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Publication: The Economic Times Delhi; Date:2012 Oct 31;
Section:Editorial; PageNumber: 16
Reforms: Good, Bad and Ugly
Not everything labelled ‘reforms’ is so; some policy
proposals need to be refined andeven reversed
Now that reforms have returned to the policy agenda, we may ask
which reforms shouldreceive priority during the remaining
oneand-a-half years of the present government.Simultaneously, we
must expose policy proposals on the table that would take the
nationbackwards.
The recent Vijay Kelkar Committee report offers an excellent
roadmap for the reforms thegovernment may tackle during its
remaining term. Though the report is principally about
fiscalconsolidation, the effects of the measures it recommends will
go well beyond cutting high fiscaldeficits. This is as it should be
since the ultimate goal behind fiscal consolidation is to
fosterefficiency and accelerate growth. As the report rightly
argues, urgent efforts are required toraise the tax-to-GDP ratio. A
government that defines itself as the champion of inclusion
and,therefore, also redistribution in favour of the poor, can
ill-afford the decline in tax revenues
from 12% of the GDP in 2007-08 to 10% in 2011-12. The government
must widen the indirect-tax base, rethink the proposed Direct Taxes
Code that would poke yet more holes in the leakytax system and,
above all, improve tax collection through more improvements in
taxadministration.In parallel, public revenues must also be
enhanced through disinvestment. In addition tobringing sizeable
revenues, this measure would greatly improve economic efficiency of
the
enterprises subject to disinvestment.But there are limits to the
increase in revenues that can be achieved in a short period.
Sometax reforms, notably the move to the goods and services tax
(GST), require legislative changesthat are unlikely in the
immediate future. So, it is essential to trim expenditure. Here,
speakingfor the government, Arvind Mayaram, secretary, department
of economic affairs, has expressedconcern that the measures
recommended by the Kelkar Committee may compromise theinterests of
the poor. This is a genuine concern, but given the regressive
nature of our transfers
and the huge inefficiencies in the way, the benefits of our
social expenditures trickle down tothe poor, there remains vast
scope for cutting total expenditures while transferring
greaterpurchasing power to the poor and improving efficiency. Plan
expenditures have skyrocketed in
recent years under a hyperactive Planning Commission. As the
Kelkar report correctly notes, “There is so much leakage in
Plan schemes that by better design and targeting, it should be
easily possible to actually improve outcomes while, at the same
time, cutting expenditure.”Additionally, the bulk of our subsidies
such as those on fertiliser, diesel, LPG, electricity andfood
procurement are regressive. Food procurement, fertiliser and
electricity subsidies benefitprimarily large farmers, while diesel
and LPG subsidies benefit middle-class urban consumers.Cuts in
these will not only enhance efficiency but also be progressive.
While moving ahead with fiscal consolidation, the government
needs to be vigilant that policyproposals that would damage the
poor, and are being promoted as ‘reforms’, must be stoppedbefore
they turn into Frankenstein. Foremost among these measures are a
series of proposals
the labour ministry has recently floated.These include an
amendment to the Contract Labour Act that would effectively
eliminate the
only available flexibility that our otherwise highly-rigid
labour laws offer: the ability to hire andlay off workers as per
need at competitive wages for at least some of the tasks firms
perform.While the labour ministry’s intentions may be laudable, its
proposed harmonisation of benefitsand wages across regular and
contract workers without the introduction of some flexibility inthe
rules governing worker layoffs will seal any residual prospects of
growth in organised sectoremployment. Already, entrepreneurs in the
organised sector have been laying off workers,installing machines
to replace them wherever they can. It is shocking that according to
thelatest available data, organised private sector employs a paltry
2.5% of the workforce in the
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country. ‘Reform’ proposals of labour ministry relating to
Minimum Wage Act, Employees’Provident Fund Act, Factories Act and
the Building and Other Construction Workers Act go in thesame
direction, lowering employment prospects.While these proposals are
in the early stages, so their advance is easier to arrest, there
is
greater urgency for a second look at two other measures that are
far advanced on the way tobecoming laws. As I argued in The Times
of India on October 19, 2012, the government needs
to resist pressing ahead with the flawed food security Bill.
Given that the government hasalready put in motion the programme on
cash transfers, it makes little sense to duplicate theeffort via
this inferior instrument, especially since it will be almost
impossible to reverse it in thefuture. Minimally, the Bill should
be modified to offer the beneficiary the option to choosebetween
subsidised grain and equivalent subsidy in cash.Finally, the
government needs to take a fresh look at the land acquisition Bill
before bringing itto a vote on the floor of the Parliament. The
Bill needs to be clearer on the definition of publicuse of the land
acquired under eminent-domain provisions and to leave land
acquisition forprivate projects to entrepreneurs at genuine market
prices.
AFTERTHOUGHT
“If you put two economists in a room, you gettwo opinions,
unless one
of them is Lord Keynes,in which case you getthree opinions.”
— Winston Churchill,
British statesman
ARVIND PANAGARIYAPROFESSOR, COLUMBIA UNIVERSITY
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