What constitutes bold reforms?
Indian Express, 19 February 2015
There are great expectations of bold reforms which will shift India into a high growth trajectory. Better implementation of socialist policies will not deliver results. Announcements of projects will not deliver results. The reforms that matter are the deeper institutional changes, to get to the high performance government organisations that are required in a mature market economy. These reforms will threaten discretionary power, laziness and corruption; they will be widely opposed. Nehruvian socialism was an intellectual construct, and replacing it by a market economy will require intellectualism.
As we come closer to Budget 2015, expectations are sky high that this will be the moment where the BJP will deliver bold reforms. The July 2014 Budget came too early, and the BJP had not then put its teams into place. Now, for the first time, we will see the full power of new thinking.
What constitutes bold reforms? Does announcing a Bombay-Calcutta six-lane expressway constitute bold reforms? Does announcing single window clearance for foreign investors constitute bold reforms?
A good place to think about this question is tax terrorism. India has a crisis of low tax revenues, and alongside this, there is universal hostility towards the working of tax policy and tax administration. Everyone agrees that bold reforms are required to get back to better tax revenues and to put an end to tax terrorism. The superficial solutions consist of sending out instructions to tax inspectors to be nicer, or of setting up an IT system which encodes some present processes. Neither of these are going to deliver results.
We must recognise that the individuals working in DOR or CBDT are honourable men, just like anyone else. Tax policy and tax administration did not run into the ground because we hired the wrong people. We got into this trouble because we have the wrong structures and frameworks.
Policemen should not have a say in writing the Criminal Procedure Code or the IPC. They would have a bias in making their own life easy, and trampling on the rights of citizens. Hence, there is a separation between the legislative power (drafting laws) and the executive power (enforcing it). But in the field of tax, we have given over legislative power (the drafting of the Finance Bill) to tax administrators. This has created a bias in favour of convenient ways to get revenue. Further, tax administrators do not know economics, and are unable to build a sound tax system with an eye on GDP growth.
Tax policy in India is now very far from a sensible and fair approach which generates the requisite tax revenues with minimum distortions of the economy. Large scale changes are required: replacing all existing indirect taxes by an ideal GST and replacing all existing direct taxes by something close to the version 1 of the DTC. A complete new design of tax administration is required, emphasising concepts of rule of law, accountability and checks and balances. These large changes will be unpopular with tax evaders, and will be resisted by the tax administration. Are we bold enough?
Why do school teachers in India fail to show up to school to teach, and when they do, why do they fail to teach? Why do doctors working in government hospitals deliver bad health care at work, and do much better on the side in their private practice? This is not about putting more money into Sarva Shiksha Abhiyaan. This is about fundamental change in the working of government in health and education. These changes will be resisted by the existing health and education bureaucracies. Are we bold enough?
Indian infrastructure did not run into the ground because of a few bad people. The foundations of policy were wrong. A field orientation will not solve this; this requires first principles thinking about policy. Asking people to work harder is not the answer; a careful understanding of policies and public administration structures is required. Are we bold enough to reform the objectives, accountability and organisation structure of Indian Railways? Or will we ask a broken organisation to deliver a high speed train from Bombay to Delhi, while continuing to fail in all other respects?
For 20 years, we have attempted financial sector reforms, and basically scored only one victory: the equity market. Justice Srikrishna's Financial Sector Legislative Reforms Commission has gone to the foundations of objectives, accountability and organisation structure. RBI runs a central planning system and resists change. Are we bold enough to reform finance?
It is seductive to say "We should have a single-window system for foreign investors" without understanding the obstacle course that foreign investors are forced to go. That system of central planning, where government controls myriad details about how foreign investment takes place, has to be dismantled. This will threaten the power of the people who man this system. Are we bold enough?
In each of these areas cited above -- tax, finance, education, health, railways -- the barrier to progress is not voters but officials. Bold reforms are those that question the power and accountability of the incumbent establishment.
What is required is detailed work of diagnosing problems, drafting new laws, designing new organisation structures, and running projects which build new public agencies. Nehruvian socialism was not built in a day. It was a complex construct of envisioning State structures, drafting laws, and designing government organisations through which detailed control of the economy was put into the hands of politicians and bureaucrats, and doing business became impossibly difficult. Nehruvian socialism was an intellectual construct, and we will need comparable capability, and boldness, in replacing it by the State structures required for a modern India.
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