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.
[1] https://www.deccanchronicle.com/nation/maharashtra-to-remove-na-charter-condition-for-setting-up-industry-on-agriculture-land-1857864
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