CA Mukund Abhyankar
While most of the announcements and policy directions from Modi government bear relationship with fulfilment of that promise, many specific things still remain to be done that will give major boost to these efforts.
Though Budget is not the only policy initiative available with the Government for making major contributions to economic progress, it has over the years assumed great importance as most comprehensive single declaration from the government every year about its policy intentions.
With this in mind, I have tried to put down my thoughts on major steps that need to be taken for achieving something spectacular on economic front. I humbly mention at the outset that these are the thoughts as a keen observer of economic events and not as an expert in the field. Besides Budget which has been already prepared and ready for submission may have little room for major changes now and what I have mentioned will be just my expectations from Budget against which actual announcement can be compared.
In my opinion there are two objectives which should be met for showing some major improvements in the lives of common people which are namely achieving economic growth and making it an inclusive economic growth.
Twin Objectives before the Government
India where large population is struggling for meeting their basic needs, any economic growth to be sustainable must be an inclusive growth , else such growth will only increase inequalities and thereby disillusionment of masses which will endanger political continuity of the Government, that has to pursue policies for such growth during remaining years till it faces next election.
Any reform related growth unless percolated towards lower income strata of population will be repeat performance of Shining India type failure of the Government and this appears to be a likely possibility now unless corrective changes are made.
Task before the Government is therefore two fold. Firstly there should be reforms to achieve growth and secondly there should be policies and schemes to channelize significant part of that growth to poor and lower middle class.
Though this task of meeting twin objectives of achieving growth and keeping it inclusive appears to be daunting one, on a closer look it may be revealed that together these objectives in fact provide a solution to be implemented for success of the Government of the day.
For this what would be needed is big change in the outlook of the Government towards reforms and policies to be pursued for inclusive growth. Though this shift may not be complete in short period, directional change can and should happen immediately.
MSMEs to replace Government as Number One agents for Inclusive Growth
So far the understanding in the Government has been focussed on collecting taxes and distributing part of that tax income amongst masses through Welfare schemes such as MNREGA, subsidies, social security measures etc. Infrastructure spend by the Government is also being looked as major offset for lack of private sector investment in that sector.
For last many years we have seen this approach has neither provided much needed support to masses nor it has created conducive environment for trade and industry to flourish and in turn bring economic growth.
Public enterprises and schemes though laudable in theory remain inefficient practically because of their inherent weaknesses emerging out of collective ownership through the Government. This is not to say that private enterprises are always efficient and always do good to society but in a market economy, these units are atleast subjected to check and control by market forces and therefore if not run efficiently can not become a continuous drain on economic resources . Private enterprises have to be tuned to the needs of the society to remain profitable and therefore can not sustain for long if they are inefficient in meeting those needs. Against this backdrop, in the cases of Government backed businesses and schemes, government ownership somewhat overrides market control and allows drain of resources to continue. We have many examples of this happening in the forms of public sector banks, Air India, Coal India etc. It is here in respect of these inefficient public initiatives that crony capitalism flourishes.
We all know that it is not market economy or socialism per se that represents what is good for the society but a system that ensures good living conditions for society in general in contrast with such conditions happening for select few enjoying political and/or economic power.
“Whether cat is black or white does not matter so long as it catches mice” was the famous Chinese proverb quoted by Chinese leaders while taking break from textual socialism for pursuing liberalisation. We need to understand enterprising attitude rests with individuals and not with government which is too large a collective body and doing business or extended social welfare is not government’s business.
This knowledge has dawned on political class in India long back since Indira Gandhi’s second term but due to political pressures, has been implemented only partially and that too in some cases in a manner favouring crony capitalism.
“Minimum government but maximum Governance” was the slogan on which Modi Government appealed to the voters and its third budget is its last opportunity to really implement that slogan when elections are at safe distance for effecting paradigm changes in this respect.
Lotus is an election symbol of ruling BJP and pond of Indian Economy will look beautiful if thousand lotuses of MSME blossom in that pond instead few big lotuses of Government enterprises and big corporate.
For real inclusive growth, Government should now handover the baton to MSME sector, who can be better agents for economic improvement of the people. Government should be more of a facilitator and observer for the effective performance of this new number one agent.
How to empower MSME sector to become better Agents for Inclusive Growth.
a. Reduce taxes and give stimulus to manufacturing and service sector in general.
Success of any business depends upon its market acceptance and therefore for existing and new MSMEs to establish and prosper, Government should ensure domestic market support and for that purpose make more money available with the people to increase overall market size substantially and for that purpose should go for reduction of both Direct and Indirect taxes.
Empowering people with more money in their hands would be a better proposition than taking money away from people through taxes and then inefficiently spending those tax funds for bringing out growth.
