BUDGET 2010 – WHERE IS THE BIG REFORM???

Well…Pranab Babu presented his career’s 6th budget on 26th February 2010 spanning over a period of 3 decades…which is a BIG feat I guess…but the question it left me mulling over, same as the budget in 2009 after the Congress led UPA got an unequivocal mandate from the Indian voters….where is the BIG reform????

The Finance Bill 2010, much like its immediate predecessor, is laudable insofar as it does not spring any negative surprises and continues the UPA manifesto of sustainable growth amidst fiscal discipline and self regulation. Typical of any budget, it tweaks with both the revenue and expenditure side, as well as direct and indirect tax exemptions and benefits. It grants fresh concessions primarily to the retail tax payer while upping the tax bill for the large corporates. It has also sought to roll back fiscal stimuli which were provided via the previous budget to industry with a view to fight the industrial slow down brought to bear by the global recessionary cues. While the benefits aimed at political vote bank (read higher income tax slabs etc) have cost the exchequer about Rs. 26,000 crores of revenue, the roll-backs and additional levies such as service tax on new services, higher MAT and higher excise and customs duties have more than compensated for this by contributing Rs. 46,000 crores to the tax revenues. There is also the usual noise about roping in the ever ballooning fiscal deficit while targeting the elusive double digit growth and also keeping inflation in check. All in all quite a commendable effort in providing directional fine tuning to the government policies and coming out on top with a revenue positive budget. Hence the ecstatic, but probably short lived, thumbs up by the markets and the ‘expert commentators’.

I would not seek to indulge in a detailed analysis of the FM’s budget proposals as I am sure there are plenty of ‘experts’ dishing out their gyaan and bombarding you with their expert-speak through your televisions, magazines, newspapers and in-boxes.

The only thing I wish to ruminate on here is what the budget did not contain as opposed to the myriad minutiae that it did.

The dream team of Manmohan Singh – Pranab Babu – Montek Singh is yet to deliver on the BIG reforms expected of them. Unless of course I am wrong in the basic assumption that Manmohan Singh does have aspirations to finish what he started in 1992. It is unlikely that Mr. Manmohan Singh would be looking to a third term as PM to deliver an encore performance of his sea-change reforms of the 90’s even if UPA is able to secure a third consecutive term at the centre in 2014. It is thus high time that they stood up and started delivering on the reforms which are not only expected of them but will also be the defining moment of this term, the same way the nuclear deal was of the previous term. After all this is already the Budget No. 2 of UPA’s second term of governance and considering the fact that there would not be much to be done in Budget no. 5 and little time to implement anything introduced in Budget no. 4, I would have thought Budgets 2 & 3 would have been where they would have started unfolding their BIG game.

So what is the BIG game you ask? It is a sum total of those changes which have been long anticipated and talked to death. Changes which have become folklore due to their elusiveness yet inevitable due to their necessity. Changes hereinbefore held back for multitude of reasons, ranging from the crutch of the Left to the mediocrity of the policy framers in the centre to perceived immaturity of our systems to handle and function under the new regimen.

Broadly, I would expect, no…demand….that at the very least, the following reforms be implemented by this UPA government to fulfil the promise of its pedigree as  also the mandate of the voters in 2009 and most importantly to propel the Indian economy into the orbit of its destined supremacy vis-a-vis the developed nations:

1.      CAPITAL ACCOUNT CONVERTIBILITY – While the Indian economy has fared well under the deregulation of the current account transactions brought about under the FEMA regime, the capital account convertibility still remains a wishful promise. The timing could not be better for our finally making the transformation. After all, our markets have matured, foreign exchange reserves are at an all time high, the central as well as commercial banks have their belt tightened in the wake of the global recession and the currency has never appeared stronger. In fact even the looming inflationary fears for a change support such policy action. It is thus high time that Mr. Singh’s team bring in the regime and unshackle the economy’s cross border capital flows so that we are allowed to stand up, cruise, stumble, fall and then learn to walk on our own in an era of free movement of capital. We should be allowed to benefit from the free flow of foreign investment (god knows the foreigner’s appetite for India is insatiable at this point of time) and also be able to freely borrow cheap capital from abroad, acquire distress assets and leverage Indian balance sheets and managerial strengths. Even if there remain concerns of money laundering and foreign contributions, I would only say, so what…isn’t it better that the black money flow into the economy and fuel our growth as well as add to the domestic tax collections rather than be parked elsewhere working for the benefit of a foreign country?

