24 February 2016

Is there room in the budget for a big rural stimulus?

Is there room in the budget for a big rural stimulus?

Three questions can help understand whether the budget has enough wherewithal to provide a big rural stimulus
The government has given enough signals that the distress-ridden rural sector would receive special focus in the forthcoming Budget. On Monday, a Mint reportquoted senior officials in the agriculture ministry saying that there could be a significant increase in budgetary allocations for crop insurance and irrigation. But in the backdrop of the 14th finance commission recommendations and the government’s own spending this year, three questions can help understand whether the Budget has enough wherewithal to provide a big rural stimulus.
1. How much has the government spent so far?
Finance minister Arun Jaitley recently said government spending on the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) would cross his budgeted estimates for the current fiscal year. He went on to say that in doing this, his government was making a departure from the earlier practice of governments which did not honour the plan expenditure commitments made in budgets as actual spending would be less than budgeted estimates figures. An examination of latest rural sector spending figures of the central government (till December 2015) shows that while spending till December as a percentage share of budgeted estimates is the highest since 2011-12, the actual amount spent is lower than last year. Rural sector spending here has been taken to include plan expenditure of ministry of agriculture, panchayati raj and rural development.
A similar picture holds for government spending on major rural sector welfare programmes. In its analysis of the 2015-16 Union budget, the Centre for Budgetary Governance and Accountability (CBGA) gave a break-up of allocation for four major rural welfare schemes during the 12th five year plan. According to the CBGA, these four schemes constitute bulk of the central government’s rural sector welfare expenditure. Among these, MGNREGS accounts for around 43% of the total spending. While MGNREGS spending seems to be on track with 12th Plan targets, the government would have to make extra effort to meet proposed spending for all four welfare schemes in this year’s budget, since allocations till 2015-16 budget have contributed to only 73% of the proposed spending.
Any shortfall in the spending should be cause for more concern, as the Planning Commission approved spending anyway was much lower than what the ministry of rural development wants, says the CBGA analysis.
2. What is the share of rural/farm sector expenditure in overall spending?
One flaw with looking at allocations to individual programmes/schemes is that an increase in spending in one programme could come at the cost of another. It is safer, therefore, to look at the overall share of rural/farm sector in a budget to understand whether or not a stimulus has been provided. One way of looking at it can be to see the share of rural/farm sector plan expenditure in the government’s total plan expenditure since non-plan spending includes items like salaries. Trends in plan expenditure for the three ministries referred above show there was a marginal decline in this figure between 2014-15 and 2015-16.
One reason for this could be a decline in the overall size of plan expenditure due to the recommendations of the 14th finance commission.
3. Untangling the tied versus untied devolution debate
Until now, budgetary policy commentators in India had their job cut out. The erstwhile Planning Commission would prepare a plan with allocations earmarked over a five-year period. Union budgets were supposed to fulfil these allocations. That situation has changed after the 14th finance commission increased the share of states in central taxes by 10 percentage points. To make up for its loss of resources, the Centre cut down on its financial support to many important Centrally Sponsored Schemes (CSS). Many of these CSSs had a rural/farm sector focus.
In an article published last year, Abhijit Sen, who as a part-time member gave a dissent note to the finance commission recommendations, raised this point. Sen argued that cutting or stopping central funding for programmes such as the Backward Region Grants Fund and Normal Central Assistance might result in some states reporting a net loss of resources under the new devolution structure. He also added that states might not be inclined to use their new untied transfers to sustain such schemes, which would lead to a reduction in the quantum of available resources to the Centre.
To be sure, central funding has been left unchanged for important schemes such as the MGNREGS. However, according to a 2015 Economic and Political Weekly paper by Pinaki Chakraborty at the National Institute of Public Finance and Policy, central government’s net support to CSS has reduced by around Rs. 67,000 crore in the 2015-16 budget, in comparison to 2014-15 revised estimate figures.
To sum up, two points can be made. One, whether or not the government has actually given a big stimulus to the farm sector in the previous years is a question which should be answered by looking at the larger spending picture rather than changes in budgetary allocations for individual schemes. Two, the government might argue that it does not have much elbow room to increase spending in the wake of increased tax devolutions to the states.
In that case, whether or not this budget will lead to an increase in farm sector spending can only be answered when a detailed analysis of state budgets is available. One thing might clinch the debate though: Jaitley announcing some new rural schemes with sizeable funding to be wholly financed by the Centre.

