Why Modi government has been a disappointment
A chartered accountant who audits several medium-sized companies was scathing in his assessment of the Narendra Modi government. “Business is at a standstill,” he said. “The Goods and Services Tax (GST) has driven many of my clients out of business with its complex rates, compliance issues and stiff penalties.”
Who does he blame? “Without doubt,” he said, “the ministry of finance (MoF). It has imposed impractical regulations which have increased the discretionary power of tax officials. Now they openly threaten clients with arrest if they spot the slightest irregularity in tax returns. Of course, the arrests never happen. But these coercive tactics have opened up the floodgates to corruption.”
Arun Jaitley, back home from his kidney transplant, is seen by business people as part of the problem, not part of the solution. If Prime Minister Narendra Modi wins a second term – which is far from assured — he will need to appoint a new finance minister. Piyush Goyal, the interim finance minister, would be a pragmatic choice.
It’s of course easy to blame Jaitley and the bureaucrats in the MoF for a multitude of missteps. But the prime minister’s office (PMO) can’t escape responsibility. The prime minister has allowed the MoF to drift. This is inexplicable because many of the structural economic reforms Modi has initiated over the past four years stand out: legislating an insolvency code to cut bank NPAs, repealing hundreds of outdated colonial-era laws, wielding an axe on benami properties, establishing the Real Estate Regulatory Authority (RERA) to protect home buyers and pushing through a plethora of schemes to enhance financial inclusion, rural electrification and sanitation.
But the public perception of these reforms has been partially negated by failures on other fronts. Over-reliance on the bureaucracy has led to embarrassments like the Haryana sports department’s ludicrous attempt to “tax” athletes’ income. It took the usually somnolent Haryana chief minister Manohar Lal Khattar to rescind the order notified by principal secretary (sports and youth department) Ashok Khemka — but only after a media outcry. The government’s move, meanwhile, to appoint through lateral induction 10 technocrats as joint secretaries is long overdue. It will add specialised domain expertise to a bureaucracy made up of generalists.
Former RBI governor YV Reddy last week blamed the UPA government for letting bank NPAs get out of control between 2008 and 2014, but held the NDA government responsible for not acting quickly enough to stem the rot. There is now the ironic possibility of the following scenario playing out.
In 2014, Modi inherits a broken economy after 10 profligate UPA years. He takes five years to set it right. In 2019, he loses the Lok Sabha election and the UPA-led Opposition inherits an economy in the pink of health with annual GDP growth nearing 8 per cent, the fiscal deficit in control at 3.3 per cent and inflation well below five per cent.
Now, compare these key economic parameters of 2018-19 with 2013-14, the final year of UPA-2: GDP growth had plunged to 4.9 per cent; the fiscal deficit was an unsustainable 4.5 per cent; inflation was out of control at nearly nine per cent.
Thus, Modi would have spent five years laboriously fixing the broken economy he inherited in May 2014 only to hand it back on a silver platter to a putative UPA-led Opposition in 2019.
Modi has less than a year to escape this predicament. He should start with bold tax reforms. Assessees with taxable incomes under Rs 7.50 lakh contribute less than 10 per cent to direct personal tax collections. Exempt them from income tax. Two immediate advantages will flow from this one step without costing the exchequer significant revenue: first, ahead of the 2019 Lok Sabha poll, it will bring the deeply alienated middle class back on to the BJP’s side; second, it will allow the income-tax department to concentrate on high-value taxpayers, boosting the exchequer’s revenue.
United States President Donald Trump may behave like a geopolitical Godzilla-on-the-rampage but he has done wonders for the US economy in his 17 months in office. Unemployment is at an historic low (3.8 per cent) and GDP growth at an historic high of (over 3.2 per cent). By cutting corporate tax from 35 per cent to 21 per cent Trump has ensured that US companies have more funds to invest in new projects and at the same time hand their employees a wage rise. Low taxes are the route India’s finance minister too should take.
The next step the Modi government must take is to place petrol and diesel under GST. The states are finally coming around to accepting the fact that their current windfall taxes from VAT (which being ad valorem rises with every crude oil price hike and rupee depreciation) can’t punish consumers forever. Fuel under GST will not only cut prices for the millions of car and two-wheeler owners, but also cut transport costs for trucks and commercial vehicles, improving economic efficiency all round without the national exchequer losing significant revenue.
The more consumers save on fuel, the greater their purchasing power, boosting consumption and corporate profits, leading to higher corporate tax revenue. This virtuous cycle can change the mood of the nation across urban, semi-urban and even rural areas where lower fuel prices impact the cost of LPG cylinders, local transport and agricultural inputs.
The Modi government has been a disappointment over several issues, including its incoherent policy on Pakistan and Jammu & Kashmir as well as the talent deficit in the Union Cabinet. Ministers like Nitin Gadkari and Piyush Goyal have shown enterprise and innovation in their portfolios. They are the exception, not the rule.
The BJP came to power on the promise of "vikas". It pledged to protect the national interest after 10 years of a desultory, scam-tainted UPA government. Modi has little time — and even less elbow room — to live up to those two promises before the people announce their verdict in May 2019.