The brilliant author of 89 novels, Louis L’Amour has written several times that for a gunfighter, it’s not good enough to be quick, he needs to be accurate; so take the time, draw the gun, aim carefully, and only then squeeze the trigger. Perhaps, the Ministry of Finance and the Reserve Bank of India (RBI) could take a lesson or two from L’Amour about trigger-happy policy fingers. Three policies in the past three months—two of them in the past one week—have created an impression that India’s policymaking is a case of shoot first and aim later. Shock-and-awe policymaking works if all potential loose ends are tied up (Prime Minister Narendra Modi’s Jan Dhan Yojana
, for instance), not when it’s done in a hurry.
On 16 May, the Ministry of Finance went into a huddle around a proposal of collecting a 20 percent tax at source from small transactions
under the Liberalized Remittance Scheme on credit cards, as was the case with debit cards. An uproar followed the policy. An INR 7 lakh applicability and education and health exclusions clarification followed the uproar
. And, in the middle, was a government looking confused, trying to manoeuvre the policy bullet after the trigger had been squeezed. “Undo the un-liberalised remittance policy: GoI’s 20% tax on foreign spend, even with its latest tweak, is regressive given India’s growing aspirations and it will neither save forex nor increase revenue,” wrote Surjit Bhalla
The public was told to deposit the ₹2,000 notes in banks “subject to extant instructions and other applicable statutory provisions,” which, the commercial banks were told, included know your customer (KYC) norms.
The rage on the 20 percent tax had barely subsided when, on 19 May, the RBI announced that ₹2,000 denomination banknotes will be withdrawn from circulation
, but will continue as legal tender. Whether this move is demonetisation or not will continue to be debated in courts
, but what has definitely happened is that the credibility of the RBI, which has done great work during the two recent crises (the Made in China COVID-19 crisis and the Made in Russia/NATO Ukraine conflict), has taken a hit. Nobody with a brain between the ears believes in RBI’s ‘clean notes’ argument
. The public was told to deposit the ₹2,000 notes in banks “subject to extant instructions and other applicable statutory provisions,” which, the commercial banks were told, included know your customer (KYC) norms. Another uproar and three days later, the RBI published a clarification that removed the KYC norms, losing an opportunity to capture those playing around with unaccounted-for monies.
Two months earlier, in March 2023, the Union Budget removed indexation benefits from debt mutual funds
. Who benefits? Commercial banks. Who loses? Investors who take risks on debt funds. Why? Because the Ministry of Finance doesn’t seem to understand the difference between a risk-bearing security and a risk-free fixed deposit. A higher risk will carry a higher expected return, with the possibility of negative returns embedded into the product. Can’t blame the ministry, as its senior mandarins are living on exchequer-financed salaries, perks, and inflation-adjusted pensions for themselves and their spouses, along with a lifetime of the best healthcare the country, and in some cases the world, offers. “The amendment that has been pushed through is a very poor market signal to a risk-averse investing public that was just about getting ready to dip a toe in the market-linked debt market,” wrote Monika Halan
What gives? India is probably hurtling towards a UPA style policy uncertainty
. If the government wants to demonetise the ₹2,000 notes to capture unaccounted-for income, it is a noble objective. Why cloud it with poor policy and poorer communication? If it wants to collect more taxes, it can—India has survived retrospective taxes—but why do it unthinkingly? Honest taxpayers will forget these policy excesses as they get distracted by the next big thing and get on with their lives; the crooks will find new ways. But before the government hammers down more policies to burden the former for the crimes of the latter, here is an eight-point toolkit to examine and deliver economic policymaking.
Honest taxpayers will forget these policy excesses as they get distracted by the next big thing and get on with their lives; the crooks will find new ways.
Time for policy reforms
The lack of electoral oversight on the notifications and regulations that the Executive arm of the State comes up with has been sanctified by the Constitution. In a democracy, laws are enacted by the Legislatures (Union and in States), while, down the line, unelected officials are free to draft micro-regulations. But, for the latter, there is no accountability. For instance, a fuzzy person called the ‘bureaucrat’ is being blamed for the three policies above. But, politically, Finance Minister Nirmala Sitharaman and RBI Governor Shaktikanta Das are left holding the can and facing the blame. This needs to change with greater accountability trickling down.
1. Document the policy problem
India needs to put in place a policy documentation process. This process must include the precise definition of the problem being addressed by a law, rule, or regulation. All legislations, for instance, have a “short title”. The Goods and Services Tax, 2017
has this: “An Act to make a provision for levy and collection of tax on intra-State supply of goods or services or both by the Central Government and for matters connected therewith or incidental thereto.” Behind this line lies reams of discussions and debates. The policymaking process needs to adopt this approach.
2. Articulate the failure
The role of the state through legislation or policy must follow a failure. It could be market failure; for instance, the lack of transparency in trading before the National Stock Exchange was created in 1994. It could be a social failure; for instance, only 25 percent of mutual funds are owned by women, hence a policy nudge is needed to fix this. It could even be a regulatory failure; for instance, the failure of protecting consumers being mis-sold toxic products under the eye of the Insurance Regulatory and Development Authority of India. This failure must be articulated clearly: What is the policy change hoping to achieve?
