Small steps to reform
The big stuff is not happening. Goods and services tax (GST), reduction in fertilizer and electricity subsidies, consolidation and recapitalization of public sector banks and many other big-ticket reforms are stalled at various stages of the political economy. But quietly, some of the small stuff is getting done.
Both the Union government and many of its agencies are pushing through changes which taken together are turning the wheel on progress. Some state governments are catching the enthusiasm and electing to do similar things. Both devils and gods lurk in the details. Here is an attempt at itemizing these steps.
A unique enterprise number: In a little-noticed development, the government announced that companies in India would use a single enterprise number for all their financial, labour-related, corporate secretarial and legal purposes. In the words of Manish Sabharwal, chairman of Teamlease, “it ends the regulatory cholesterol of multiple numbers that include the corporate identity number (unique 21 digits), taxpayer identification number for commercial taxes (unique 11 digits), service tax number (15-digit alphanumeric), Permanent Account Number (10-digit alphanumeric), Central excise (PAN plus two characters), provident fund number (11-digit alphanumeric), profession tax registration certificate (nine-digit numeric), profession tax enrolment certificate (nine-digit numeric), income tax deduction and calculation number (10-digit alphanumeric), ESIC number (17-digit numeric), labour department registration (13-digit state-specific alphanumeric), importer exporter code (10-digit numeric), shops and establishments registration number (20 plus-digit alphanumeric), contract labour registration (15 plus-digit alphanumeric), labour welfare board (five-digit numeric) and higher court case number (12-digit alphanumeric)”. The single number will be the corporate PAN number, and back-end databases for all agencies that deal with companies will relate to this unique number. Of course, even this simple but highly effective reform is fraught with political economy issues. The turf war between all other agencies and the Central Board of Direct Taxes (CBDT), which owns the PAN number, appears to be settled, but it will require full participation from all agencies to make this a success. States should follow suit and do the same.
Repealing obsolete laws: The 19th and 20th law commissions were charged with identifying obsolete laws in the country. The commission piggy-backed on the “100 laws repeal project” authored by the Centre for Civil Society. In a telling report published in late 2014, the 20th law commission says, “253 laws despite having been recommended for repeal in historical law commission reports are still on the books, 34 laws that have been repealed still figure on government websites and similarly, laws that have been passed have not been recorded on appropriate websites”. The good news is that Parliament has already agreed to repeal 125 laws. The government has proposed another 1,000 or so laws for repeal—currently a victim of the Rajya Sabha logjam. For a Parliament that appears to be at loggerheads, passing bills of this nature (with low stakes) may be a good path to ease their way back to doing business.
Release of income tax data: In a surprise move, the CBDT last week released aggregate direct tax data on corporate and individual taxpayers for the first time in nearly 15 years. The data confirms the tragically low tax penetration and collection in the country. In a country with more than 250 million households, the number of individual assesses is only 48 million, and out of 67 million enterprises, only 714,000 are registered to pay tax. In recent years, the growth rate in taxes collected is lower than the growth rate in nominal gross domestic product. Scholars and economists can now study the underlying data and suggest ways to improve and widen the tax base. If direct taxes represent only 5.5% of GDP, the country will not have the resources to upgrade the growth potential of the economy. A disproportionate reliance on indirect taxes has a distortionary effect and risks converting the system from a progressive to a regressive tax regime.
Deregulation of rates: The Reserve Bank of India deregulated savings rates for both domestic and non-resident deposits nearly five years ago, leading to healthy competition in the banking sector. Customers have benefited. Since then, various entities such as the 13th and 14th finance commissions have suggested further deregulation and market-linking of small savings schemes and pension pools. Even though the government has disappointingly backtracked on some provident fund-related reforms, the genie is out of the bottle. Subsidization of financial savings will gradually become a smaller issue in the economy and with it should come more effective transmission of monetary policy.
A clutch of really small things: Over the past couple of years, the government has implemented a motley set of micro reforms—permitting self-attestation on documents, third-party inspections of boilers, an improvement in efficiency of major ports leading to greater cargo handling, lifetime licence for Indian-flag coastal ships and creating a bureau of Indian standards.
At a time of logjam in the parliamentary process, it may be fruitful for the government to accelerate small reforms.
P.S.: “If you cannot do great things, do small things in a great way”, said Napoleon Hill.
Narayan Ramachandran is chairman, InKlude Labs.
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