Ditch the Budget, Go for Five Reforms Instead Dear Prime Minister

 
Prime Minister Narendra Modi Addressing Media Ahead of the Budget Session 2025

For the last few years, we have been solely missing reform in our government action. Instead, we have been seeing an attempt at tax tinkering in the name of simplification, not just for individuals, but also for corporates, being passed off as reforms. Now, the problem, as Professor Prassana Tantri explains well in this chat on the popular podcast Vaad, is that these things will be meaningless in the presence of tax targets being set regularly to fund government expenditure. It is a must watch, and can be seen at the link below.



This literally hurts – India cannot be a consumption economy like the United States of America, despite all the people who are perhaps advising the government to do so, inspired by the motherland of the Chicago School of Economics which is widespread across American thought. However, the policy advisory of raising funds comes from the European model, which a country with 800 million getting free grains just so that they do not enter destitution all over again cannot afford beyond a point.

We have once again gotten the whole drama of having an annual budget tamasha. The halwas and the briefcases have come out, and we have the smiles and the scowls on our television battling it out to occupy our mindscapes. It is perhaps nobody’s case to state that a governance reform is overdue – scrap the annual budget and instead come out with a five year annual allocation, subject to review in the mid term of the parliament. This would force governments to at least bring out a stable policy regime. This aside, it remains a fact that the budget is a dud exercise, and that reforms can be enforced and rolled out even without requiring the consent of the legislature in several cases. Be that as it may, given the drama round the Budget on the back of a slow growth economy facing a high inflation problem, there are steps that are needed to rectify the rut that has set in by oiling the engine gears all over again.

Mandarins and their political masters need to understand that income tax collections cannot be higher than corporate tax collections, as has been the case of 2023-24, elections notwithstanding. We have been seeing a stagnation for a year and a half because new investments are not coming up – this has to be addressed for the reasons that the government is continually shying away from. Now, while people have been advocating interest rate cuts on borrowing and granting greater freedoms for NBFCs to operate for riskier profiles, which is critical for the very survival, if not growth of the micro, small and medium enterprises (MSMEs), one also has to come forth and understand a few things about the cost of establishing and running a business in India. That is where the real reforms have to step in and the areas where innovative thinking needs to be taken up.

While one keeps talking of more reforms these days, what is ironic is that the name of these steps is missing from discussions. Contract enforcement and cost of borrowing are definitely measures that get some attention, but that is the result of the government’s publicly stated positions on the same. When asked about other reform steps needed, there is generally a muted response from the government and its advisors particularly, because they need honest conversations instead of simply staring down the barrels.

So, what should be these reforms? Firstly, cost of land in this country has become unsustainable, and is the biggest barrier to establishment of businesses, especially the large scale ones that the government believes will help boost manufacturing. This is not even including the extraneous cost of corruption in terms of transfers. The key reason for this has been the clause of non-agriculture (NA) charter for setting up a new Industry on Agriculture land. Even conversion charges tend to be steep, and remain mired in controversy, further causing escalations in land. What the Maharashtra government recently announced in this regard can be a game changer, and states need to be pushed to free up agriculture land is revolutionary in this regard[1]. BJP ruled states need to start doing this for obvious reasons – small scale land holdings in any case make farming unproductive, and to prevent market exit of such people will only skew the distress in rural areas further.

The second big reform would be to redirect capital expenditure spending to ensure urban development for our smaller towns and cities. Again, while Professor Tantri has asked for reduction in it, I would rather say that this money be redirected to undertake a second wave of smart cities mission, particularly for the next hundred big cities by population. It will soon be evident that urban population of India will be greater than that of rural India. I had argued three years ago that delimitation will lead to a shift of seats away from rural India[2]. In such a scenario, the political dividend of urban development program that delivers bang for the buck in the second tier of hundred cities of India by population will be immense for the ruling party. The multiplier effect here will be far bigger than simply building unfeasible metro lines that have very less ridership. Jokes about pigeons riding Jaipur metro apart, let’s take another example from Maharashtra. The ₹9,000 crore white elephant Nagpur metro project could very well be replaced by holistic urban development smaller cities like Kolhapur, Solapur, Sangli, Solapur, Amravati and Nanded with a far bigger multiplier effect emerging from it. Similarly, new national highway projects must not be considered till the existing ones are not completed and should be synchronized instead with the expansion of India’s rail network.

