First, I wish that the 14th Finance Commission challenges the status quo of the system of intergovernmental transfers. Recently, a committee chaired by Raghuram Rajan, chief economic adviser at the time, offered an alternative methodology for measuring underdevelopment, on which to base these transfers. This was more in the context of Planning Commission transfers and questions about the validity of the special category for some states, rather than Finance Commission tax-sharing recommendations. But the committees suggestions were all in the wrong direction, in my view. India needs a simpler, more transparent, more unified, and more limited system of intergovernmental transfers, with the last goal being achieved by giving state and local governments greater tax authority. I wish that the Finance Commission proposes specific changes along these lines, to create foundations for better incentives for sub-national governments to manage their finances and their performance.
Second, I wish that the union finance minister and the Empowered Committee of State Finance Ministers quickly come up with a deal to implement the Goods and Services Tax (GST). The GST seems to have become an odd political football. The introduction of the Value Added Tax (VAT), which also took time but was accomplished smoothly, was much more of an innovation than the GST, which extends the VAT concept, but also broadens the tax base and the scope of centre-state coordination. India is under-taxed for its income level, and with import duties an inefficient and unattractive alternative in a world of complex production networks, failure to move the GST forward represents extreme negligence on the part of Indias political leaders. There is scope for increasing tax revenue enough to make sure that neither the centre nor any state suffers from the changeover.
My first two wishes are complementary, and doing one can help the other. My third wish risks being too broad, but I will try to narrow it down: it is a wish for Raghuram Rajan and the vast institution he heads. Indias system of financial intermediation is, on the whole, terrible. Financial savings are not being collected and channelled to good investment uses anywhere near what is possible. The possibility frontier has shifted out because of technological innovation, which improves information collection and analysis. Indian banking needs more competition and better monitoring to become more efficient and increase its reach. Capital markets need better regulation, with greater clarity but also greater freedom to innovate. Reliable systems of credit rating need to be developed for firms and households. India can quickly achieve much greater financial inclusion and better financial intermediation at the same time, if the wheels are put in motion.
My final wish is for Indias elite diplomats. Indias global aspirations are exposing the fact that this domestic elite has a much lower status abroad. Nominally, foreign policy and global strategy are set by the political leadership, but I wish that the Indian Foreign Service (IFS) would rethink its role, going beyond the polish of conventional diplomacy to direct the ground-level implementation of a global strategy that interweaves economic and political objectives. This will require greater resources in Indias foreign missions, and creation of webs of influence in countries that matter most for India. The trick is to do this subtly enough so that it is not abrasive. Indias politicians have to support this change, but the financial cost would be minimal, and the IFS can and should take the lead in conceptualising this shift.
These are my four very modest wishes for India for 2014. Modest, in that they do not directly address the huge challenges of providing food, health care, education or jobs to the hundreds of millions who do not have enough. Modest in that their implementation can be started by relatively small groups of people, those who already wield power and influence. I think if these wishes come true, India will have a very happy new year.
The author is professor of Economics, University of California, Santa Cruz