In the interests of public order

In the interests of public order

Systemic flaws enable political parties to selectively enforce fundamental rights to further their own interests
There has been much furore about the home ministry’s recent decision to arrest Jawaharlal Nehru University (JNU) students on the ground of sedition for allegedly chanting “anti-national” slogans. Though the move is not without supporters, many have criticized the arrest on grounds such as the fact that there is no law criminalizing anti-national activities, that the controversial offence of sedition has been misapplied or that it amounts to a blatant attack on free speech by the current government.
While these are all certainly valid arguments, they fail to address the larger pattern that is at the heart of the issue—a pattern that is not peculiar to one political party. After all, sedition isn’t the only law restricting the freedom of speech and the case of Aseem Trivedi has shown that the misapplication of sedition is not limited to the current dispensation.
Systemic flaws exist in Indian polity that enable political parties to selectively enforce fundamental rights to further their own interests when in power. The Constitution permits “reasonable restrictions” on these rights—and we are now at an unfortunate stage where the restrictions are being prioritized over their corresponding rights. B.R. Ambedkar was aware of such a possibility when he said that a good constitution could be undermined in the hands of bad people, and that it was possible to pervert the Constitution without amending it but by administrating it in a way that is inconsistent with its spirit. It is time the Indian state, whether it be via the judiciary, elected government or otherwise, re-examined its relationship with fundamental rights and their restrictions by asking: Why do we restrict our fundamental freedoms in the first place?
Article 19 of the Constitution is one of the most important fundamental rights as it is the one that grants basic freedoms such as the rights to free speech, to assemble peaceably and to work. However, the Constitution lists various reasons for Parliament to create “reasonable restrictions” for each of these different rights.
The reasons for restricting the right to free speech were significantly expanded by the 1st amendment to include restrictions “in the interests of” issues like the security of the state and public order. In 1962, the Supreme Court held that in the interests of public order, speech or behaviour could constitutionally be declared seditious if violence or a call to violence was involved (Kedar Nath Singh v. State of Bihar).
However, this position has rarely been followed by governments eager to silence dissenting or critical voices. While such charges of sedition do not hold up to scrutiny by courts, the arduous process of fighting legal battles in India is in itself a form of punishment. Not everyone possesses the bare modicum of legal knowledge, time or resources required to challenge these charges through multiple levels of courts. Furthermore, “public order” is not just used to punish dissenting opinions but prevent them. Governments have prevented assemblies or screening of films on the grounds that the content is objectionable to a community and will lead to a law and order problem. Such decisions have worryingly become the norm despite the fact that the Supreme Court has stated that such a response “would tantamount to negation of the rule of law and a surrender to blackmail and intimidation” and that it is “the duty of the State to protect the freedom of expression since it is a liberty guaranteed to handle the hostile audience problem” (S. Rangarajan v. P. Jagjivan Ram).
However, public order and the other reasonable restrictions have now become ends in and of themselves. Home minister Rajnath Singh promised the strongest possible action against anti-India slogans, which he qualified as trying to raise questions on the country’s unity and integrity. “Sovereignty and integrity of India” is one of the reasonable restrictions listed in the Constitution. But prioritizing restrictions over rights flies in the face of the very purpose of statehood. The reason that people willingly become part of a state is because its structure prevents a life of chaos and anarchy where survival is the primary concern. Granting the state a monopoly of violence enables it to secure law and order in a society so that citizens can pursue their goals and ambitions without fear. Ideas like the “security of the state”, “sovereignty and integrity of India” and “public order” are permissible restrictions not because they are worthy goals but because they are necessary ingredients in granting this sense of security to citizens.
It is also for this sense of security that fundamental rights exist in the first place. They are intended to secure a democratic and republic society where people can pursue their lives without fearing undue reprisal from the state or their fellow citizens. They are, among other things, intended to prevent arbitrariness and the overreach of government power by securing the rule of law. They are rarely absolute but generally are restricted only where their free exercise undermines other people’s rights or this sense of security. Reasonable restrictions were written into the Constitution only to avoid leaving the limits of fundamental rights to the sole discretion of judges.
Reasonable restrictions were thus intended to set clear parameters with which to limit fundamental rights so that people could exercise them harmoniously. However, reasonable restrictions have ended up providing the state a ready-made excuse to avoid building the capacity to enforce fundamental rights. In the name of public order, the police are more likely to refuse permission for events than provide increased security.
When the state dodges its duty to enforce fundamental rights, noxious elements of society take advantage by browbeating people who don’t follow the line they set. The ostensible objection that the Akhil Bharatiya Vidyarthi Parishad (ABVP) had against the rally on 9 February was that they “feared” it might “disrupt” peace on campus—that is, it threatens “public order”.