A Securities and Exchange Board of India’s study on disclosures was based on the analysis that in FY 2022, nine out of 10 (89 percent) individual traders in the equity futures and options (F&O) segment incurred losses, with an average loss of INR 1.1 lakh.
3. Demonstrate the failure
Every policy, from a legislation to a regulatory change, needs to display the failure. In the data-rich world of today, this is easily achieved. A Securities and Exchange Board of India’s study
on disclosures was based on the analysis that in FY 2022, nine out of 10 (89 percent) individual traders in the equity futures and options (F&O) segment incurred losses, with an average loss of INR 1.1 lakh. The journey to a regulatory change—disclosure of this information—becomes compelling. Policies based on data and its analysis is far superior to knee-jerk feel-good virtue-signalling.
4. Seek out the best option
But even this is not enough. The same data and its analysis can lead to varying policy solutions. Taking the results of losses in futures and options above as given, there can be three options. First, put a monetary entry barrier before investors: Only those with financial assets of more than INR 5 crore can indulge in futures and options, for instance. Second, put an entry barrier before brokers: The same condition but with the responsibility being shifted to brokers. And third, push disclosures: Assume investors know what they are doing and alerting them. Either of the three can work to fix the problem. Finding the lowest-cost and the most-efficient method is the responsibility of policymakers.
5. Spell out the expected outcome
What will happen with the TCS? How much money will be collected and how much will have to be returned against taxes already paid? Is it worth the effort? Is the burden on every citizen travelling abroad, funding a child’s stay (education is exempt) there or managing a health issue in a foreign land worth the return? If monetary returns are not worth the administrative investment, explain how the TCS hopes to capture high-value and unreported transactions. If the policy expects to catch even a thousand such evaders, say so and make a case for this policy, so that the people can support it. Otherwise, find another way.
6. Place the policy proposal in the public domain
The dominant narrative is that elected ministers and selected bureaucrats are the sole keepers of all wisdom. This was never the case and, in the 21st century, will be rejected loudly. Once the data has been collated, analysed and the policy options decided, place the policy proposal before the nation for comments from those on the other side of policy. Nobody likes surprises—not the government, not corporations, not citizens. Again, SEBI is doing phenomenal work—a consultation paper on mutual funds that should make these vehicles more efficient for investors is online
, seeking comments from the public till 1 June 2023. In the 21st century, throwing a policy in the face of those who will be affected by it reeks of a pre-1947 arrogance. Agreed, the system of Independent India has been copy-pasted from the colonial masters. But the public is no longer going to accept it. Better to co-opt the nation than face its wrath. Sensible exclusions that need secrecy, such as the withdrawal of the ₹2,000 notes, must stay.
According to an Observer Research Foundation study, there are 69,233 compliances that businesses have to follow at an aggregate; 26,134 of them carry imprisonment clauses.
7. Explain the compliance route
It is easy to design bad policies. It is far more challenging to execute them. In the middle are corrupt economic agents, who use bad public policies to fill personal pockets. The quota-permit Raj began to end in 1991 with the Statement on Industrial Policy, but the inspector Raj continues till date. According to an Observer Research Foundation study
, there are 69,233 compliances that businesses have to follow at an aggregate; 26,134 of them carry imprisonment clauses. But if business persons are not filling the jails, there is clearly a gap that is being filled by bribery. These are bad policies, some of which will be fixed by the Jan Vishwas (Amendment of Provision) Bill, 2022
, currently awaiting enactment. Going forward, it will be incumbent on the government and regulators to draw out a complete compliance route and communicate it to the people.
8. Define the contours of accountability
Hardworking and honest taxpayers must not carry the burden of poor policies delivered by lazy policymaking. A name-and-shame penalty or name-and-pride incentives must be introduced. Tenured bureaucrats must be answerable. They must not be allowed to get away and hide behind the anonymity the unaccountable service provides. Otherwise, every policy will be traced to, and be the responsibility of, the head of the organisation, Finance Minister Nirmala Sitharaman in the case of Ministry of Finance’s recent taxation blunders, and Governor Shaktikanta Das in the case of RBI’s recent withdrawing—or demonetising—the ₹2,000 notes. Likewise, all credit for disclosures for the F&O investors will flow to SEBI Chairperson Madhabi Puri Buch. A democratisation of accountability is needed and can be implemented.
As India heads towards becoming the world’s third-largest economy within this decade, regulation will have to keep pace with this journey. It will have to regulate capital without harming it, it will have to regulate companies without rhetoric, it will have to regulate criminals without hurting the honest. To the best of our knowledge, SEBI is an outlier in setting these future-ready standards. The RBI and Ministry of Finance in particular, and other ministries and regulators in general, need to learn, adapt and deliver.
Above all, don’t shoot without aiming.
Gautam Chikermane is Vice President at the Observer Research Foundation
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