Left to him, he won’t rock right reforms

That doesn’t mean we ought to be satisfied with 6.5 to seven per cent. The longterm challenge is indeed one of increasing growth to eight per cent plus and broad-basing it to include agriculture. However, even 6.5 to seven per cent means tax revenue will be good and the fiscal deficit (expressed as share of GDP) won’t look disreputable.

Despite the RBI’s concerns, the inflation record isn’t that bad either. The RBI has to be cautious. However, even 5.5 per cent on annualised basis isn’t disastrous.

THE new budget should push ahead on tax reform. The two Kelkar Task Force recommendations already exist. The NDA shied away from anything beyond procedural simplification, although procedural simplification cannot be delinked from exemption removal.

Therefore, all exemptions, personal and corporate, should be scrapped. The Left may have some problems with this, but not serious ones.

The partial VAT (valued added tax) got postponed because of the NDA’s trader support base. Let’s have that. Let’s integrate service sector taxation into the VAT framework and once issues of compensating states for possible revenue losses are sorted out, there should be no serious problems in moving towards a complete VAT.

That also ties in with a new anti-dumping legislation the Commerce Ministry is planning and a WTO-compatible system of export incentives.

The Left may not actually want higher tax rates. It may want more service sectors brought into the tax net. What’s wrong with that, as long as this is integrated into a VAT framework? How about earmarking tobacco and liquor tax revenue for the health sector?

That leaves import duties. The Left may oppose import duty reductions on manufactured products. WTO negotiations are going nowhere and there is a window of opportunity where no multilateral compulsions on duty reductions are necessary, although bilateral free trade agreements also bring in import competition.

The Left apart, there is indeed a problem with reducing import duties on agro-products, especially dairy and edible oils. However, there is no need to touch import duties this year.

Today, if one includes all state-level indirect taxes, the tax/GDP ratio is around 15 per cent. If the tax reform takes place, this should increase to around 18 per cent and provide the cushion to increase public investment in health, education and the rural sector. That is part of the longterm agenda to broad-base growth.

ON expenditure, the NDA promptly forgot about the Expenditure Reforms Commission (ERC), having set it up. Those recommendations should be resurrected. There may indeed be problems if one actually tries to retrench surplus staff. However, the retraining part should be fine.

True, 3.4 million Central government employees is a trickle in terms of its quantitative impact, expect for the pension burden. But there is nothing one can do about the pension burden, except introducing a new system for new government employees.

However, downsizing government expenditure on wages and salaries is an important signal, because the quantitative impact is quite serious for state governments.

ERC recommendations also involve subsidies. At the Central government level, this is primarily food, fertiliser and petroleum-related subsidies. And there is an immediate problem. Because of the hike in global oil prices, retail prices of petrol, diesel, LPG and kerosene should increase.

But forget the Left, even the Congress will find this difficult. And before you blame the Congress or the Left, would Ram Naik have behaved differently?

The exchange rate management issue is also tangentially linked to the rupee cost of oil imports. Should the RBI intervene to prevent rupee appreciation? How does one operationalise the idea of using forex reserves more productively, say for electricity projects?

THE broader issue is subsidies, food being the most obvious. Who should be entitled to subsidised food or employment guarantees? Logically, such subsidies should only extend to BPL (below the poverty line) families or Antyodaya ones.

And identification of the poor needn’t be done on the basis of NSS (National Sample Survey) data. Certainly for rural areas, it is possible to devolve such identification to panchayats, using objective criteria. Kerala’s Janmabhoomi programme is an example.

Decentralisation fits in well with the agendas of all constituents of the UPA. Let’s have Right to Information Acts, let’s have citizens’ charters, let’s increase accountability, transparency and efficiency of public expenditure. Let’s completely revamp centrally-sponsored schemes and devolve them downwards. Subsidy targeting is also possible geographically. Using objective criteria again, it is not very difficult to identify India’s 100 most deprived districts. This will also address ST issues, if not SC ones.

NOTICE that in this agenda, I have not mentioned the two most visible items — privatisation and labour market reforms. On the latter, labour market reforms are necessary, but we shouldn’t equate them with amending the Industrial Disputes Act (IDA). The IDA is less of a constraint than we imagine it to be.

Not only is privatisation not that important in the overall reform agenda, there should be grave reservations about privatisation interpreted as strategic sales.

Whatever the Sensex might think, privatisation is not worth fighting over. Ditto indeed for FDI policy, if by FDI policy one means hikes in sectoral equity caps, as opposed to improving procedures.

Sitaram Yechury was never tired of saying that India Shining benefited only 10 per cent. Let’s accept that figure, instead of quibbling about it. This mandate is about broad-basing growth to bring in the remaining 90 per cent — and the agenda shouldn’t lose sight of that objective.