A special but vulnerable Himalayan relationship

A special but vulnerable Himalayan relationship

Indo-Nepal ties have come full circle in the span of just 19 months
With the six-day visit of Nepalese Prime Minister Khadga Prasad Sharma Oli coming to an end, the India-Nepal bilateral relationship has completed a full circle in the span of a mere 19 months. This period saw the high of the August 2014 visit by Narendra Modi—the first by an Indian prime minister in 17 years—to Kathmandu and the low of a near-blockade on the borders in more recent months. Both the highs and the lows are suggestive of the special relationship that the two countries share and its vulnerabilities to domestic political exigencies with significant cross-border spillover.
The constitution of Nepal, which came into effect on 20 September after protracted delays, alienated a large part of the population comprising of the Madhesis, Tharus and Janajatis. Pursuing an exclusivist and discriminatory agenda, the mainstream parties—whose leaders hail from the hilly areas—colluded to go back on the promise of proportionate representation enshrined in the interim constitution of 2007. In addition to issues of representation, the principles of federalism and citizenship were also used to dilute the rights and privileges of the Terai-based population. Unsurprisingly, the promulgation of such a constitution invited fierce protests from the adversely affected communities.
The response from across the border wasn’t enthusiastic either; New Delhi noted the promulgation of “a” constitution but did not welcome the same. The Madhesis share familial, cultural and business ties across the border. Partly due to the protests and partly due to the incorrigible attitude of political leaders in Kathmandu—which led to disaffection among top leaders in New Delhi—the supply of goods from India slowed down considerably. While Sushma Swaraj, India’s minister for external affairs, claimed she was trying to send essential goods like medicine despite the blockade by protesters, the leadership in Nepal squarely blamed the Modi government for the halted queue of trucks on the border. Nepal also attempted to play the China card, albeit without much success.
A confluence of three factors brought a much needed change: (a) the government in New Delhi battling charges of mismanaging Kathmandu by the domestic opposition was eagerly looking for an opportunity to change track; (b) the opportunity was provided by the Oli government as it presented a four-point proposal to resolve the domestic logjam; and (c) the energy and vigour displayed by the protesters was gradually wearing off six months into the stand-off. The protesters also did not stand much chance of success once the Indian government decided to welcome the proposals of the Oli government. New Delhi was also keen to make sure that the usual tradition of Nepalese prime ministers making their first foreign visit to India remained intact. This tradition was broken in 2008 by former Nepalese prime minister Pushpa Kamal Dahal ‘Prachanda’—currently an important partner of Oli in Nepal’s ruling coalition.
The souring of ties came after the historic visit of Modi in August 2014, when his speech to the constituent assembly won the hearts of the entire political class of Nepal. Modi also offered a blank slate to Nepalese leaders to amend the 1950 Treaty of Peace and Friendship Between The Government of India and The Government of Nepal, which is widely seen as undermining the Himalayan country’s sovereignty. Modi visited Kathmandu again in 2014 to attend the 18th Saarc (South Asian Association for Regional Cooperation) summit.
In this context, the current visit by a 46-member delegation including Nepal’s home, finance and foreign ministers led by Oli is an important opportunity to reset the relationship and also the expectations. The visit has been successful so far; Oli has said that the misunderstandings of the last few months have been cleared away. The two sides have signed as many as nine agreements to push cooperation on a diverse range of subjects. India is an indispensable partner for Nepal as the latter is engaged in reconstruction after suffering two major earthquakes in 2015. The countries are also looking to expedite cooperation on infrastructure issues like roads and hydroelectric power.
The progress in these areas notwithstanding, the Modi government should be well aware that domestic turmoil can reignite in Nepal anytime if a long-term political accommodation is not reached. Nepal’s journey, in that case, to—in Modi’s words—sthirta (stability), samaaveshta (inclusiveness), samadrishti (fairness), andsamriddhi (prosperity) will be indefinitely delayed and its ties with India will inevitably suffer.
Are India and Nepal’s ties on the mend? 