Great need exists therefore for reduction in the rates of taxes both direct and indirect. For direct taxes slab rates for incomes upto Rs. 1 Cr should be brought down to 20% level and corporate tax rate also should be reduced to 20% level so as to make investment decisions more lucrative. To compensate for loss of tax revenue from reduction in corporate tax rate, tax exemptions should be withdrawn and dividends should be fully taxed. Here it needs to be remembered that Direct tax reduction has significant effect on investment climate.
Indirect tax rates of Excise Duty and Service Tax should be reduced to 8% which will be level at which CGST will be charged in GST regime. In this respect suggestion in some quarters for increasing service tax rate to 16% appears to be based on wrong premise that GST rate will be 16%. It needs to be noted that 16% is the combined rate of Central and State Governments and share of Central rate is only 8% in that combined rate.
Such a big reduction in Tax rates will give much needed stimulus to all sectors and domestic growth achieved thus will more than compensate drop in exports.
Such tax reduction should be supplemented with provisions for seamless tax credits so as to reduce the prices of goods and services to end consumers. At present roughly around 20-30% of taxes paid on inputs are not allowed as credit to manufacturers and service providers and these taxes finally land up in selling prices.
It is said time and again that inflation has to be kept under check and that is one of the foremost objective of the Budget exercise. Conventional method of doing this by using percentage of fiscal deficit to GDP as a tool can be replaced with new approach of allowing demand and capital for business to increase with real money supply as against a created one by printing notes. Economy today is facing Stagflation due investment related supply side constraints which can be removed increasing overall money supply.
b. Ensure conducive environment for business
Now its high time for the Modi Government to make all business and tax laws conducive for growth of private enterprise. These laws need to be simple to understand and follow to any average businessman. This alone will reduce the red tape and attendant corruption. Compliances under these laws must be very few and easy so that businessman can concentrate on their real function of remaining competitive based on efficiency rather on success in managing bureaucracy and compliances. Many established businesses in private sector will get exposed to real threat if competition develops from new entrants, who are prevented today from entering into business for fear of harassment and burden of compliances.
Ease of doing business is the success mantra for growth of private sector and this should be achieved on topmost priority. For this Ministers should listen to businessmen routinely and give access to them to bring forth frequent irritants to business coming from one-sided laws and bureaucracy. This should be “Man Ki Baat” from trade and industry that should be conveyed directly to perople’s representatives rather than to Officers who have habit of using authority against people criticising them. Ministers should understand that instead of people showing them door at the end of 5 years it is better to listen to their grievances when they have time to correct themselves and thereby protect them from the imminent threat.
As a radical mindset change, burden of all business compliances should be based on self certification and checking mechanism from bureaucracy should be based strictly on random selection of only 1-2% of the total cases . Process of random selection should be transparent and open for participation for concerned businessmen to ensure credibility of selection mechanism. Heavy penalties can then be imposed for serious non compliances observed in respect of the cases selected, which will be sufficient deterrent for others against giving wrong self certifications.
Strict time limits should be imposed on any monitoring of compliances by bureaucracy and such time limits should not be more than 3 years for any verification.
These measures will free businessmen from unproductive work and business will be focussed on efficiency of operation.
Lot is talked about GST not happening in the country and posing barriers for all India market to develop. However if looked from different perspective most of that what GST can bring about, can be achieved even without GST also if CST rate is made zero. Nil CST will free all inter state trade for any tax burden. Already we have Tax credits under local VAT laws of the States and if inter state trade is also tax free then not much difference remains between GST regime and modified CST provisions. However a major procedural change must be made for submission of “C”, “F” declaration forms. Currently these forms have to be obtained from Department by the customer and then these are furnishded to the seller for claiming concessional rate of CST. This creates lots of problems in doing inter state trade transactions and removal of C Forms is in my opinion single most attractive feature of GST for trade and industry. In this respect a change can be made under current CST regime, whereby buyer should be allowed to furnish self certified “C” or “F” form along with his Purchase Order, so that nothing remains to be done for competing an inter state in a seamless manner. Penalties for wrong declarations can be made heavy and be charged on cases selected for verification on random basis. This single amendment will remove a major irritant to trade and industry and will significantly improve ease of doing business in the country.
Whether it is a startup or MSME simple compliance mechanism which places equal accountability on bureaucracy is strongly required in every aspect of tax and commercial laws, for such units to prosper.
Very few of young Indians will not want to be a businessman and creative if proper environment is available for setting up of business.
For a respectable and sustained GDP growth to happen, more and more of such first generation entrepreneurs should contribute their worth to economy which I feel is a major precondition for inclusive growth. These businessmen will tap opportunities for value addition so far untapped and their contribution will lead to economic growth. All Good Initiatives of the Government like “Make in India”, “Digital India” can be implemented by such empowered MSME sector.
Growth strategy focussed on MSME will also lead to an Inclusive Growth because compared with large enterprises these units interact economically with larger set of people around them and thus fruits of their growth become available to masses in bigger manner.