Prime Minister Narendra Modi
Prime Minister Narendra Modi

Opinion | It’s not the time for going hell for leather on tax compliance

Given falling interest rates, it’s a good time for the government to borrow more from markets

For a government with such a massive mandate, the Narendra Modi government is signalling financial desperation. Granted, the government needs money for a range of spending programmes, but grab-as-grab-can is not the way to do it.

The recent budget raised taxes on the well-off (those earning above 2 crore a year, including foreign portfolio investors who had routed their investments through trusts), not to speak of import duties on a range of items. Last year, the government sought additional resources from the Reserve Bank’s excess capital, and does not sound happy with what the Bimal Jalan Committee looks likely to recommend. More recently, it has asked markets regulator Securities and Exchange Board of India (Sebi) to hand over its excess reserves. In an after-thought, it extended the term of the Finance Commission by another month so that it can find some money for defence and internal security.

It is never a good idea for parents to raid their children’s piggy banks because incomes are not enough to meet expanding lifestyles. While it’s possible to justify the transfer of excess reserves from the central bank for recapitalizing banks, raiding Sebi for a few hundred crore is hardly going to make central finances look more robust, and the point of asking the Finance Commission to keep defence and internal security funding in mind makes no sense. These tasks constitute a first charge on central resources, for the primary job of the government is to protect its citizens, even before it can think of improving their lot in other ways.

This is not to rubbish any of the Modi government’s key political and economic goals. Its spending priorities are broadly right: infrastructure, health, water supply and sanitation, education, raising farmers’ incomes and incentives for job creation. However, it does not follow that all these things ought to be financed directly by the Centre, especially in a year of slowdown, sub-par revenue growth, weak corporate profits, low consumer confidence and a yet-to-revive banking system. This is not the time for taxing anybody more or going hell for leather on tax compliance. This is the time to leave more money in the pockets of all economic agents.

Given the falling interest rates, it is actually a good time for the government to borrow more from markets. Yields are heading towards 6% for 10-year paper and could fall below that level. Yields have fallen to levels where a sovereign bond issue is not likely to look very attractive even at a 3% dollar coupon rate. Add at least 3% annual depreciation of the rupee and domestic borrowing begins to look competitive. Logically, the finance minister should ease fiscal targets and borrow more to spend on investment. Extracting more taxes from citizens and business should be the last thought on her mind.

Over the last five years, the Modi government has been trying to raise the Centre’s resources through attacks on black money, making stringent tax compliance provisions, reducing subsidy leakages and slowing down the rate of corporate tax reductions. The 25% tax rate promised to corporations in the 2015-16 budget is being extended in homoeopathic doses, effectively denying it to the larger companies that will have to drive any investment revival.

The problem: Despite articulating a whole lot of lofty economic goals and social objectives, the Modi government has no elevating vision on the role of the state in promoting growth.

Modi has defined his goals in such specific terms (doubling farmers’ incomes by 2022, homes for every family by 2022, gas and water connections to every home, a $5 trillion economy by 2024) that the only logical thing for any government to do is to find the money to make all this happen.

The Modi government has not asked more fundamental questions about some of its flagship schemes. At which level of government are some goals best achieved? Toilet-building can be funded by the Centre, but Swachh Bharat is a municipal and local body issue. If you want to double farmers’ incomes, which farmers are we talking about? Isn’t agriculture a state subject? Can the Centre mandate Smart Cities, when cities are administered by state government-appointed commissioners? How will private investment start flowing if you are going to delay tax reforms or lack trust in business? Is it the government’s job to do everything and fund everything, or should it be just an enabler of business and social entrepreneurship, directly entering only those areas where private parties fear to tread?

Indians may love anything free thrown at them, but at heart, they resent the idea that government must loom large in every part of their lives. If Modi wants to leave his imprint on India, he needs to develop a better vision on what the relationship should be between state and citizen, state and business, and Centre and states. He may find that India may work better if it had a stronger but more focused and limited Centre, much stronger states that focus on their competitive advantages and skilling, and even stronger cities that drive wealth creation and jobs. Real power needs to devolve to cities that will be the engines of future growth. Aspiring politicians should want to become mayors, not prime ministers.

R. Jagannathan is editorial director, ‘Swarajya’ magazine

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