Health Minister inaugurates 3-day international conference on Antimicrobial Resistance

Health Minister inaugurates 3-day international conference on Antimicrobial Resistance

I reiterate India’s commitment, leadership and resolve to combat AMR’: Shri J P Nadda
“India is committed to combatingAntimicrobial Resistance (AMR). However, a collective action is required by all stakeholders within a country and by all countries within a region. India,will be very happy to work with other Member States towards this common goal”, said Shri JP Nadda, Union Minister of Health and Family Welfare. He was speaking at the inauguration of the 3-day International Conference on Combating Antimicrobial Resistance, here today. Also present at the function wereMr. TandinWangchuk, Health Minister of Bhutan;Mr. Ram JanamChaudhary, Health Minister of Nepal;Mr. Mohamed Habeeb, Minister of State for Health, Maldives; Dr. PoonamKhetrapal Singh, Regional Director, World Health Organization, South East Asia Region and Dr. Keiji Fukuda, Assistant Director General, World Health Organization.

Noting that AMR has emerged as the number one public health challenge faced by the world today, the Union Health Minister stated that the first step in addressing the problem of AMR is to avoid the need for antibiotics at all in the first place. He further added that this is best done through improved water and sanitation, in the absence of which the proliferation of diarrheal diseases results in inappropriate antibiotic use. Through the Swacch Bharat programme, the Government has taken active steps to improve hygiene and sanitation and reduce the environmental spread of pathogens, he said. Vaccination is an equally important public health measure. Through Mission Indradhanush, India has set itself an ambitious goal of increasing routine immunization coverage to 90% within just a few years.

ShriNadda stated that the complexity of AMR is also fuelled by numerous stakeholders impacting and impacted by AMR. These include the consumers or the patients who take the medicine, doctors who prescribe, pharmacists who dispense, the industry which manufactures, the Government which regulates, the research organizations which innovate, the animal and agricultural sector which contribute to the food chain, the hospitals which treats the patients, the Civil Society which articulates the peoples’ perspectives, and the media which can focus attention on this important issue. Given this scenario, the Health Minister pointed out that it is imperative that all stakeholders connected with AMR contribute to pave the way for effective action to combat AMR.ShriNadda also pointed out to the grave economic consequences that countries across the world are facing due to non-rational use of antibiotics. He emphasized on correct prescription practices, prescription audits and digital repository of patients’ medical history among other important measures to be taken to combat the growing misuse of antibiotics. ShriNadda extended India’s commitment and resolve to work with other countries towards combatting this problem.

Drawing attention to the importance of surveillance and monitoring, Shri B P Sharma, Secretary (HFW) laid emphasis onthe role of regulatory authorities.He informed that the Ministry has undertaken an exercise for mapping health facilities in the private and public sectors across the country which shall be complete in the next three years. This shall provide a useful database to analyse the various determinants and impacts of non-rational use of antibiotics.

