Perhaps the biggest disappointment for the corporate sector in >Arun Jaitley’s maiden budget was the Finance Minister’s unwillingness to repeal the retrospective amendments to the Income Tax Act introduced in Pranab Mukerjee’s budget of 2012-13. Ever since, the corporate world has gone to town saying that this particular provision has been the single biggest deterrent to investing in India, especially for foreign investors.
In his budget, Mr. Jaitley declared: “The sovereign right of the government to undertake retrospective legislation is unquestionable.” He also said his government “will not ordinarily bring about any change retrospectively” which leaves the door open for the government to act where ever necessary in national interest. These statements must be unreservedly welcomed.
The >retrospective amendments were necessitated by the Vodafone case in which the company claimed it was not liable to pay taxes in India consequent to its purchase of Hutchison Essar Telecom services in April 2007. The Supreme Court had ruled in favour of the company.
Fixing loopholes in tax laws The world over, companies have been using formidable legal expertise at their disposal to take advantage of loopholes in tax laws. There is now a concerted effort on the part of governments to tackle this problem. A repeal of the retrospective amendments was thus simply not on, especially at a time when the government is battling a severe fiscal problem.
Retrospective tax amendments is not the only area in which Mr. Jaitley has disappointed fervent advocates of ‘reforms.’ He has not acted as hoped for on any of the other areas in which action was thought imperative: subsidies, labour laws, land acquisition, cash transfers, foreign direct investment and privatisation (especially of public sector banks). P. Chidambaram has noted wryly that the projections in Mr. Jaitley’s budget are not very different from those in his interim budget. He might have added that the basic policy framework is not very different either.
If corporates and commentators are disappointed, they have only themselves to blame. Both in the run-up to elections and ahead of the budget, a false narrative of the travails of the Indian economy had been built up. The Indian economy, it was said, had run aground after its merry run in 2004-08 mainly on account of ‘policy paralysis’ which was reflected in a failure to push through sundry ‘reforms.’ The United Progressive Alliance government had sacrificed growth at the altar of ‘welfarism.’ The Modi government, we were told, would change all this.
In fairness to the Modi government, such expectations were not fully supported either by the pronouncements of Bharatiya Janata Party leaders or the party’s own track record. During the election campaign, Mr. Modi was careful to emphasise that subsidies needed to be preserved. He also said that public sector enterprises could be strengthened with the right political backing. Many leaders of the BJP had been critical of the Aadhar scheme and the associated cash transfers.
The BJP had supported the Land Acquisition Act and the Food Security Act and, indeed, had favoured some provisions that were to the left of those proposed by the UPA government. Soon after Gopinath Munde assumed office as Minister for Rural Development, he commended both MNREGA and the Land Acquisition Act. Under the circumstances, to have expected a radical departure from the UPA framework, and that too in the first budget, was impossibly naïve.
>What has happened in this budget is a re-run of what we have seen since the first bout of reforms was initiated in 1991 and continued until the late nineties. For over a decade now, every new government and almost every budget has given rise to expectations of “bold” measures. UPA-I was said to have been weighed down by its dependence on the Left parties. Once the Left was shaken off, we were told that a breakthrough in economic policies was on the cards. Instead, ahead of the 2009 elections, we had a slew of spending measures that was almost unprecedented in its magnitude.
UPA-II was supposed to fare much better because the Congress had more numbers in the Lok Sabha than they did in UPA-I. India needed a crisis in order to undertake serious reforms; the global crisis of 2007 had provided just the right spur. UPA-II would undertake significant reforms well before the next round of elections loomed. Unfortunately, the reformers were roundly disappointed. The NDA was said to be better placed than any government since the nineties, as the BJP had a majority of its own in the Lok Sabha and could easily make course corrections in the first couple of years. India’s reformers must marvel at the perversity of the Indian political class.
The reformers just don’t get it. If two different coalitions that span virtually the entire political spectrum cannot undertake some measures or do something to the contrary, it must be because of the demands of the political economy. As the economist Joseph Stigltiz once said, measures that are populist are also genuinely popular.
‘Second generation’ reforms The >reforms of the nineties were relatively easy to push through because the benefits clearly outweighed the short-term as well as long-term costs. The same cannot be said of the ‘second generation’ reforms. These entail substantial costs in the short-run and the benefits are not unambiguous nor can they be attained unless certain conditions are met.
Consider some of the reforms being urged. It may be desirable to reduce subsidies by targeting those who need these most. But when targeting is difficult, it is preferable to make subsidies more inclusive. Labour law ‘reform’ is a euphemism for hire and fire. If management is to be given this freedom, several corollary measures must be put in place: a safety net for labour, investment in retraining, enforcing accountability of management through improved corporate governance and an active market for takeovers. The Land Acquisition Act came after years of massive displacement without proper compensation being given to disadvantaged groups. ‘Second generation’ reforms can happen only in a measured way, under conditions of good growth and with a significant improvement in the standard of living. In an economy where growth has slowed down and which faces the prospect of additional distress on account of global factors as well as a poor monsoon, positing these reforms as an answer to slower growth is a luxury that only economists can afford. Mr. Jaitley has correctly understood that the need of the hour is to create a feel-good factor that will help ignite animal spirits.
Perhaps the boldest statement in Mr. Jaitley’s budget speech is that the >Indian economy would take three to four years to get back to growth of 7-8 per cent. It shows a clear recognition that growth can happen only on the back of a global recovery and after serious institutional shortcomings in the country are fixed. There is no easy short-cut that ‘reforms’ can provide. Soon after Jaswant Singh became Finance Minister in the Vajpayee government, he recalled a piece of advice given to him: hang a sign outside the office that read: “Men at work, economists keep off.” Mr. Jaitley has shown that he does not need the advice.
(T.T. Ram Mohan is professor at IIM Ahmedabad.)