The third measure that may be considered by the government to show its commitment to a simple tax order is to withdraw all tax related litigation, be it individual or company, below thresholds, and in cases, even forego the idea of any recovery. The signal it will send out is that the government remains committed to ease of doing business and not in tax terrorism. If the quantum of tax recovered is lower than the administrative expense related to it, clearly there is a problem. “Utilizing data” is part of this administrative cost, however innocuous and efficient it may seemingly sound. The story of the panipuri seller receiving GST notice[3] in fact has done more damage to India’s payment digitization than even the commissions that the banks have been allowed to charge without user knowledge. Of course, this also has to be pushed down into states, since in the panipuri seller case, it was the state government that had raised the notice.

Step number four, in this series, would definitely be the permission of more financial institutions into the system. If the government claims that the financial sector’s health is in the pink, surely it should have no problems in having a liberal NBFC/banking license regime. Fact remains that the administrative cost of borrowing will remain high so long as the number of players remains regulated. This is what translates to the higher cost of capital that is hurting India’s MSME sector especially, not to mention the arrest on borrowing for new investment from the larger group. Further, the Reserve Bank of India has to be involved to allow easier borrowing for MSME units that may not have a good credit score, since current regulations stymie that process for institutions. Newer institutions can be allowed to tackle them and the market be trusted to undertake these. Again, Professor Tantri has spoken enough on it, but this is a topic that deserves to be talked about for donkey’s years.

A fifth measure, and this is something that needs political capital for sure, is the reintroduction of the farm laws. To quote Professor Salvatore Babones from his chat with Smita Prakash a year ago[4] while explaining the significant impact of agricultural reforms in India:

“…what's necessary to have middle income status is to have high productivity throughout the economy or to have middle income status; have at least a reasonable medium productivity throughout the entire economy so India exports about 20 percent of its GDP. Brazil exports about 20 of its GDP; Argentina exports about 20 percent of GDP; those countries have GDP per capita that are three to four times India's level and they have that because they have extraordinarily productive agricultural sectors that is in those countries agriculture is a leading industry. They export their agriculture, but the point is that their agriculture is productive and other sectors are less productive. The manufacturing sector in well in Brazil is not so bad; in Argentina the manufacturing sector is notoriously very low productivity because there are lots of regulatory barriers and Union barriers to manufacturing. Now you can contrast that with East Asia in East Asia – exports is a percent of GDP tend to be more like 40 percent of GDP for China it's around 40 or Mexico. Mexico is an export driven economy and their exports are about 40 percent of GDP now China and Mexico have the same GDP per capita. Again, in rough terms, as Argentina and Brazil they're just different models - the most efficient sector in Mexico is the export sector, and agriculture is lagging behind and keeping the economy back. So the route to Middle income status simply requires that the economy as a whole be productive at the level of roughly ten thousand dollars per person per year if that's what the economy as a whole is producing.”

Agriculture in India is transforming in ways that cannot be fully fathomed, and is on a good trajectory, thanks to several good steps by the government. However, the full power can come up only if these reform measures, especially a unified marketplace and increased productivity through corporatization can help. That means taking the bull by its horns in the form of APMC amendments being pursued. If any state wants to be left behind by rejecting the proposed changes[5], the government should let that be the case, and instead at the least get the BJP ruled states to sign up for this unified marketplace.

The annual budget drama is of frankly little use for the $3 trillion economy today. Long term vision and commensurate actions should instead be pursued by the government of the day. It is no one’s case that there is potential – but how to unleash the potential, now that is a problem that needs sincerity and not just accounting jugglery. This is a moment that will test the Narendra Modi government in a big way, and we can only hope that he passes through with ease. May Goddess Lakshmi also be accompanied by Saraswati and Durga to enable these reforms.

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