Dr.SaumyaSwaminathan, DG, ICMR, said that community based surveillance will play a very major role in finding solutions to Anti-TB drug resistance and other viral diseases. Noting the AMR is a top priority at ICMR, there is need to study how resistance spreads and what are the drivers for AMR, she stated.

Providing a regional perspective on AMR, DrPoonamKhetrpal Singh, Regional Director, WHO, said that by 2050 AMR will contribute to around 10 million deaths worldwide. Therefore, urgent action is needed to combat AMR globally. This will need policy commitment from the governments, sustained investment, technical assistance and regional cooperation. She applauded India commitment to combat AMR and the steps India has taken in this direction.

Dr. Mohamed Habeeb, MOS Health, Maldives stated that AMR is a major public health issue globally that is challenging several advances made in health sector. DrHabeeb further said that awareness programme for containment of AMR is the need of the hour.

Bhutan Health Minister,Mr. TandinWangchuk, called AMR a public health challenge and priority. He said that the inappropriate use of antibiotics is leading to high mortality and morbidity resulting in serious social and economic consequences.

Mr. Ram JanamChaudhary, Health Minister of Nepal extended full cooperation for countering AMR. He said his government will be happy for cross border collaboration on this issue. He also emphasized on the need for rational use of antibiotics.

Appreciating the need for media campaign for raising awareness about antibiotics, Shri J P Naddalaunched the “Medicines with the Red Line” media campaign at the function which creates awareness regarding rational usage of medicines which carry a red line on their strip. He also unveiled the Infection Control Policies for Hospitals handbook.

Also present on this occasion were, Dr. (Prof) Jagdish Prasad, DGHS, Dr. Arun Panda, Additional Secretary (Health) ShriAnshuPrakash, Joint Secretary, and other senior officers of the Health Ministry, representatives of WHO, UNICEF and representatives from various countries

Prime Minister to Inaugurate 3rd Asia Ministerial Conference on Tiger Conservation

Prime Minister to Inaugurate 3rd Asia Ministerial Conference on Tiger Conservation in April
The three-day Asia Ministerial Conference on Tiger Conservation will be inaugurated by the Prime Minister, Shri Narendra Modi on April 12, 2016.  This is the third such conference on tiger conservation. 
The Environment Ministry held a meeting as a prelude to the 3rd Asia Ministerial Conference (3 AMC) on Tiger Conservation, here yesterday.  The meeting was attended by the representatives of four Tiger Range countries (TRCs) - Bhutan, Indonesia, Malaysia and Russia, besides senior officers of the Ministry, including Secretary, Ministry of Environment, Forest and Climate Change and the Joint Secretary, East, Ministry of External Affairs.   The meeting was held under the chairmanship of Minister of State (Independent Charge) of Environment, Forest and Climate Change, Shri Prakash Javadekar.


The meeting held as a prelude to 3rd Asia Ministerial Conference on Tiger Conservation

Speaking on the occasion, Shri Javadekar said that there are only 13 countries that have the pride of having tigers in the wild and tiger-bearing areas in the world. The Minister also said that organising the 3rd Asia Ministerial Conference is a proud moment for India, where all TRCs can share their good practices and success stories, thereby contributing towards the cause of conservation of the magnificent species and the national animal of India - Tiger. Welcoming the delegates, Secretary, MOEFCC, Shri Ashok Lavasa, highlighted the importance of the 3rd Asia Ministerial Conference on Tiger Conservation and the value attached to it. India’s commitment to save its tiger, wildlife and concern for forests was also narrated. 
A presentation on the background of earlier Asia Ministerial Conference and a presentation of 3AMC was made by Additional Director General, Project Tiger (ADG-PT) & Member Secretary, National Tiger Conservation Authority (NTCA), Shri B.S. Bonal, besides bringing out the contribution made by Project Tiger/National Tiger Conservation Authority and achievements of India in the field of tiger conservation.  It was highlighted that the biggest threat to tiger conservation is poaching, due to the existing market and demand for tiger body parts and derivatives in other countries.  Thus, there is a need for a sustained effort from all Tiger Range Countries and other partners outside the government system. 
This conference will bring the desired will and momentum for tiger conservation at global level and have long-term ramifications in the future.  Thanking the delegates and representatives of countries present, the Chairman, NTCA, Shri Javadekar, emphasized the need for all TRCs to attend this important conference, the significance of which lies in it being inaugurated by the Prime Minister.

