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Just the right stuff, Jaswant

January 13, 2004

It's amusing to note the way Jaswant Singh's budget-without-hoopla has been panned in the media.

Quite understandable, considering how much effort and planning the media puts into budget coverage these days.

To be robbed of all that and be handed down a measly press note can be galling.

Little wonder, everybody has dismissed it as an unconscionable election gimmick.

Let's rethink this: If duty cuts, deregulation and reform of the tax administration are indeed election gimmicks, we should be having more of them.

Since politicians love election gimmicks, reforms should in future be a breeze because we tend to have some election or the other almost every year.

Privatisation? Simple. All you need to do is unload profitable PSU holdings through IPOs priced at par.

The exchequer may lose money, but the PSU will be privatised and common people will make money through capital gains.

After that, you can always let a private bidder mop up the shares through the market and gain control. What better way to privatise than to let the market decide who should run the company?

However ignoble Jaswant Singh's motives were, I think the right action needs applause, not opprobrium. So what's he done right?

The problem with India's finance ministers is that they have been barking up the wrong tree: they have invested too much time in budget-making and too little on course corrections and day-to-day financial management; they have expended too much effort trying to find new ways to tax people instead of monitoring how the money is spent; they have focused excessively on expanding the taxpayer base when they should have been thinking of ensuring higher yields from existing taxpayers; they have also been talking about reform from the annual budgetary podium instead of actually doing something about it.

I am glad Jaswant has shown us the benefits of having no budget -- though I suspect he will revert to it after the election.

What India needs is an annual accounting exercise that shows everyone in the government's book of accounts: making the economy work and balancing those books is the task of every day of the year.

The finance minister's pre-election sops (some of them, at least) actually go in the direction of implementation rather than mere promise.

Take the scrapping of tax returns for those with salary incomes up to Rs 150,000. Sounds like a bribe to urban middle-class voters.

It may be that. But the move will also improve tax administration.

I have never been an admirer of the one-by-six rule where you have to file returns merely because you own a telephone or visited Bangladesh.

When Rs 500 is all you need to own a mobile, the tax administration will only be wasting its time in getting all kinds of such people to file returns.

It should be concentrating on the big taxpayers -- getting them to pay correctly and giving them royal treatment when they do so.

The world over, managements know the 80:20 rule. Eight per cent of your revenues come from 20 per cent of products.

When it comes to tax, 80 per cent of taxes come from 20 per cent of assessees. The one-by-six rule inverted the idea and made it the 20:80 rule -- focus most on the guys who will bring you the least revenue.

This increases the cost of tax administration by making officials chase salary earners who don't anyway have a chance to evade taxes.

The question the finance minister needs to ask himself is simple: should tax efficiency be judged by the amount of taxes collected or by the number of taxpayers registered?

Thankfully, Jaswant Singh seems to be moving away from this trap.

A key criticism of Jaswant's press-note-budget is that it gifts away huge amounts when the fiscal situation is so precarious.

Moreover, nobody seems ready to buy the argument that lower taxes will ultimately generate more tax revenues by increasing demand and increasing economic activity.

While fiscal prudence is important, any finance minister has to judge his risks: should he sacrifice growth for fiscal rectitude (with uncertain economic and electoral dividends from it) or roll the dice in favour of growth and hope for the best?

I believe that in India the fiscal deficit will come down not by a direct attack on it, but by growing the denominator -- the GDP -- faster.

The fact is the current mood of economic optimism is just the right time for Jaswant to gamble on growth. And let's not forget, he has slipped in customs duty cuts and forex liberalisation -- reforms that will improve the competitiveness of Indian business in the medium term.

Jaswant's critics need to ask themselves what they are cribbing about: would they rather have him do the right thing for electoral purposes or the wrong thing (or nothing) for whatever purpose?

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