Finance ministers have wrestled with the problem of a burgeoning fiscal deficit or the burden of accumulated government borrowing in the run-up to almost every budget in the last three decades. It was no different this time. Unlike his predecessors, however, Pranab Mukherjee didn’t duck the issue; he opted to first publicly acknowledge the problem and then sought a course correction—by raising indirect taxes even at the risk of fanning inflation, and putting the brakes on politically sensitive spending such as fertilizer and petroleum subsidies.
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Purely for this effort, at the risk of sounding gushy, I would argue that not only is he Captain Courageous, but also deserves to stake a claim to being one of the game-changing economic reformers of modern India.
Further, he has accepted almost all the recommendations of the 13th Finance Commission (TFC), which include economic empowerment of the third tier of government—panchayats (village councils) and urban local bodies such as municipalities—by guaranteeing them a share in the divisible pool of national taxes. This is a big deal. Unlike in the cities where anonymity makes corruption easier, at the third tier there is inevitably a face attached to a name—making it difficult, if not impossible, to elude accountability.
Captain Courageous: Mukherjee did not sidestep the fiscal deficit. Atul Yadav / PTI
There is more.
In the run-up to the Budget, select sections of the media peppered their daily offerings with stories claiming that the direct tax code (DTC), a singular tax reform effort that would guarantee stability of rates and transparency in the law, was in trouble and that the finance minister was neglecting it.
Those stories proved to be unfounded. Mukherjee, much against expectations, effected a major tweak to the direct tax structure, giving back money to the middle class. Most have interpreted this to be a giveaway. We (in an interview given to Mint) have it from the finance minister himself that this is in line with what has been envisaged in DTC to be put in play by April next year.
Having already demonstrated intent, it is obvious that the chances of finance minister sticking to the committed date are very high. This would, as Mukherjee said in his Budget speech, be accompanied by the single goods and services tax (GST) legislation. As Capital Calculus has explained before, this would mean moving towards a uniform tax regime for the entire country.
Not only does it ensure economic unity of India, it also ensures a level playing field, especially in the context of the fact that the government is rapidly moving towards dismantling import duty protection through free trade agreements (at the moment, there is no way of ensuring imported goods are slapped with countervailing duties in lieu of levies paid by domestic companies). Further, TFC claims that this would stimulate growth so dramatically that the country’s annual income would grow by an additional 1.5 percentage points.
Once these two legislations are in place, India would have finished a journey that ironically began towards the end of Mukherjee’s first stint as finance minister in the 1980s. He had sown the seeds of what became the seminal document—put out by finance minister V.P. Singh in 1985 and authored by Bimal Jalan, who later became a governor of the Reserve Bank of India—known as the Long-Term Fiscal Policy. It would also provide India with one of the most sophisticated tax structures in the world, a model that countries with similar disparities may like to emulate.
To Mukherjee, personally too this must be a special moment. It was in the Sixth Plan (1980-81 to 1985-86), which overlapped with his tenure as finance minister, that the country evolved its economic reform strategy under the aegis of Indira Gandhi after her return to power in the 1980 general election. At that time, it was more of talk and less of action. Politically, the country, which was still in the embrace of socialism, found it difficult to effect such a dramatic course correction. It is only apt that he returns to close a critical but very important chapter of reforms initiated during his oversight of the economy.
Unlike some of his predecessors, he has couched his Budget speech in very modest language (like his July effort, it will take a while to sink in), so consistent with his political style: promise less and deliver more.
However, his claim to fame is hinged on one very vulnerable assumption underlying the Budget: inflation. If things go wrong from here (especially if the policy missteps of the last six months in managing food supplies continue), the finance minister risks political attack.
More importantly, a politically weakened finance minister would find it next to impossible to stave off various lobbies that are determined to nix the twin tax reform initiatives.
It is a moment not just for the Congress, but the entire United Progressive Alliance to back the finance minister. But are the allies listening?
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@ livemint.com