***

23 February 2016

India is an outlier in its tax policy

India is an outlier in its tax policy

As India broke from its clichéd Hindu rate of growth post 1991, its tax-to-GDP ratio stayed constant, belying those who predicted a spike 

The celebrated French economist Thomas Piketty’s recent visit to India caused much consternation for his remarks. He proclaimed that 1) inequality in India is widening, 2) India’s tax-to-gross domestic product (GDP) ratio is abysmally low and 3) the Indian state spends too little on health and education. This sounded like cacophony or harmony to India’s commenting class, depending on one’s ideological fancies. Regardless of one’s views on India’s inequality, it is irrefutable from empirical evidence that India has a “twin deficit” issue in its taxation policy. That is, India taxes its citizens much lower in proportion to its GDP vis-à-vis other comparator economies and a substantive portion of such taxes are collected through largely regressive and distorting indirect rather than direct means.

Analysis of data from Organization for Economic Cooperation and Development (OECD) and India’s ministry of finance, spanning nearly 50 years from 1965 to 2013 across 35 countries, reveals that India is indeed an outlier. India’s tax-to-GDP ratio increased from 10.4% in 1965 to 17.2% in 2013. This includes both central and state tax revenues. The corresponding tax-to-GDP ratio for OECD countries (weighted by GDP) increased from 21% in 1965 to 33% in 2013. Purely in terms of a tax-to-GDP ratio, India has always been substantially lower than the average of OECD economies, over a 50-year period. Compared to a subset of OECD nations with lower GDP (Korea, Turkey, Mexico, Chile, Portugal, Greece, Slovenia, Indonesia and Poland), India’s tax-to-GDP is still lower at 17% versus an average of 24% for these nations. Piketty is certainly right in pointing out that India’s overall tax revenues are very small for the size of its economy. Then, is there a desired tax-to-GDP ratio that India should aspire for? Economic theory is, perhaps surprisingly, silent on what might be an optimal tax-to-GDP ratio. Conventional macroeconomics does say that it is not optimal for the tax rate to exhibit erratic jumps up or down—this is Robert Barro’s famous “tax smoothing” proposition, but this does not pin down any optimum. We also know that there is a maximum feasible tax-to-GDP ratio, which corresponds to the peak of the celebrated “Laffer curve”, but this is only an upper bound on the government’s taxing capacity, again not a statement of what is the optimum. In the ultimate analysis, the optimum tax-to-GDP ratio is simply the lowest tax-to-GDP ratio which pays the government’s bills and keeps its books balanced, in the long run, without running perpetual budget deficits or surpluses. Thus, in the absence of a theoretical framework for an optimal tax-to-GDP ratio, it might be prudent for India to target a comparable tax-to-GDP ratio of other similar economies.
Some postulate that an economy’s tax-to-GDP ratio is, or should be, a function of its per capita GDP, and hence it is misleading to compare India’s with those much wealthier. The theoretical basis for such an assertion is debatable, and empirical evidence for this is also lacking. While India’s own tax-to-GDP has increased over 50 years with increasing per capita GDP, superficially supporting the theory, this fact hides more than it reveals, if one breaks the time period of study into two quarter-century periods. In the 25-year period from 1965 to 1990, India’s tax-to-GDP increased steadily from 10% to 16% while GDP increased 2.8-fold. In the subsequent 25-year period from 1991 to 2014, India’s tax-to-GDP stayed roughly constant between 16% and 17% while GDP increased 4.5-fold. It is puzzling to us that just as India broke away from its clichéd Hindu rate of growth post the 1991 economic reforms to grow much more rapidly, its tax-to-GDP ratio stayed constant, belying those who would have predicted an increase. That, curiously, India’s rate of tax revenues did not grow commensurate with its GDP growth post the 1991 reforms is inexplicable.
