Friday, 11 July 2014

Jaitley's Budget That Might Have Been (But Wasn't)

John Greenleaf Whittier hit it on the noggin: "Of all sad words of tongue or pen, the saddest are these, 'It might have been.'"

My feelings on reading about Indian Finance Minister Arun Jaitley's maiden budget were akin to being socked across the face with something bloated and wet. After Narendra Modi's dramatic election win in May, we have all been treated, like the IBM salesman's bride, to rousing speeches about how wonderful it's all going to be. We were told that the socialist-shackled economy was going to be unchained and a powerful, roaring tiger set free at last. Many of us had virtual goose-pimples at what was going to happen.

But when the time for action arrived, what we got was this timid left-of-centre budget that may well have been authored by the previous government, with its discredited populist model of pretending to help people by looting them.

Tchah!

Swaminathan S Aiyar summed up his assessment of the Modi government in one damning sentence, "Sher ki soorat, khargosh ka kaleja" ("Face of a tiger, liver of a rabbit"). Ouch!

Having let myself be carried away by the hype of radical change, I had begun to predict what the budget was going to contain. Let me swallow my considerable embarrassment and share this list. 

I believed the thrust of the budget should have been about retooling the Indian economy to redirect it away from the primary sector (agriculture) and towards the secondary sector (manufacturing). A once-in-history opportunity has opened up for India with the rising costs of Chinese manufacturing and the aging demographic of China, and India should move post-haste to inherit the mantle of the world's factory. The opportunity to dramatically raise GDP and living standards through this one shift alone is unprecedented.

And so, I imagined that these would be the major policy announcements:

1. Fiscal discipline and a healthier exchequer by ending all subsidies - food, diesel, electricity, etc. (This could be gradual, say over 2 to 3 years, to prevent a sudden shock to the system, but the government needs the courage to stay the course and not roll back these measures.)

2. To offset the pain of the sharp price rise from the removal of subsidies, a drastic overhaul of the tax laws is required to help the middle classes keep more of their money - a high exemption limit of Rs 500,000 a year, and a flat tax of 20% thereafter. To avoid tax arbitrage, corporate taxes should also be reduced to a single flat rate of 20%, with no exemptions, loopholes or surcharges. All employee benefits should count as personal income to avoid fringe benefits rorting. Simplicity and low-overhead administration should be the name of the taxation game.

3. Labour laws should be drastically simplified, and should allow hire-and-fire for firms of any size, without compensation. The incentives this creates for setting up enterprises will offset the uncertainties created by the lack of job security for workers. The lower classes who are hit by the rise in prices should see some relief through increased opportunities for employment.

4. Land laws should be simplified to allow takeovers by government and private industry with one-time cash compensation and nothing more (definitely no guarantees of employment). The aim should explicitly be to drive agricultural labour and small farmers out of farming and into industry. Farmer suicides are a symptom of unviable farming practices. Getting small farmers out of farms and into factories is the most humane solution to the problem.

5. FDI upto 100% should be allowed into every sector, including defence and multi-brand retail. The message should be that India is open for business.

6. The Companies Act should be dramatically simplified to incentivise the growth of industry, with a complete end to license raj. It should be easier to do business in India than in Hong Kong.

7. The legal system should be simplified and the capacity of courts should be raised manifold to allow speedy disposal of cases, especially land, property and other civil cases.

8. The money saved through cutting subsidies (in the lakhs of crores) should be used to develop hard infrastructure - primarily new factory towns, expanded ports, roads and railways to connect factories to ports, and improved communications. Funding could cover the gamut of Public-Private Partnership models. Global manufacturing companies should be able to come in with a complete absence of red tape, set up 100% owned factories in the Indian hinterland, acquire land at reasonable rates, hire (and fire) local labour, develop and operate their own roads (and levy tolls), develop and operate ports, and push goods out into the world as fast as they can make them. The stated aim should be to take over from China as the world's manufacturing hub within 5 years, and the government should pull out all the stops to make that happen.

9. The bulk of the remainder of the revenue that accrues to the government should be spent on "soft infrastructure" that raises human capital - primary healthcare, primary education and trade-oriented training and certification. The aim should be to tap into unemployed youth and make them employment-ready in the shortest possible time. Higher education is a relative luxury and should be largely privatised, with foreign universities allowed to set up local centres. The elite will fund themselves in a variety of ways to acquire university-level education.

Further in the area of soft infrastructure, a powerful antitrust body should be established with the clout to order the breakup of the largest corporate entities if required. Capitalism without a liquid market will distort rather than develop the country. Additionally, a pragmatic environmental clearance board should be set up that works with industry for sustainable development instead of acting like a blocker.

10. States should be cut free of the central government's apron strings, with only infrastructure projects of national importance to be funded by the central government. In all other respects, the states should be made to compete with each other to attract foreign investment, skilled labour, tourism, etc. A time-bound plan should be announced to introduce a Goods and Services Tax (GST) across the country, say within a year, with revenue flowing to the states. 

Through all of this, the positive message that should be conveyed is that a new era has arrived and there are huge benefits to be reaped. While there may seem to be big risks and disadvantages, the bold and the enterprising will become prosperous beyond their dreams. The sense of excitement that such a budget unleashes will overcome the fear and negativity that arise from generations of socialist conditioning.

Alas, this was all a dream, and we have now woken up to the reality of Jaitley and his rabbit-livered budget.
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