Column: What now, UPA?

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: for adhering to principles, which is a more demanding system of regulation as compared with check-box compliance of detailed regulatory checklists.

4. Inadequacies of financial firms: Financial firms in India are inadequate midgets, either by international standards or when compared with the needs of the new India. This is largely a consequence of the three difficulties described above. The way forward lies in multi-product conglomerates, such as ICICI or HDFC, which derive size and sophistication from operating in all areas of finance. This requires breaking the ‘silo system’ of Indian finance, where each regulator has a feudal notion of the companies that it ‘controls’. This silo system needs to give way to a financial holding company framework. ICICI Holding Company should be the corporate headquarters, that is only subject to company law (and listing agreements). It should control a series of subsidiaries in various fields, while retaining a coordinated group-wide product strategy.

5. Tax distortions: There are three big flaws in tax policy. The first is taxation of transactions at various points. This must give way to the VAT principle, as has been done with great success for goods. The second is the lack of pass-through in fund management. This is a core principle of tax policy: whether person X manages his own money or hires person Y to be his fund manager, nothing should change about the tax treatment of X. The third problem is the partial double-taxation of corporations. The logically sound level of dividend taxation is zero.

6. Capital controls: Capital controls are to finance what tariffs or quantitative restrictions are to physical goods. Sophisticated and competitive corporations came about in India only when tariffs and QRs were largely removed. In similar fashion, the removal of capital controls is of critical importance to placing Indian financial firms under competitive pressure, which would then produce competence and dynamism.