The second and perhaps the more important deviation in India’s tax structure from other major economies is in terms of the split of the total tax take between direct and indirect taxes. Direct taxes are taxes on income, wealth, property and capital gains. Indirect taxes are taxes on goods, services and excise taxes. Indirect taxes are considered regressive since its marginal impact on the economically weaker sections of society is far greater. India’s direct to indirect tax ratio is roughly 35:65. This is in contrast to most OECD economies where the ratio is the exact opposite, 67:33 in favour of direct taxes. In the 50-year period of our analysis, India’s direct-to-indirect tax ratio has swung from a low of 13:87 to its current high of 35:65. For the OECD nations, throughout this 50-year period, the direct-to-indirect tax ratio has remained roughly constant in the range of 65:35. Again, is there a desired balance between direct and indirect taxes for an economy?
Economic literature lays down two principal views. The first view, which was popular in the 19th century and into the middle of the 20th century, is the “desirable balance” view—roughly, the idea that there should be something like a half-and-half split. The great 19th century liberal prime minister of Great Britain, William Gladstone, subscribed to this view, for instance, suggesting that direct and indirect taxes were akin to “two attractive sisters each with an ample fortune”! Eventually, however, with the advent of mathematical optimization techniques in economics, the consensus view shifted to what is now the mainstream view, what economist Anthony Atkinson calls “superiority of direct taxes”.
According to the modern mainstream view, direct taxes—such as income or wealth taxes—function better both in terms of efficiency and equity, while indirect taxes are inferior. What is more, ideologically, both left and right should prefer direct taxes to indirect taxes, for different reasons—the left for reasons of progressivity, the right for reasons of minimizing inefficiency. If indirect taxes must be used, perhaps because of some constitutional or political economy constraint on the level of income or wealth taxes that a government may levy, then ideally they should be minimally distorting—in effect, by mimicking the effects of a direct tax.
An example of a “good” indirect tax is a single rate goods and services tax (GST) with no exemptions. Such a tax distorts individuals’ labour supply and savings choices, like direct income and wealth taxes, but does not distort the economy’s structure of production or consumption, as most indirect taxes, such as trade tariffs, do. The “worst” taxes are sector-specific excise taxes with high tax rates—such as taxes on petroleum, alcohol and tobacco—which are maximally distorting to the economy and maximally regressive. Unfortunately, they are also among the most popular for governments the world over, because they are good ways to grab a lot of revenue, although not good for the economy or its citizens.
Nobel-winning economist Joseph Stiglitz summarizes well the consensus view in the economics profession. He argues that desirable features of an optimal tax system would be “progressive income taxes, complemented by indirect taxation, bequest taxes and capital taxes that enhance the progressivity that can be achieved by the tax system while limiting the level of distortion (deadweight loss)”. Clearly, India—and for that matter, many other economies—are far away from this ideal.
The bottom line is that, while economists and others may disagree on what India’s tax-to-GDP ratio ought to be, we have shown that it is way below that of OECD economies. What is more, there is no disagreement that the bulk of taxes—whatever their share of GDP—should be raised using direct, rather than indirect, taxes. Here again, we have shown that India is an outlier, relying heavily on indirect taxes. Whatever may be one’s views on Piketty’s battle against inequality, we can all agree that he has done a valuable service by drawing attention to India’s peculiar and distorted tax structure.

