GST – Phase 2

We know how things work in India – you try to spend years, often decades in a vain hunt for the holy grail of any law or reform move. By then costs mount, direct and indirect, but who cares? Because the poor beggar whose son grows up to be a beggar & is doomed to poverty all his life will not connect his misery to delays in implementing GST or getting that airport built.

But then after all this delay, finally when things get done, they don’t show the perfection expected of such long effort. It as if Kamal Amrohi spent 20 years making not Pakeezah but some usual Bollywood masala trash. This is because the exact same issues that kept the process tortuous have not vanished but have simply resulted in compromises and optimisations that almost manage to defeat the purpose.

Strangely, all of the above applies equally well to other divisive democracies with distributed powers like USA. But then they are rich and can do with lousy healthcare law or Sarbanes Oxley sort of nonsense but we cannot afford to do so.

As far as India is concerned, this is true whether Congress, BJP is in power directly or through messy coalitions.

But then the mere fact that reforms get done in of itself is a major achievement that cannot be underplayed. In fact, that is the only way things can get done. You can wait for perfection another 20 years, and it aint gonna happen.

That is the story of GST too. We cannot stop congratulating and thanking Jaitley, Modi & Co for getting it done. No mean achievement.

What next?

But having done that and benefit of hindsight what else can be done? After all the present law is merely a first step in a long journey.

Arvind Datar and Vaitheeswaran (Indian Express, 28 Sep 2017) have written an excellent piece on this topic and instead of the usual nasty sarcasm, useless criticism and agenda driven venom that passes for journalism in India these days, have given sensible suggestions that is almost a to-do list. Hats off.

Similar sentiments were expressed in our earlier article on this topic – link here.

Adding to the excellent to-do list mentioned above we would suggest the following

1. Get contiguous BJP ruled states to go whole hog and include petroleum, real estate and whatever else is left out into the GST net. That is almost all of India these days! This creates competitive pressure on rest to reform or literally perish as businesses votes with their feet. This is a lot faster than arguing with megalomaniacs and anarchists like Mamata Banerjee & Arvind Kejriwal who will never agree to anything sensible just because it came from Modi. We say contiguous because goods can freely move (with necessary input credit) without having to cross a non-compliant state.

2. Announce that for the first one year, there wont be any penalties (beyond recovery of tax due) on anything other than wilful and wanton tax evasion, that too narrowly defined and clearly listed out.

3. Give taxpayers option of accelerated refunds with the condition that should they prove to be cheats, the law will come down on them like a ton of bricks. Yes, this may expose the revenue to some risks but the benefits will be considerable too. Known offenders, tax defaulters can be left out.

4. Go easy on minor delays in filing other returns such as Company Law, Income Tax etc. because the same bunch of people (Accountants, CAs etc) that are busy decoding GST also are responsible for those tasks and must be tired and exhausted. Remove useless returns, forms, filings that waste time and don’t bring any benefit to any stakeholder. In fact a general amnesty in that direction announced ahead of time is a great PR move and costs nothing.

5. Study the GST credit system of Singapore where ordinary poor (by local standard) taxpayers were given money for first year or two. Nothing works like free money to soothe irritated public mood. It need not be substantial but should not be trivial.

6. Make small but effective steps towards single rate, each month, every month. No need to wait for big bang reforms and endless arguments. Perhaps a good start is Pistachio, Cashew, Almond and Walnut all of which have different rates as one wag pointed out!

Reform is not easy. But rewards can be huge. Indian voters have shown this many times.

 

 

 

 

 

Fixing the “slowdown”

To anyone seeking a masters degree in left propaganda yellow journalism, Indian “liberal” media and its constantly shifting narratives offer a practical course that no University can provide. That too free of charge! Pity they don’t issue a certificate upon completion.

You may recall the concerted campaign mounted hardly 6 months back about “manipulated statistics” & “cooked books” that made India’s GDP growth more than what it “really” was. Of course, it was all laid at the door of Narendra Modi who, we were told is doing this to hide his many failures. No amount of explanation by professional statisticians in the government (none of whom were appointed by this regime) mattered. While some genuine economists had genuine questions about changed methodology etc (which are never static), it was mostly propaganda noise by faithful media warriors of the left + Congress continuum that reached high decibels.

