fertilizer from sea brine water and glauconite sandstones, exploration and mining deep-sea minerals, offshore renewable energy projects and development of a new (not copycat) process or new products especially drugs.

The corporation tax holiday for pioneering industries should be considered as a means to generating indirect tax revenues from equipment that companies buy or hire to implement projects. The Holiday should serve as a technique to generate employment and collect personal income tax from staff employed by project developers.

Big Bang 4: Plug the fatal flaw (population explosion) in the development process. Allocate budgetary funds equivalent to one percent of GDP on reining in population growth. Reconstitute the moribund PM-chaired National Commission on Population (NCP), which met only twice during the two UPA regimes. Frame a new National Population Policy (NPP) in place of the one unveiled in 2000.

Link and limit the provision of food & fuel subsidies & all other social benefits to the size of the family with immediate prospective effect. Create privileged and graded social benefits system for families with one and two children. They should get priority in admission of children to educational institutions and in award of scholarship, etc. Those parents, who procreate with vengeance in the name of religion, caste and vote bank politics should taken to task for harming the mother earth. They should be penalized by putting them in the last in the queue for availing government facilities. Parents that spawn large families should be debarred from contesting elections. The idea is to cause minimum discomfort to the children of large families but shame and name their parents.

Simultaneously launch an awareness campaign on the adverse impact of population explosion on national development. Cite the political fallacy of not paying heed to the report of Sir Joseph Bhore Committee that submitted its report in 1946.

The Committee, formally known as The Health Survey & Development Committee (HSDC), had observed "The steady growth of population, which has taken place in (pre-partition) India during the past few decades, has had its repercussions on all such matters as the housing, clothing and feeding of the additional numbers brought into existence from year to year, their education and the provision of adequate measures for the protection of their health."

It stated: "No programme of social reconstruction can therefore, afford to ignore the implications of the population problem."

Educate environmental and human rights activists with the fact that the mother of all environmental and social woes is population explosion.

Big Bang 5 : Financially empower States to become equal partners with the Union in socio-economic development. Share non-shared resources with the States for whole-hearted implementation of cooperative federalism. Stop levy of surcharge on taxes as a means to generating revenue exclusive for the Centre. Abolish or merge surcharge with respective taxes to make their revenue receipts sharable with the States. Convene immediately a meeting of PM-chaired Inter-State Council to take a joint call with the Chief Ministers on recommendations of Commission on Centre-State Relations (CCSR) that submitted its report in April 2010.

Accept and implement the non-binding recommendations of 14th Finance Commission (FFC) and the previous one regarding the sharing of non-tax revenue with the States.

A few other big-bang ideas such as enactment of litigation-insulated National Development and Jobs Creation Act were mentioned as 12-point agenda for Modi government in earlier column headlined 'Mr. Modi, don't go the Abhimanyu way; Shear UPA's Chains to Untie Growth Genie.'

Many better ideas should be available in the public domain. Mr. Jaitley should thus not been complaining about lack of big-bang ideas. It is, however, his prerogative to overlook or trash unsolicited ideas. And it is for Mr. Modi to remain reconciled to a situation where his vision for speedy reforms would get transformed into wishful thinking.