Public policy’s twin deficit

A few days ago, the department of industrial policy and promotion notified the start-up policy in the gazette, following up on its announcement in mid-January. An inter-ministerial board of certification would declare a start-up to be an innovative start-up so that it could avail of the tax benefits under the policy. To be fair, this was not new. This was already flagged in mid-January. Jerry Rao, in a thought-provoking article in Swarajya, had noted correctly that committees and start-ups do not go together. The gazette notification offered an interesting contrast. On the one hand, applicants could use a mobile app/online portal to upload their application with any one of the prescribed six documents. Yet, an inter-ministerial board would have to approve it. This could be a bureaucratic compromise. Therein lies a vital clue to India’s achievement to aspiration ratio being less than one.
The approval process reflects many things. One, it reflects a trust deficit that is an endemic feature of Indian society. Indeed, this government has gone further than most in providing for self-attestation and self-certification in many areas. These are not merely about easing business conditions and interaction with government. This is more than that. It is about bridging the large and persistent trust deficit in the country. Without that, procedures and oversight would dominate much of the economic activity. Opportunity cost of lost economic growth is immense. It adds up over time. In his recent Pataudi Memorial Lecture, Rahul Dravid spoke about India’s pursuit of short-term goals achieved through shortcuts. Part of the problem of non-performing assets in the Indian banking system is the betrayal of trust by borrowers-promoters. That is why the government should persist with its carrot approach to building trust by broadening the areas of self-certification and self-attestation in the society, but carry a big stick. Importantly, with such a trusting policy, it should not be afraid to wield the stick, without fear or favour. That would lend credibility and meaning to its initiatives.
Second, it also reflects a fear of being accused by overzealous watchdog bodies—the office of the comptroller and auditor general or the courts—of corruption and favouritism down the road. Some of these agencies compete with networks for TRPs (television rating points) with their theatrical and rhetorical questions. They need to reflect and urgently too.
Third, it reflects a continuing mindset that the goal of the regulatory regime is to ensure zero frauds. In the pursuit of the last scoundrel, the government makes life difficult for a substantial majority that operates honestly. Objectives of control and submission were logical for a colonial regime. Indians developed a taste for it and have never let go of it, since then. Even in the era of economic liberalization, it never retreated fully. The interesting paradox is that the start-up policy has allowed for self-certification on compliance with labour and environmental laws, with random checks to discourage fraud and abuse. A similar approach could have been adopted here.
Of course, no policy needs to be adopted forever. It can be relaxed further or tightened depending on experience. That requires the recognition of the need for and collection of relevant data from policy inception and setting an example of conducting policy debates and evaluation with data than with rhetoric.
That brings us to our second example that captures the data deficit issue: the news that the commerce ministry would like all tax concessions for special economic zones (SEZs) to remain, for their removal would hurt exports and employment generation. A quick Internet search reveals that this has been a refrain with the commerce ministry.
While it may not be reasonable, it may be natural for the ministry to bat for its policies. But, in showing how to bat for them, it could set an example. It should make a case for its demand through reliable data backed up by meaningful and rigorous analysis. I searched for such an analytical and data-driven case by the ministry. It was in vain. Press notes and some academic papers did not do the job. A statement made in Parliament on 9 December 2013 showed that the share of SEZs in overall exports had remained unchanged at around 27% for around four years. A case for continuing with the favourable tax treatment for SEZs has to be made by demonstrating incremental productivity, value-addition, export and employment gains from units located within SEZs. More importantly, the ministry had to satisfy itself and the country that SEZs did not merely displace but added to export capacity that would not have come into existence otherwise.
Lastly, the ministry should be aware that its demand reflects a silo mentality and undermines a collective policy initiative. The finance minister told us at the time of the last budget that the budgets in the coming years would focus on lowering the corporate tax rate and removing ad-hoc exemptions. That was a sound decision. There is a role here for the prime minister to ensure that the government is an ensemble and not a motley collection of solos in silos. Such process improvements in government are, arguably, more important than the wish-lists that circulate in the public domain.

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UKPCS2012 FINAL RESULT SAMVEG IAS DEHRADUN

    Heartfelt congratulations to all my dear student .this was outstanding performance .this was possible due to ...