Now once the govt announced that growth slowed to 5.7% in the latest June 2017 quarter all this talk died down and vanished like a ghost. In its place another narrative – that India’s economy is in a “tailspin“. It is no one’s case that economic growth is doing fine but surely tailspin is not the most appropriate word for a rate of growth most developing countries will happily report? Apart from the tailspin narrative, it was all talk of gloom and doom and what Modi should or should not do to stop this free fall that was a product of his own miscalculation.

Arvind Panagariya, until recently Vice-Chairman of the NITI Aayog (whose departure created yet another wave of senseless speculation and innuendos), wrote a brilliant article for TOI advising caution and putting the numbers in perspective. All was not lost and there is no need for desperate measures. Other op-ed writers including the likes of Mihir Sharma who is not exactly Modi regime friendly echoed the same prescription (not to loosen purse strings at cost of fiscal stability) but of course differed on the cause and magnitude of the problem.

In this context what should be the “common sense” approach for the Modi sarkar? We summarise them below.

  1. There’s lots of low hanging fruit in the ‘ease of doing business’ department. Most of them do not need ANY legislative change, just mindset change. PM Modi should ask each of minister to abolish just 1 form or return each week. We have mentioned this earlier, but any SME that chooses to incorporates itself into a Pvt Ltd company files a lot more returns and faces tons of paper work that companies in Malaysia or Singapore don’t face at all.  Among other negative effects, this (plus various other reasons) forces Indian startups as well as established companies to setup holding companies there and raise funds in Singapore instead of India!
  2. A give and take approach to labour law reform. Unions can be asked to tick off reform measure they will approve happily in exchange for benefits and facilities that they need and is fair. Implementing incremental changes in India is lot easier and better than “boil the ocean” types that take decades. Not only that within existing bunch of labor laws one can be 400% sure, as Musharraf would say, there is scope for procedural simplifications, speed up of decision making etc that will keep things going and can make a major change.
  3. That brings us to the next topic – speed up the administration. We in India always think of constitution changes, major laws with draconian clauses etc to fix problems for which much simpler solutions are available. Even if a particular law or Act requires ten steps, where one would be adequate, there is NOTHING in any Act that says don’t do them fast and in fair manner! What is stopping successive regimes from simply cranking up the motor? It is here that Modi has, in our opinion, failed to make a major difference.
  4. To give a simple example, opening a restaurant in USA or Germany or even Singapore is not easy. It may require permits relating to Fire, Food safety, Workers welfare and safety, Building Code, Hours of business, Parking etc from many departments scattered over local, federal and state levels. But the key difference is, at each of these places, rules are transparent, fair, available and accessible and one doesn’t have to bribe desk after desk to move papers. So what is desirable and quicker? Amending or integrating 100 different laws (as our labor Ministry is trying to do) fighting through a thicket of resistance from entrenched babus and the ‘system’ or simply looking at implementation speed and fairness of process?
  5. Bypass the banking system to provide funds where it is really needed, perhaps through existing or dedicated development bank. This can be done for quick win projects that create jobs. Again quick to do while debates about who takes the hair cut and how much can go on for another 20 years in the regular banking system. In fact, there are even doubts if private businesses are keen to borrow and spend on capacity even if funds were available on demand until existing excess capacities are taken care of.
  6. Go easy on harsh and punitive measures particularly in relation to GST. The last thing that one wants is depressed sentiments and fear psychosis caused by overzealous and often corrupt bureaucrats raiding and destroying genuine businesses because there are “errors” in returns that no one understands. There is time and place for that kind of measures.
  7. Get more funds from rich friendly nations on soft terms like the one for bullet train project – but for spending on projects that create immediate jobs, kick start consumption and give booster shot to the economy without wasteful expenditure. Japan, Saudi/UAE (but not Beijing) and others that work on government to government levels and who have already promised cooperation are obvious targets. This is far better than borrowing domestically that crowds out others and pushes up rates.
  8. Go faster on reforms that stir the pot and send the right signals but do not bog down the entire government with lots of resistance. Air India is one good example. There are dozens more. Speed of action is of the essence here, without compromising on transparency. Extensive land reforms can wait for Term 2 for precisely same reason. Plus they don’t give results for five or more years. Correspondents of Financial Times and Washington Post do not vote in Indian elections.
  9. Fill up government posts where new recruits are put to productive use. This not only makes electoral sense but is also eminently do-able given the shortfall in many critical areas. Delivery and governance are suffering even as excess staff who cannot be re-trained or re-deployed act as drag elsewhere.

Hope the next few months are full of action that will show results by early 2018 because it may be too late if results come too close to 2019 May. Just check with A B Vajpayee!