Column: What is to be done

Written by Meghnad Desai | Updated: Jan 20 2014, 09:32am hrs
There seems to be, at long last, some discussion of economic issues in the campaign for the forthcoming general elections. First, there was the balloon floated about the BJPs intention to abolish all taxes and replace them with a transaction tax. Then, there was the sudden announcement by the new Delhi government to reverse the decision by its predecessor to welcome the FDI in multi-brand retail business. Indeed, each of the three decisions made by the new AAP-governmentwater subsidy, power subsidy and the audit of the power discom accounts have also roused a debate. There has been much unease about these decisions as well as about some possible copycat moves by other states, such as Maharashtras on power subsidy.

At the very least, the budgetary process has to be improved. In the UK, every budget is analysed in terms of the gains and losses of each decile of income-earners. That tells us whether the latest tax and benefit changes are progressive or not. India needs a similar discipline in its budgetary process. Indeed, each such decision as the Delhi governments decision to subsidise water ought to show how it is going to be paid for. Often the debate is about huge hidden subsidies that the corporate sector gets. Let us have a statement of both taxes uncollected and subsidies paid along with information on how each subsidy is paid for.

The tax abolition decision has come without any pedigree. India has no tradition of any serious libertarian thinking, no anti-tax political movement since independence. There was a high income tax rate culture during the glorious socialist years where Congress could not have enough of income and wealth taxes at prohibitively high rates. Now, at least the income tax rates have come down. The wide spread and persistent growth of black money is a proof of the adverse incentive effects of taxation.

The idea of abolition of all taxes may find no owners but the idea of simplifying the administration of taxes and reducing the transaction costs (in terms of time and money spent) of tax compliance would be welcome. If taxes have to be reduced or abolished, there has to be a careful testing of the alternative tax proposed. The transaction tax, as currently proposed, may lead to a growth in the cash economy which we should not encourage.

There is some discussion of bringing back black money from abroad. This may be good but the bigger hoard of black money is at home. This hoard of black money circulates and earns profits. It permeates politics. To abolish it would be revolutionary. The proposal that large denomination notes should be removed is a beginning but does not go far enough. To seriously tackle black money, one would need to replace the old currency with a new one, devalorising the old currency completely. Households would then be allowed to change old currency for new, up to say, R 1 crore each. Any surplus would have to be shown to be legitimate. For the rest, the government should offer to mop up illegitimate currency hoards by exchanging old currency for zero coupon bonds which would be saleable. That step would allow the market to work out the discount on old black currency. This may also raise a lot of money to retire the national debt.

The size of national debt does not attract the sort of attention which spending on subsidies does. Yet, the much more serious problem is fiscal profligacy. India has no serious political party nor an intellectual tradition which is committed to fiscal responsibility. One-third of the annual tax revenue is spent on servicing the debt. What the next government needs is a serious strategy to diminish this burden. Divestment has to be pursued more seriously than UPA2 has managed. For example, if one was to reduce the government's share in PSU banks equity to 51%, that alone would raise a lot of the needed money. Of course, the smarter move would be to convert some of these banks into private ones immediately, but one cannot expect that sort of courage from any party. Reduction of government ownership to reduce the debt burden and thereby, raising the share of health and education would be the sort of inclusive growth we should be pursuing.

There is a need to re-examine the entire gamut of nationalised industries. Nehru nationalised only the Imperial Bank ( State Bank) and LIC. Many new units were started under government ownership. Indira Gandhi was the one who nationalised many private firms, most notoriously the commercial banks which she openly said was done for political reasons. At the very outset, a new government ought to look at all the nationalised firms and ask itself which ones are strategic (to be retained) and which ones can be jettisoned, with the loss making ones sold at near-zero prices. India should be left with a small number of strategic firms which should be retained in the public hands.

The author is a prominent economist and Labour peer