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Chidu's last budget: What the next govt will have to do to fix our economy

With the interim budget of the UPA government now out of the way, attention will turn not only to the elections up ahead, but what the next government must do to fix a struggling economy.

Here are 10 things the next government needs to do.

 Chidus last budget: What the next govt will have to do to fix our economy

Reuters

#1: The fiscal situation in 2014-15 will be desperate. In an attempt to stick to the red line of 4.8 percent (fiscal deficit as a percentage of GDP) in 2013-14, expenditure has been carried forward to 2014-15 and capital and plan expenditure (this includes defence) have been slashed.  Public sector banks are in dire straits and will need capital infusion of at least Rs 25,000 crore.  The Fiscal Responsibility and Budget Management Act  (and Rules) must be rehabilitated, with explicit targets of eliminating the revenue deficit, the reducing fiscal deficit/GDP ratio to 3 percent and setting a cap on outstanding liabilities to GDP, within a clear time-frame, say five years.

#2: The RE (revised estimates) for 2013-14 will have to be redone. This time without using any “creative accounting”.  For example, oil bonds and off-budget expenses will be included in the computation of the “fiscal deficit”.  These norms should be adhered to in all future deficit calculations. What this means is that the base fiscal deficit will be more like 8 percent in 2013-14, not 4.8 percent.  Over a three-year timeframe, there will also be a move from cash to accrual-based accounting.  With a base of 8 percent in 2013-14 and, given expenditure commitments, the fiscal deficit-GDP ratio cannot be reduced to below 7 percent in 2014-15, and even that will be a tall order.  Such a reduction cannot be brought about without privatisation. All 60-odd loss-making Central PSUs should be privatised, regardless of whether market conditions are right or not. The revenue target for this should be Rs 100,000 crore.

#3: Scrapping administered pricing: If there is administered pricing, “loss” and “profit” become notional.  Most profit-making central public sector units (PSUs) are in crude oil, coal, power generation and petroleum products.  First, APM (administered price mechanism) for petroleum products should be scrapped. Second, these profit-making central PSUs are sitting on cash surpluses and do not invest because ministries work at cross-purposes.  Therefore, combining Coal, Mines, New and Renewable Energy, Petroleum and Natural Gas and Power, there should be only a single Ministry for Energy. Third, coal needs to be denationalised.  Fourth, all central PSUs (not just these) must  be freed from ministerial control.

#4: The DTC (Direct Taxes Code) must be reintroduced in its original simple form. First, nothing other than income will be taxed. Second, personal income tax rates should be 10 percent, 20 percent and 30 percent, while the corporate rate will be 30 percent.  Third, non-agricultural incomes of farmers need to be taxed.  Fourth, there will be no retrospective application of taxation changes.  Fifth, since nothing other than income will be taxed, all exemptions will be scrapped.  Sixth, the Central Board of Direct Taxes (CBDT) should reduce harassment by tightening up systems for scrutiny, appeals and refunds.

#5: GST (good and services tax) must be introduced in the form that was originally intended.  This means services taxation will be integrated into GST, with clarity about input credits for services. Petroleum products, liquor and tobacco will be part of GST. All other taxes, including stamp duties, will be abolished.  With a dual GST, states will resist such ideas and will also resist any attempt to harmonise GST rates across items. Therefore, revenue compensation will be offered through the 14th Finance Commission. The GST rate will be 16 percent, not 20 percent. But to ensure this reduction in rates, all indirect tax exemptions will be scrapped.  with CBDT and CBEC (the Central Board of Excise and Customs) will work out steps to reduce harassment.

#6: The 7th Pay Commission has been announced and it will devastate State-government finances. There are several recommendations on civil service reform, such as performance appraisal prior to vertical mobility, lateral entry, contractual appointments and exit. However, with the exception of salary and pension increases, these recommendations on increasing productivity are rarely implemented. (89 percent of Central government employees belong to Groups C and D.) These recommendations will be implemented through the 7th Pay Commission. Bureaucrats have not been taking decisions. There is a double problem. Dishonest civil servants are not convicted and honest civil servants are not protected. The second Administrative Reforms Commission (its fourth Report) has detailed recommendations on both and these need to be implemented.

#7: Ending centrally-sponsored schemes. A lot of central money is frittered away on the central sector and centrally-sponsored schemes (CSSs). There are still around 200 CSSs.  These are typically in areas that are in the state list of the Seventh Schedule. In 2014-15, only the following CSSs should be retained: Swajaldhara, MGNREGS (i.e. the 100 days job guarantee scheme), the Total Sanitation Campaign, the three health missions (NHM, NRHM, NUHM), the SGRY (Sampoorna Grameen Rozgar Yojana), SJGSY (the Swarnajayanti Gram Swarozgar Yojana), ICDS (the Integrated Child Development Programme), the Sarva Shiksha Abhiyan (SSA), the Pradhan Mantri Gram Sadak Yojana, the Rajiv Gandhi Grameen Vidyutikaran Yojana, the Economically Weaker Sections/Low Income Group housing scheme in urban areas, the Indira Awaas Yojana, the Mid-Day Meal Scheme, and the Rashtriya Krishi Vikas Yojana. These are major schemes and are, in some sense demand-driven.

#8: Winding down the Planning Commission: There should be a five-year timeframe to phase the above CSSs out too. In that timespan of five years, all devolution of funds to states will be through the Finance Commission, abolishing the plan versus non-plan distinction. The Finance Commission will draw a clear distinction between grants-in-aid (meant for Special Category States) and formulae-based transfers. There will be a clear and unambiguous method for identifying Special Category States. Ideally, this shouldn’t even be state-based. The identification should be of backward districts (say around 70), which is what the Backward Regions Grant Fund (BRGF) was originally meant to be. Stated differently, in five years, the Planning Commission will be wound down.

#9: There should be a mechanism to monitor the implementation of the recommendations of the 14th Finance Commission. More importantly, State Finance Commissions will be set up and their recommendations made mandatory. This will ensure devolution to ULBs (urban local bodies) and PRIs. (The Seventh Schedule should be amended to have a pruned Union List, an enhanced State List and an added Local Body List. The Concurrent List should be scrapped.)  Financial devolution will be linked to decentralised planning. Below poverty line (BPL) identification will also be decentralised, through the kinds of indicators that have been talked about since the Ninth Plan.

#10: Basic principles on issues connected to land, forest, environment and technology clearances have to be laid down. The following principles should be implemented.  First, once a clearance has been granted, it will not be opened up afresh, retrospectively. Second, there cannot be an open-ended system for clearances. If a clearance has not been granted within a certain number of days, it will be deemed to have been given. Third, such clearances can be parallel, they need not be sequential. Fourth, following the decentralisation agenda, if a clearance has been granted by a state, or local bodies further down, it will not be opened up afresh by Delhi. In general, the collective responsibility of Cabinet will be rehabilitated and the group of ministers/empowered group of ministers (GOM/EGOM) system needs to be scrapped.

(Bibek Debroy is an economist and works with the Centre for Policy Research)

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Updated Date: Feb 17, 2014 15:09:04 IST