The reform story

The tortuous path of GST is possibly the only example of a reform initiative which has actually gained from its extended delay (with the exception of recent segments of it)

Photo: PTI
Photo: PTI

The economic reform process which began dramatically over a few days at the end of July 1991 was a massive collective achievement in a country where any change for the better is stymied by the enemy within. And the plethora of books marking 25 years of that start has been enormously educative in taking us through the internal parlays, and in a few cases subterfuge, which together made it all happen.

It is a well-worn cliché to say that the 1991 package was incomplete, and intellectually flawed (which it was), but what we now need is to pick up each thread of the impossible skein of controls wrapped around the Indian economy pre-reform, and see how it has fared over the years, and where it lies right now. We need to recognize that a second important reform impetus happened over 1999-2001 which sprung loose some tightly wound threads, and further straightened out those that had been unwrapped in 1991.

Then there were reform initiatives which were talked about in 1991 but not actually introduced at the time. One such is the goods and services tax (GST). The tax reforms committee of 1991, chaired by Raja Chelliah, was tasked in its terms of reference only to look at taxes levied by the centre (this was part of the larger problem of neglect of state participation which characterized that first round of reforms). Even so, it said (para 9.3 of the interim report): “It would be ideal if there were one comprehensive VAT (value-added tax) replacing the present system of Central excises, the State sales taxes and other indirect taxes except the State levy on alcoholic liquor...” The GST was a brainchild of the fiscal reforms of 1991 although the committee didn’t call it by that name.

The constitutional amendment to enable GST finally cleared the Rajya Sabha on 3 August, but the amendments to the bill to make that possible mean that it will have to pass through the Lok Sabha again. Then the GST bill to operationalize the tax will have to be passed, probably only in the next session of Parliament. The tortuous path of GST is possibly the only example of a reform initiative which has actually gained from its extended delay (with the exception of recent segments of it). It was sensible to first attempt value-added taxation separately in the indirect taxation sphere at the centre (the first tentative moves of which happened with MODVAT, or modified value-added tax in pre-reform 1986), and in the sphere of states (begun in 2005 in most states), before attempting to merge the two. Much will now depend on the GST network, a special purpose vehicle appointed to smooth out glitches in the information technology channels so that taxpayers can make their GST payments through a single window.

The Compensatory Afforestation Bill of 2016, finally passed in the Rajya Sabha on 28 July, a long time after its passage through the Lok Sabha, is somewhat different from GST. Here is a case which completes a reform begun even earlier in 1980, where nothing whatever has been gained from the delay. On the contrary, there has been only profoundly irreversible loss. This will be fully acknowledged even by those opposed to diversion of forested land to commercial uses such as dams, which was made legally permissible by the Forest (Conservation) Act of 1980, subject to prior approval from the Government of India, and subject to payment of a prescribed sum for compensatory afforestation. Given that enactment, and given that land has already been diverted under its provisions, and compensation paid, even those opposed to forest land diversion will surely agree that such compensation should be actually used for afforestation instead of being locked up as unutilized funds. Which, believe it or not, was the situation until the recently moved bill. If those funds had been ploughed in at the time they were collected, we would actually have fully grown forests in place. What we can hope for at best now, after the bill is passed, is maybe saplings in a year’s time. Time lost. Environment disprotected. Irretrievable loss.

A Supreme Court order dated 30 October 2002, in its judgement on a writ petition, mandated that the amounts payable under the 1980 Act should be deposited in a Compensatory Afforestation Fund. A further Supreme Court direction, dated 5 May 2006, required that in the absence of a formally legislated Compensatory Afforestation Fund Management and Planning Authority (CAMPA) of the kind that will now come into being with the passage of the 2016 bill, an ad hoc CAMPA be created at the Centre to “centrally pool the money recovered on behalf of the said Authority lying in the States and Union territories”. This suggests that between 2002 and 2006 the sequestered funding lay where it was collected, at state-level, and that between 1980 and 2002 the unsequestered funds were merged with the general budget under the general head of non-tax receipts, and dealt with, productively or otherwise, by states.

Subsequent to the 2006 Supreme Court direction, the money was pooled in an ad hoc CAMPA fund at the centre. Not all was hoarded—some was indeed distributed to states, in proportion to jurisdictional collections. A report of the Comptroller and Auditor General (CAG Report No. 21 of 2013), reports that the annual amount released from the central ad hoc CAMPA to states over the three years 2009-12 amounted to nearly Rs.3,000 crore in aggregate. Even so, the amount remaining at the centre for distribution between states, as mentioned in the preamble to the 2016 bill, is Rs.38,000 crore. This is presumably the collection since 2002, since before that nothing was being accumulated. The sum represents the total collected under several heads covering compensatory afforestation and penalties levied on those who did not take prior approval, added to the net present value of the diverted forest land or cultivated catchment area.

Thus the loss in not having used this fund towards afforestation earlier is truly enormous. All that can be hoped for now, going forward, is that the monitoring mechanism proposed in the bill will ensure productive use at ground level of the accumulated funds. As for funds payable on further diversion of forest land, the 2016 bill will hand over 90% of compensatory funds received directly to states. However, the CAG report referred to above presents a very discouraging picture of state capacity to use afforestation funds effectively. The overall utilization by states of funds released over 2009-12 was as low as 61%. Even more worryingly, the utilization rates were lowest in states with high forest cover such as Arunachal Pradesh (9%), Chhattisgarh (33%), Himachal Pradesh (59%) and Meghalaya (0%).

What reform has failed to do in every sphere is to improve government capacity for expenditure. Monitoring mechanisms to prevent misdirection of government expenditure merely result in obstructing expenditure altogether. Even in the 2016 bill, the steering committee mandated at state level is chaired by the chief secretary. The time and attention of the senior-most civil servant in the state, thought necessary to secure every process from corruption, becomes so thinly stretched as a result that procedural delays become the norm rather than the exception. Government processes remain substantially unreformed.

The accumulation of unspent funds for afforestation, and the low level of utilization of even such funds as were disbursed to states for the purpose, is only a small part of the larger problem of unspent funds (float) lying with governments in all departments. A. Santhosh Mathew, a government officer belonging to the Indian Administrative Service, has written widely to demonstrate how this results from the antiquated system of layered file-based certification of fund utilization. He estimates that a third of reported government expenditure lies parked, unused. A workflow based IT platform for each expenditure programme, such that funds can be transferred in real time from the funding source directly to the point of expenditure, can get rid of this problem of unspent funds. To quote him: “…a synchronized effort to adopt IT systems across government simply means a dramatic reduction in fiscal deficit, more money for lending to the private sector, a more efficient public financial management system, and a more reliable government to conduct business with.”

The only reservation I have is that where government systems have been shifted onto automated platforms, automation is typically done through a tender process that selects private players working on wafer-thin margins, who run their systems with poorly paid operators, and face high employee turnover. Add to that problems with electricity, and you have systems that have users tearing their hair in frustration. Very often automated systems ask that users use the manual channel in addition, which then renders redundant the very purpose of automation.

But automation with a provision for continued correction through interface with users is clearly the direction in which to move. That alone, however, will not get compensatory afforestation moving on the ground.

Indira Rajaraman is an economist.

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