In Q2, the US economy has clocked 2.5% growth, better than expected. There are good numbers for eurozone and Japan too. This year will be better than 2012 and, presumably, 2014 better than 2013. The recovery may be mild, but India’s ability to tap into any recovery will be milder still. From an emerging-economy status, India has plummeted into a sub-5% submerging-economy category.
The finance minister’s 10-point agenda hasn’t shaken the world and the Prime Minister said nothing of note. NREGA messed up labour markets. The Land Acquisition Bill messed up land markets, and natural resources have suffered from forest and environmental clearances.
Deficits and public expenditure messed up capital markets. Intervention constrained entrepreneurship and drove it out of the country. The Food Security Bill ended any hope of targeting subsidies and will discourage farm growth and diversification.
RTI Too Shares the Blame
As an unintended consequence, through the RTI, scams and corruption were exposed. This demolished decision-making. That’s a stinking kettle of rotten fish. Nothing excepting mouthing platitudes will be done before elections.
An incoming government will find it difficult to roll back the decisions, even with a National Dis-advisory Council to reverse NAC decisions. Public expenditure is a given and the possibility of a reversal remote. But an incoming government can hope to improve efficiency and there are ways to do this, getting away from the fetish of fiscal deficits. Take the devolution agenda that any incoming coalition is bound to support. Most stuff one wants government to spend on is in social sectors. These are state, municipal or panchayat subjects.
Why not transfer funds directly to states, and lower down, scrapping the central sector and centrally-sponsored schemes? At best, there can be a menu of options the states can spend on.
Power to the States
For instance, if Chhattisgarh wants to use the Food Security Bill for salt, so be it. If nothing else, this will save on administrative costs of delivery. Let’s scrap Plan versus non-Plan distinctions and let all devolution to the states happen through the Finance Commission. Let there be a clear definition of special-category states and let only these be entitled to discretionary grants-in-aid.
Let all other devolution be formulae-based, without indicators for deprivation. Following the same line of argument, let forest and environmental clearances be decided by states. Let the ministry of environment and forests become irrelevant, except for international negotiations. Let there be decentralised identification of poor families and make the Planning Commission irrelevant.
Let’s make oil pricing market-determined. Policy paralysis and governance deficits, more important than current account and fiscal deficits, have been caused by Delhi. Let’s make Delhi irrelevant, even if the Seventh Schedule cannot immediately be amended. Friedrich Hayek correlated socialism and dictatorship. Though we are stuck with the Preamble, we can invoke democracy and demolish Delhi’s dictatorship.
Next, turn to revenue. The goods and services tax (GST) is in the works for a long time, though what is contemplated is not quite what GST was supposed to be: complete elimination of all other taxes, including stamp duties. Estimates suggest a one-shot tax rise of 1.5-2% because of the GST.
Exempt the Exemptions
In consultation with the states, it should be possible to standardise and harmonise the template more. On direct and indirect taxes, repeal retrospective clauses and scrap exemptions. As long as there are exemptions, the costs of compliance cannot be reduced, nor harassment by tax officials. Removal of exemptions will also help reduce deficits, as will sales of PSU equity.
One of the problems with the finance minister’s 10-point agenda is that it is fixated on the external sector. Current account deficits and gold imports are symptoms. You would also park your savings in gold since there are no alternative avenues. You may want to take out your money at Rs 60 to a dollar, and hope to bring it back at Rs 75 to a dollar. High-cost sovereign bonds and high interest rates for non-resident Indians aren’t the answer.
Nor is foreign direct investment the key. If make Delhi irrelevant is one strand, make the world irrelevant is another. Let’s fix the domestic supplyside. Let’s reform agricultural markets and ensure inter-state movements of agricultural produce. If we fix the domestic problems, growth and investments will revive. So will manufacturing and exports.
This isn’t a pension, banking, insurance and Industrial Disputes Act agenda. Idon’t see why any incoming government should refuse to accept these two strands. All it requires is an acceptance of making itself less important and converting Centre-state (which is not an expression in the Constitution) to Union-state (which is one). Democracy, thus defined, is the best antidote to the dictatorship of socialism inflicted on us.
