There are three sets of actions India’s new Finance Minister Nirmala Sitharaman needs to work on – writing the full Union Budget 2019, taking executive decisions, and drafting new legislations. Some, such as the Budget and executive decisions can happen right away. Others, such as enacting new laws need political support within and outside the BJP for legislative passage. The first five can be part of her 100-day programme, the last three can be seeded now but executed three years later, once the BJP has a majority in Rajya Sabha as well.
Budget 2019
- Work in progress. Within the various aspects of Verdict 2019, on the economic front, the people of India voted for policy continuity. As such, the Union Budget 2019 needs to continue the economic conversations of the past five years, under Modi Season 1. This is particularly so in areas of governance delivery to the bottom 100 million people. That will take care of wealth redistribution. But that delivery cannot happen without ensuring private investment on the wealth creation side. Budget 2019 must deliver on making private investment welcome. The work on the Ease of Doing Business front needs to be taken further, and India must enter the top 50 league.
- Show executive intent on reforms. While no single Budget can deliver big ticket reforms, we need to see executive intent that Modi Season 2 is willing to and will push for economic reforms. The least Budget 2019 must do is flag the reform issues. While the list of sectoral reforms is long, there must be a conceptual clarity on why reforms are needed – attracting investment, both domestic and foreign; turning Indian into a manufacturing hub and creating jobs; turning the coercive and colonial nature of the Indian state into one that facilitates growth, wealth and prosperity; make the economy stronger and more efficient. Look at any sector and there’s a reform waiting to unleash the energies of India’s youth. Do not fritter away a powerful mandate.
- Remove tax arbitrage between asset classes. While the tax structure has been and will likely remain stable, one specific area Sitharaman must get into with full attention is to end the tax arbitrage between various asset classes. A household does not save or invest on the basis of regulators. So, granting the stature of ‘long-term’ to equities as one year, real estate at two years and debt products as three years doesn’t make sense. In the financialisation of the economy, Sitharaman needs to end investment inequality and bring all investments, from PPF to gold to real estate to bonds to equities and any other asset class of tomorrow, under a single capital gains umbrella. The same logic must apply to switching investments: selling a house and buying another carries no capital gains, but selling a mutual fund and buying another does. This must end and will increase the velocity of money in the economy.
Read Also: Six headwinds Modi will face in Season 2
Executive decisions
- Deliver GST 2.0. One of the finest and most complex laws to be enacted by Parliament, the Goods and Services Tax (GST), the result of one Constitutional Amendment, four Central laws, 29 State laws and one notification for Union Territories, was the landmark economic legislation of Modi Season 1. It has turned the idea of tax evasion on its head and brought efficiency into tax collections. Teething troubles, particularly on compliance by small business, are behind us. Now, in Season 2, Sitharaman needs to work with State governments to bring real estate, electricity, fuel and alcohol for human consumption under the GST. She can begin by persuading the BJP-governed states. The other problem with GST 1.0 is the large number of rates: effectively we have six rates – nil, 5%, 12%, 18% and 28%, with 1% for affordable housing. These must collapse into three (nil, 5% and 12%). In the GST Council, she needs to take leadership of these changes.
- Disinvestment. This is a no-brainer – it gets money into the exchequer’s coffers, it delivers efficiency and dynamism into the system and allows the government to do what it is meant to rather than be competing with private entrepreneurs. But to execute this policy, Sitharaman needs to convince her colleagues and Prime Minister Narendra Modi about the philosophical basis of the government getting out of business. By competing in the market with private players, the government gets conflicted, as it plays the role of an enterprise as well as a regulator. The job of the government is not to sell goods and services to the people; it is to create a regulatory environment such that private investment enters a sector and creates jobs and wealth. Starting with Air India and going further to banks, mining, manufacturing and across sectors and industries, Sitharaman must conceptualise and deliver an exit path. To put this problem in context, against five Central public sector enterprises (PSEs) on an investment of Rs 29 crore in the first five year plan, there are 339 Central PSEs with a total investment of Rs 13 lakh crore operating as on 31 March 2018, the last such data available. The number of Central PSEs has risen by 19 between 2016 and 2018.
Read Also: 7 economic reforms that await Modi Season 2
Legislations
- Financial Resolution and Deposit Insurance (FDRI). For a $3 trillion economy to not have a process that addresses failures in the financial sector is out of synch. The FRDI Bill of 2017 proposed a mechanism, a method, a path to address potential failures in the financial sector. For a $3 trillion economy going on $5 trillion, to not have such a system shows a legislative lacuna that the Bill addresses. Petty politics and illiterate understanding of the Bill, particularly the ‘bail-in’ clause, under which the resolution corporation formed under the law would have the power to take part of the money of consumers (deposits in banks, for instance) to keep financial institutions afloat, so that “tax-funded bail-outs become less likely”. But what its critics failed to mention was that the depositor needs to agree to a bail-in while signing the contract. While this clause can be negotiated in several ways, India cannot wait for those discussions – it is best removed, and the law enacted, or financial institutions forced to offer this as an option and written into law.
- The Indian Financial Code (IFC). The first legislation that’s ready to be presented to Parliament is the IFC, a draft of which awaits attention on the Ministry of Finance website. Conceptualised by the Financial Sector Legislative Reforms Commission in March 2013, the IFC is an elegant law that brings the consumer of financial products at the centre of financial services and its regulation. As consumers, we don’t think about investments in regulatory silos, most of which seem to have been created to deliver sinecures to retired bureaucrats. We think in terms of investment returns. Once Sitharaman would have cleared the cobwebs around tax arbitrage in Budget 2019, she must focus on long-term reforms in the financial sector through the IFC. With an increasing financialisation of India, a rise in the number of people investing in financial products, this law can be the pivot around which an entirely new political constituency can be created. Finally, this is a future-ready architecture that can become India’s soft export to the world.
- The Direct Taxes Code (DTC). In a country where just 46.7 million individuals and 1.1 million firms paid income tax in 2017-18, leaving a huge chunk outside the tax network, direct taxes need to be reformed, akin to the goods and services tax, through a policy rethink and legislative intervention. Between the complexity of tax laws on the one side and a rent-seeking tax bureaucracy on the other, the case for staying out of the tax network and evading taxes is strong. What the DTC must deliver is make taxation more predictable, reduce the cost of compliance on the taxpayer’s side and administration on the government’s, reduce or end all exemptions, make unambiguous rules and regulations, and check tax evasion. What GST did to indirect taxes, DTC can do for direct taxes. The final outcome will impact India’s macroeconomics through a higher tax-GDP ratio.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
PREV
