Saturday 30 December 2017

Needed: A pro-growth ‘Gujarati’ Union Budget (Sunday Guardian)

By M D Nalapat
Had Gujarati wisdom been fully applied and tax rates brought down substantially, both revenue collection and the number of taxpayers would have risen.
The governance system in India remains locked inside a time warp keeping its responses anchored to the period when the Union Jack flew over what is now Rashtrapati Bhavan. However, increasingly the people of this country have willy-nilly acquired the skill-sets needed to adapt to a world pervaded by Artificial Intelligence (AI) and Artificial General Intelligence (AGI). Such a world may mean that only around 20% of the population will be directly involved in managing AGI and AI-assisted systems, while much of the rest of the population provide services and commodities to the (AGI and AI-directing) fifth of the population. We are already seeing such a transformation from goods to services in some of the better shopping malls in the metro centres, where outlets selling commodities are steadily getting replaced by movie theatres, health spas, children’s play areas, games arenas, food outlets and video play consoles. Such an economic system requires those earning higher incomes to spend a goodly proportion of such takings, so that others share in their wealth. An example is the wedding industry in India, which involves millions of individuals serving up music, entertainment, temporary facilities and much else to the families of the bride and groom. Given the reality of officials having relatively low income levels (as compared with the commercial sector) going together with high dollops of power and discretion (especially those belonging to the IAS, the IPS, the IRS and other elite administrative cadres) in post-1947 India, to expect governmental corruption to get eliminated is unrealistic. Since 2004, the smaller than needed doses of economic reform that were carried out since Narasimha Rao have been reversed, such that massive boosts in administrative discretion and intrusion took place while Manmohan Singh was legally in charge of the Central government. Sardar Vallabhbhai Patel believed that practically every individual in the civil service had integrity and a desire to improve the lives of the citizenry in general, so that it was safe to transfer huge tranches of discretionary and disciplinary authority to them. This assumption and practice has continued since the Sardar’s time, including by Prime Minister Narendra Modi. 
Income-tax officers, for example, have been given freedom and powers on a scale unprecedented in post-1947 India, and they have, therefore, been busy sending tax notices and raiding several times more individuals that was the case under Finance Minister Jaswant Singh. However, such exertions have resulted only in a moderate rise in the number of registered taxpayers, from 3.65 crore to 4.07 crore, with actual income-tax contributors this year remaining at around 2 crore. Had Gujarati wisdom been fully applied and effective tax rates brought down substantially, both revenue collection as well as the number of taxpayers would have risen by several times more than is the case now. Empirical evidence shows that reductions in tax rates have invariably led to more than proportionate increases in both taxpayer base as well as collections. Narendra Modi has been celebrated across the globe as a maestro of economic administration. He needs to take authority back from his officials to ensure that the 2018-19 Union Budget breaks away from those witnessed since 2004 by lowering effective tax rates substantially. 
The Union Government has launched a “War on Cash” since coming to office, so that such transactions in key economic job creating sectors appear to have been substantially reduced. However, the structure and mechanics of administration still result in substantial amounts of undeclared cash. For example, since high GST rates were fixed on several items, more service outlets than before are offering customers the choice of paying in cash, thereby getting a price reduced by the quantum of GST that would otherwise have been levied. At the same time, those establishments that honestly declare their incomes and require the same from their customers are witnessing a fall in business. Many High Net Worth individuals are now celebrating the marriage of family members in locations such as Rome or Bangkok, away from the radar of the tax authorities. Increasing amounts of cash have been moving illegally outside rather than getting invested or otherwise spent in India. North Block’s obsessive search for every rupee of available revenue is having the effect of dampening spending. Not declaring taxable income is of course wrong, both legally and ethically. However, it would be unrealistic to expect either this evil to vanish in a short period or to believe that the official machinery is such as to reduce leakages to low levels. Had that been the case, around Rs 550,000 crore of the 86% of currency made illegal on 8 November 2016 would not have dared to return to the banking system, whereas in practice almost all the banned currency returned for conversion. 
The forthcoming Union Budget needs to be finalised with Gujarati practicality, and must ensure a red carpet to investment and consumer activity, on the correct premise that a higher velocity of circulation of money will ensure that some tax gets paid somewhere and somehow in a way impossible if much of potential spending were driven overseas or extinguished through police methods. A “Gujarati” budget would cut taxes and make compliance simple, thereby ensuring that a climate of optimism and growth replaces the present atmosphere of dread of official excess. The 2018-19 Union Budget will shape the remainder of Prime Minister Modi’s term in office and must bear witness to the Prime Minister’s innate pragmatism and pro-growth instincts.

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