July 12, 2020
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OPINION | Should We Encourage Kuccha Receipts? Institutional Cleansing Part Of Improving Business Environment

The government wishes to improve the business environment, and institutional cleansing is a part of that. It’s surely not gloom and doom.

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OPINION | Should We Encourage Kuccha Receipts? Institutional Cleansing Part Of Improving Business Environment
PM Modi meets economists at NITI Aayog ahead of the budget
Photograph by PTI
OPINION | Should We Encourage Kuccha Receipts? Institutional Cleansing Part Of Improving Business Environment

Expressions, even technical ones, are often used loosely. The word “recession” has been used for India. What are the real GDP growth forecasts for 2019-20? The recent Union budget assumes 7 per cent. There are other projections, some from outside the government system. Those too are around 7 per cent, perhaps marginally below. Even if one assumes 6.5 per cent, that’s still growth. GDP hasn’t declined. There is no recession. Compared to growth in some countries, where there can indeed be recession, 6.5-7 per cent is no reason for gloom and doom either. There has been some tilting at windmills, questioning ­veracity of GDP numbers. A Rocinante horse is close to dead and need not be flogged again. Therefore, let’s be clear about the macro argument.

Without getting into semantics of structural versus cyclical, best left to economists to debate, the argument can be stated as follows. For development and wealth and employment creation, 7 per cent isn’t enough. We need Citius, and perhaps Altius and Fortius too. As the recent Economic Survey computed, to get to $5 trillion GDP in 2024-25, we need 8 per cent real growth. Besides, is growth rate tapering off? The last four quarters of 2018-19 gave us 8, 7, 6.6 and 5.8 per cent, respectively. Notwithstanding the average of 6.8 per cent in 2018-19, this suggests a slowdown. What can be done to reverse this?

Discourse in English language media is often ­focused on some visible segments such as automobiles and real estate. Consequent to better delivery of public goods (toilets, sanitation, roads, electricity, LPG gas), there is a slightly different discourse in vernacular media. This doesn’t negate concerns about rural job creation, or direct and indirect ­employment potential in sectors like automobiles and real estate. By the way, because of changes in consumer preferences and technology, the automobile sector faces travails globally. To a lesser extent, that’s also true of real estate.

Preventing some ­gaming of the system leads to a ­litany of woes from those ­adversely affected.

Let’s ask a few rhetorical questions. Was RERA (Real Estate Regulatory Act) desirable? Cash isn’t illegal. But the source of cash can be. Should there be greater scrutiny of cash transactions in general, and specifically for real estate and capital markets? If I have a credit card, travel abroad or own a motor ­vehicle, shouldn’t I submit an income tax return? For those who haven’t submitted such income tax returns, should questions be asked? For those not exempted under GST, is it right to expect them to pay indirect taxes? As a society, should we encourage the system of “kuccha” receipts? Should we have NCLT (National Company Law Tribunal) and IBC (Insolvency and Bankruptcy Code) and force recalcitrant promoters to exit? Should Union government procurement take place through a portal?

If these questions are indeed rhetorical, one must inevitably accept short-term costs and complaints, since those adversely affected by institutional cleansing will not celebrate. To state it directly, some gaming of the system is prevented and that leads to a litany of woes. When complaining about government action, there are three distinct propositions, and they are distinct. First, because of costs, we don’t want cleansing. We were fine with the status quo. Second, clean up the system for others, but let me remain with my status and my quid pro quo. (This shouldn’t be a serious proposition, but is often the case.) Third, cleansing is necessary, but procedural costs of transition can be reduced. Of these, only the third should be taken seriously.

A 7 or 8 per cent is an all-India growth rate. India, that is Bharat, is a Union of states. All all-India growth rate is aggregated upwards from the states. Economists who believe in structural constraints list out several desired reforms. Almost all involve factor markets (land, labour, natural resources) or agriculture. In the Seventh Schedule, these are in the state list or concurrent list. Ipso facto, both ­benign (things government should do) and malign (things government shouldn’t do) decisions are for state governments. With exception of railways or defence, aggregate GDP growth is explained by what’s happening in the states. Growth in GSDP (gross state domestic product) often shows volatility and year-to-year fluctuations.

Either we should be prepared to pay more as taxes, or what we ­expect as citizens must be curtailed.

Subject to that, among large states, which states have not had real (constant prices) double digit growth in any of the years between 2012-13 and 2018-19? They are Kerala, Maharashtra, Punjab, Raj­a­sthan, Tamil Nadu, Uttar Pradesh and Uttarakhand. If growth picks up in these states, 8 per cent and more for India is eminently doable. Now that the states have been mentioned, one should mention the legislature and the judiciary. The executive arm of Union government has degrees of freedom rightly circumscribed by these two institutions.

From the executive’s perspective, there are four components to growth—net exports, private con­sumption, investments and government expendi­ture. There was a period when India clocked more than 9 per cent growth in successive years. However, the external environment was kinder then, with fewer tiffs over tariffs. So the demand side for exports isn’t promising. Export competitiveness would be easier if the rupee depreciated, especially against competitor currencies. But there are capital inflows and int­erference in forex market has costs. Therefore, it boils down to ­improving supply side for exports (logistics, ­customs, WTO-compatible incentives), which is what the government has been doing.

In the immediate future, net exports can’t be a major contributor to growth. Arguments about global supply chains belong to the somewhat more distant future. Union government expenditure is constrained by fiscal consolidation and deficit ­reduction. Government borrowing has costs, typically paid by future generations, apart from crowding out private expenditure. Think of our wish list (not just for Union government). Public expenditure on education must be 6 per cent of GDP, on health 4 per cent, on infrastructure 10 per cent, on defence 3 per cent and so on. We are already at 23 per cent of GDP and Union plus state government taxes amount to around 16 per cent. Something must give. Either we should be prepared to pay more as taxes, or our expectations as citizens must be curtailed.

A lot of Union government expenditure (salaries, pensions, interest payments) is fixed in the short-turn. Co-terminus with 15th Finance Commission recommendations, the government has said there will be a revamp of central sector and centrally sponsored schemes, though some of these have legislative backing. Such a revamp imp­arts greater efficiency to public expenditure. Privatisation of central public sector enterprises (PSEs) is also on the cards, though land often bel­ongs to state governments and is with PSEs on lease. This leaves taxes. On GST, transition to three rates is the prerogative of the GST Council. However, on an average, we are paying less as taxes under the GST regime. To use a technical expression, GST should have been ­revenue neutral, but has become revenue negative. That does not augur well for various items we expect public expenditure to deliver.

Do we want direct tax reform (personal income as well as corporate taxes) to be revenue negative? If not, we can’t have lower rates unless we give up exemptions. But are we ready? For instance, if we want special deals for automobiles and real estate, other than fiscal concessions, what will they be? Thus, both taxes and expenditure are undergoing structural change. To stimulate both consumption and investments, beyond undesirable ­sector-specific interventions, what remains? An improvement in business environment, which is what government intends, and institutional cleansing is part of that. That’s not gloom and doom, but warp and weft of the loom.

(The writer is chairperson, Economic Advisory Council to the PM)

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