The amendment on the taxation of off-shore transactions could adversely impact India?s credibility with foreign investors
This year I happened to be in New Delhi the day the Union Budget was presented in Parliament. I was at the India Habitat Centre for an academic conference, but much of that complex was turned into a media circus, with TV stations offering live coverage and instantaneous commentary from pundits scurrying from room to room. The next day?s newspapers overflowed with examinations of the still warm body of the Budget speech and its accoutrements. By now, anything I say will seem like reading the entrails. The hot news moment has passed.
Many reactions from academic and industry commentators that I have read have been very critical of the Budget. I read them before I had a chance to read the Budget speech itself. Perhaps as a result, I was somewhat pleasantly surprised when I did so. In any case, given the political events that preceded the Budget, I was not expecting too much. Finally, having studied the evolution of the Indian Budget over several years, I have come to expect that the Budget speech has moved away from being a vision statement, focusing instead (properly in my view) on setting out revenue and expenditure policies and estimates. Of course one can infer some important things from these policies?a bit like reading entrails.
Expenditure plans have not changed much over the last few years. There are always a host of schemes, large and small, old and new. Certainly, the government has continually sought to promote inclusion in the benefits of growth through greater redistribution, and access to opportunities through increases in spending on health, education and rural development. Problems in targeting have plagued the former. Here, the progress in the Aadhaar platform is a remarkable achievement. The fact that the government has reached out to the private sector and gotten the expertise it needed to make a potentially fundamental change in how it tracks and targets transfer payments is highly commendable. This is reform at its best.
The government has also announced a goal of limiting aggregate subsidy payments: this may well founder on the rocks of political realities. But perhaps Aadhaar will show the way for one day improving the tracking and evaluation of project spending. A few years ago, in this column, I suggested that the Planning Commission needs an IT-based dashboard to monitor expenditures. Perhaps it will happen at the state level, with some enterprising chief minister.
On the tax side, as on the spending side, there is a mix of policies that seem likely to be welfare improving, and ones that are probably driven by political expediencies. There has been quibbling about the rise in the service tax rate, and the failure to announce a definitive time path for the GST. But the sum total of the several steps that were announced (broadening the base, cleaning up anomalies in rates, integrating central excise and sales taxes, and especially the introduction of the IT platform for the GST) amount to significant progress.
The one thing that remains is striking a bargain with the states. I have been on record as favouring a greater share of taxes for the states (with concomitant reductions in transfers). This would make striking such a bargain easier. The last Finance Commission?s report was not inconsistent with this approach. Such structural changes are major reforms, beyond any single Budget speech. Even without them, the GST is slowly making its way into the Indian economy.
Another sign of progress on the tax front appeared to me to be the clearer use of ?tax expenditures??reductions in taxes to promote welfare goals. The examples of this approach in the Budget for tackling malnutrition were highly encouraging. There are other problems, which are institutional, but those require other ministries to do their jobs better. The proposal to scrap the arbitrary nine-sector limitation on venture capital could be a boon to innovation, if accompanied again by institutional reform. One should be happy in general with the active agenda of financial sector legislative reform, mentioned in the Budget speech and the Economic Survey: this is at odds with the image of a do-nothing government.
Against these positives, however, was the proposal in the Finance Bill to ?clarify? the taxation of cross-border off-shore transactions, with retroactive impact to 1962. What might seem like a logical step to a bureaucrat incensed by court-supported tax avoidance could have a disastrous impact on India?s credibility with foreign investors, far outweighing all the other positive steps in the Budget.
No doubt there are other shortcomings in the Budget proposals, especially with the over-optimism and lack of credibility with respect to bringing down the fiscal deficit. But this seemed to me to be a workmanlike Budget that mostly does not rock the boat (with the 50-year retrospective ?clarification? a big exception), and sets out an ongoing process of nitty-gritty reforms, that will have to survive the test of the current political realities at the Centre for implementation. And for vision, one can always read, reflect on, and enjoy the intellectual treat of the Economic Survey?s second chapter.
The author is professor of economics, University of California, Santa Cruz