31 Jan Avoiding Fiscal Feudalism
The impending Budget has assumed importance because it will solidify the way the NDA government sees the Fiscal Governance of this country.
This is an important week for the National Democratic Alliance (NDA) government. The fourth budget is due to be presented. This one is coming after the note ban or note replacement exercise that commenced on 8 November. The budget has assumed importance because it will solidify the way the NDA government sees the fiscal governance of this country. So far, in several fiscal and taxation matters, the government has positioned itself in an adversarial role versus the public.
To a significant extent, the country’s low tax base and far too few taxpayers necessitated such a stance. But, to an equally large degree, some of it was disproportionate and continues to be so. The present finance minister coined the phrase “tax terrorism” to refer to the taxation policies of the previous government throughout its 10 years of governance. He was right. But it is equally right to say that this government has not dismantled that terror mechanism. Arguably, it might have grown even stronger.
Last week, there were reports of the cabinet approving the Bill on the management of the Indian Institutes of Management (IIMs), granting them the operational autonomy that they had sought. From first reactions, it is clear that the proposed Bill satisfies most of the demands for autonomy sought by the institutes. The initial draft proposed in 2015 caused an uproar for it could have enabled government interference. It need not have to be this way. The first instinct of the government does not necessarily have to be one of distrust and suspicion and, hence, justification for its oversight and interference.
The government’s attitude can be one of non-interference in legitimate economic and non-economic activity and one of demanding performance or reciprocal obligations where it provides support. For example, even in the case of the IIMs, if the government had met the wishes of the institutes on operational autonomy, it does have an obligation—as do the institutes—to demand international standards of educational and research quality from the institutes. A similar attitude must pervade fiscal interventions.
Just recently, a Central Board of Direct Taxes (CBDT) circular came up with a complicated proposal for taxing gains on mutual funds (including global funds) selling and buying shares of Indian companies in stock markets. This was sheer madness. The circular has since been put on hold. But the damage is done. It would not have taken much imagination and intelligence to anticipate the consternation and exasperation such a move would cause. Yet, the order was allowed to be issued in the first place. There is a problem of accepting trust as the foundation of governance not only at the level of the officer who drafted the circular but also at the level that approved the circular to be placed in the public domain. There is a fear that the budget for 2017-18 to be presented on 1 February, will continue with this approach. If fear were combined with feudal populism, one could forget the country’s economic and other aspirations.
Two recent fiscal proposals give rise to this concern and if both of them do not leave the drawing board, then this column will have been a needless effort and that would be a relief, actually! One is the proposal to have a universal basic income (UBI) for all Indians. Whether UBI is extended to all Indians or only to a targeted segment of the population, the idea is full of moral hazard. “Something for nothing” is populism and it is the same whether it is free cash or free television sets. A knowledgeable observer of the Indian policy scene over several decades told me that the assumption that UBI as an entitlement would be paid for by withdrawing existing specific subsidies is scarcely feasible in a democracy. For example, in the 1980s, in Tamil Nadu, the All India Anna Dravida Munnetra Kazhagam (AIADMK) government had introduced the nutritious noon meal scheme for children. The Dravida Munnetra Kazhagam (DMK) opposed it. When the DMK came to office, it could not reverse the scheme. Worse, a subsidy becomes an entitlement after one term. To continue to satisfy the electorate, more subsidies have to be created. That is what the DMK did!
The moral of the story is that UBI cannot be paid for by removing any of the existing subsidies nor would UBI mean an end to future subsidies. It is a bad idea in a country where savings rates have plateaued and declined and where scarce resources have many more useful applications. The Peter principle of management works with a vengeance in the Indian policymaking context: For every problem, bad ideas rise towards the ultimate level of consideration.
The second idea that has been proposed is one of taxing cash withdrawals exceeding Rs50,000. A committee of chief ministers has proposed it. The United Progressive Alliance government had done it for five years in the name of the Banking Transaction Tax. It runs counter to the idea of encouraging the use of banking channels to store savings and wealth.
What the government needs to do is to make both taxation and its administration less adversarial. Risk aversion and static analyses of revenue foregone must be replaced with an entrepreneurial, risk-taking approach that bets on higher economic activity to generate fiscal resources rather than through a mindless calculation involving higher rates backed up by a corrupt and coercive tax administration. War on hoarding ill-gotten cash may be fine but war on generating wealth is not. It would be a shame if a Gujarati politician were to be remembered for the latter in order for him to claim success on the former.
V. Anantha Nageswaran is an independent financial markets consultant based in Singapore.
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