The political
economy of India enters the 72nd Independence Day with a sense of
pride, no doubt, with the third largest economy of the world on an uptick of
7.5% growth rate. What is more, there is hope of consistency in such growth. GST,
a showpiece of cooperative federalism, is the major indirect tax reform on the
road to stabilization after the recent rate modifications and relaxed quarterly
return submission. All it now needs is bringing fuel prices under its ambit. Yet,
the nation cries for more reforms to ensure equity and social justice to all.
The Worries:
Core Consumer
Price Index inflation accelerated to a 3-year high in July 2018 at 5.7%, while
Wholesale Price Index moved to a six year high. Inflation is set to breach 5%
in 2018, crossing the benchmark rate of 4%. Fiscal policy will be under severe
pressure during the current year with States’ contribution to the widening
deficit as warned by a recent Study of State Finances by the RBI. Impending
General Elections 2019 to Lok Sabha would add more fuel to this fire.
The rise in
stock-market indices driven by more domestic investment of about Rs.66666cr in
the backdrop of foreign portfolio investors pulling out Rs.4,583cr in 2018 thus
far, has little to cheer as the balance of payments position continues to be
weak. IMF in its Annual External Sector Report cautioned India against relying
on global financial markets to fund current account deficit of 3% of GDP. The over-valued US dollar in the wake of
increasing oil prices is enough cause for our future worry. A few economists
have already predicted a burst of the bubble sooner than later with the exodus
of FIIs.
Developed India:
70 reforms
during the last 71 years have led to the present status of development. The
nation has a large unfinished agenda on education and health reforms. I would
add one more: water security in the country.
National
Water Commission’s (2012) recommendation for establishing Water Regulatory
Authority in each State to ensure use and allocation of water as a precursor to
attaining equity and social justice is yet to gain acceptance in the wake of
water wars.
Government of
Telangana holds a beacon light in water policy with the world acclaimed Mission
Bhagirath assuring to provide drinking water to every household in the State
every day and Mission Kakatiya, tank-linking project that cleaned up 30000 of
46000 tanks in the state. Adaptation to climate change, demand management and
water use efficiency in the wake of ever declining ground water resources also
deserve greater attention.
Fiscal Responsibility:
Fiscal
deficit is bound to exist to some degree or the other as the State has a
constitutional responsibility to ensure welfare, safety and security of all the
citizens. The earning capabilities are not neutral to size of the villages on
one side and the natural resource base of the villages on the other. Such
fiscal deficit occurs right from decentralized level to the State and Central
level.
The resources
should preferably be from the sub-regional fiscal allocations – i.e., the
panchayats and mandals, for the assessment of the need can best happen at the
village level and not at the District and State levels. Therefore, there is
need for insisting on a transparent mechanism of sub-regional allocations and
releases of the resources.
The ability
of the villages to levy taxes and cess just does not exist and even if it
existed, it has to be integrated with the regional pool of resource. For
example, property taxes, drinking water cess, drainage cess, etc can be
collected at the village level and their deployment for effective maintenance
can be ensured through a decentralized monitoring mechanism that should include
professional surveillance and social audit.
Natural
disasters are unpredictable and so are the resources required for restoring
normalcy in the affected areas. Many a time the expenditure cannot wait
assessment of damage. These will initially cut into the budgetary allocations
for various sectors but have to be replaced with appropriate fiscal
initiatives. A few states have recurring floods while a few others have
frequently occurring drought. Each disaster cannot be treated with the same
brush.
“There is enough evidence of growth leading to
reduction in poverty: Prof S.S. Bhalla has proved (Inclusion: January-March
2012) that during the 21-year period (1984-2005) growth was around 55% and
poverty decline was about 2 percent per annum (in log terms). In the five year
period since 2004-05, as the growth increased the pace of poverty decline also
more than doubled to 4.7% per annum.”
Reaching the
poor through Jan Dhan and Mobile access led to greater financial inclusion and
the social benefits of schemes like Mid Day meals programmes with the twin aim
of higher enrolment and lessening poverty at the Union level; Kalyan Lakshmi
schemes easing the burden of marriage costs, schemes meant for financial and
social security for the farmers through ‘Rythu Bandhu’ and Rythu Bhima of
Telangana Government serving as role models; making MNREGS more inclusive,
2-bed room houses for the poor from Telangana Government; and central and state
schemes for providing houses to the poor etc., are all in the direction of
economic empowerment of the poor and social security.
Investment Climate
If investment
climate has to distance from state led incentives, there is a case for more tax
reforms. While the GoI may be happy at the steady inflows of direct taxes,
there is a case of reduction in the income tax and corporate tax. Both are
possible if the Government can eye on increasing the share transaction tax
where the tax administration expense is almost zero. Both the buyer and seller
of the shares buys or sells with an eye on gains. The present STT at 0.15% can
move to 1%. Since the tax deducted instantly moves to revenue kit of GoI as all
demat accounts FRBM comes with ease.
Finally, In
the backdrop of unprecedented pile up of NPAs, financial sector reforms leading
to improvement in governance of the PSBs cry for immediate attention. This
should preferably start with the winding up of the Department of Banking with
the GoI. All these reform measures have the potential to take the growth to
higher trajectory with stability at the expected ten percent per annum.
Published in Telangana Today's Opinion Column on 15th August 2018.