2.      PETROLEUM PRICE DEREGULATION – The administered price mechanism (APM) era is behind us, so is the super spike. We live now in an era of relatively benign energy prices, yet we continue to be hounded by vote bank politics administering the fuel prices. The subsidies distort the economic indicators and the ad-hoc manner of distribution of the subsidiary burden over the PSU’s strips such navratnas of their credibility in the investors’ eyes. It is high time that a transparent and market linked system be laid down for fixing the retail price of petrol, diesel and LPG. There may be subsidization built into the system but it should at least bring predictability in the movement of these prices vis-a-vis the international market and also transparency in the basis of distribution of subsidy burden between the upstream and downstream oil companies. The petroleum pricing policy continues to remain a tool which is used by the politicos at their whims to conjure up brownie points from the voters by simply transferring the burden of under-recoveries to the oil companies and helping the consumers live in the utopian world of low energy prices coupled with an artificially understated inflation. It is time we took this tool away from the politicians and put the systems in place to help us persevere and grow beyond this era of fluctuating energy prices.

3.      GST – This is another one which has been in the offing since forever. There were allusions to the onset of GST w.e.f. 1st April 2011 by Pranab Babu in his budget speech. But it still remains to be seen if they will be able to muster up the support of the states for introducing the long awaited yet absolutely essential GST regime. The way I see it, support or not, no government at the centre will ever be stronger or better placed to implement GST across the country than the current one. And it has to be a whole hearted implementation…not a piece-meal, whimsy excuse of an implementation. We need to see a uniform rate and pervasively applicable goods and service tax regime in the country as it will not only rationalize and simplify the indirect tax system but will also, in the longer run, boost the collections through better compliance and lower leakage.

4.      DIRECT TAX REFORMS – By the direct tax reforms here I do not mean the new direct tax code which has been tabled in the parliament since last year and has been the subject matter of numerous consultative sessions and expert commentaries. The direct tax reforms that are needed are much more simplistic yet pervasive. Due credit to the preceding finance ministers must be given that they have been treading in the directionally correct path in this case. A regime marked with low rates, doing away exemptions and ad-hoc deductions and focussing on boosting revenues through compliances is what is entailed here but not found in totality in the new code. The direct tax reforms will only be complete once the system is revamped to bring about uniform applicability without leaving loopholes to be taken advantage of in the form of exemptions (such as exemptions to trusts etc). This coupled with low tax rates would ensure simplified governance and higher level of voluntary compliance. Furthermore, implementation of  TDS on all incomes, better reporting mechanisms and integration of PAN across different governmental departments as well as transaction points would help plug evasion and thus ensure the revenue loss due to lower rates is more than adequately compensated. This is a simplistic approach, but one which is capable of yielding the intended goals while capitalizing fully on the wide tax base our country can have going forward with an ever increasing per capital income.

While one could go on and on with a laundry list of what one would like to see, even if the UPA government in this term manages to deliver the above 4, I would be pleased to take my proverbial hat off and bow down to the administrators for they would have left our country far better off than when they stepped in to form the Government in May 2009. It would be a legacy which would be well befitting the pedigree and genius of Manmohan Singh and would have continuing and cascading benefits for the economy for decades…

The optimist within makes one anticipate the onset of the above…maybe the budget document is the wrong place to look for them…time will tell!!!