Reform Derailed

Dr Bharat Jhunjhunwala

The mantra these days is that more reforms are needed to jump start the economy. Question is why the reforms undertaken till now are not delivering. The patient should become well if he has been given the right medicines. Why should it be necessary to change and administer newer medicines every week? Basic problem of the economy is that the politician-bureaucrat axis is bleeding the country and not allowing the common man to grow.

Say you are rickshaw puller. You cut back on consumption, saved some money and wanted to buy an autorickshaw. Let us examine whether the present reforms will help you in this endeavour. You would be assisted if the bank manager was efficient and helpful in providing a loan. A corrupt manager would kill your ambitions. Fifteen years ago the Fifth Pay Commission had recommended that external evaluation of government servants should be got done by an independent agency. This evaluation should be prominently considered in granting promotions; and those found inefficient should be shown the door. Such reform in governance would have helped you in securing a loan as well as getting your autorickshaw registered. Alas! These reforms do not find place in the Government’s agenda.

Availability of good quality autorickshaw in the market would be of help. A better average and lower maintenance cost would make your venture profitable. The Government gets full one mark on this count. Free trade has led to availability of cheap imported goods and FDI has led to improvement in the quality of goods manufactured in the country.

Third point is of taxes. Higher road tax and price of diesel is harmful for you. But the ideology of the present government seeks to increase the level of taxes. Thinking is that increased revenues can be used to provide better education and other facilities to the people. Therefore, you are not likely to get any relief in taxes from these reforms. Remember that the increased receipts by the government from reduction is subsidies, sale of shares of PSUs and imposition of service tax on a slew of new trades will be used to meet revenue expenditures of the government such as more benefits to the government servants. Their DA has been continuously raised. Moreover, the facilities provided in the name of people’s welfare are mostly used to serve the rich as seen in the heavy expenditures on hospitals in metros and Kendriya Vidyalayas. Therefore, the tax reforms will only impose an additional burden on you.

Fourth point is of law and order and justice. You will have to make many rounds of the courts if by chance you get involved in an accident. The numbers of judges in the courts is less while numbers of cases continues to grow. The Allahabad High Court, for example, has only 70 justices against an approved strength of 160. Speedy justice is simply not on the reforms agenda.
Your ability to buy an autorickshaw also depends on your education. Good education would enable you to negotiate through the loan documents. The government education system, unfortunately, is in shambles. Government teachers are paid five times the salaries of teachers in private schools and produce one-half the results. The government refuses to consider giving out education vouchers to empower the students to obtain education from school of their choice.

The sixth point is of infrastructure. Here the government does get one-half point. Making of highways and flyovers has been speeded up through public-private partnerships. This has improved the quality of infrastructure at least in the metros. Your autorickshaw is likely to have lesser breakdowns. However, the side roads remain in dismal condition. On the whole, therefore, the present reforms get one and one-half point out of six.
Now we can examine the impact of other reforms that are being sought. FDI in retail will make available goods produced in various countries. But these will be beneficial only for the middle and upper classes because shopping in these mega stores takes more time, choice is less, personalised service is not available and one has to spend much time and money to reach these stores located faraway. The government claims that these companies will open new markets for our farmers. I am not convinced. There is no bar for Wal Mart to procure grapes from India for export even today. Indian retail companies are already buying goods from the farmers and providing to the consumers. How Wal Mart will make a difference is not understood by me. Therefore, as an autorickshaw owner you will have little benefit from FDI in retail. On the contrary, small shopkeepers like your brother may lose some business. The government loses one-half a point on this count.

Another step taken by the government is to sell shares of PSUs. This would have been good if the proceeds were to be used to reduce the burden of taxes on the aam aadmi. Unfortunately, it is not so. The proceeds are to be used for meeting the regular expenditures of the government. There will likewise be little or no impact on the aam aadmi from allowing FDI in insurance and civil aviation.
The third important move of the Government is to introduce a unified goods and services tax. Multiple rates of taxes lead to disputes with the tax authorities. Inter-State movement of goods is restricted because of different tax laws among states. Indeed, simplification of the tax system will help increase the growth rate. The flip side, however, is that the tyre of your autorickshaw and that of the luxury Mercedes car will be taxed at the same rate. The present pro-poor tax structure via lower rates of tax on items consumed by the poor will get flattened and you will have to pay higher taxes. The government loses another half-point on this count.

Thinking of the Government is that increase in consumption of the rich; and high profits of companies supplying those goods will lead to higher revenues which could then be used for increasing outlays on welfare programmes like MNREGA. This is correct. However, the receipts by the poor from these programmes will be but a trickle. Just as a bumper crop harvester by the landlord leads to the bonded labour getting an extra pair of dhoti but that is not called ‘growth’; similarly the trickle from welfare programmes coming from increase in incomes of the rich is not satisfactory. In fact, increasing disparity in the consumption of the rich and poor will lead to social instability. The government loses another half-point because of this increasing inequality.

The government gained one and one-half point from increase in quality of goods and improvement in infrastructure. These are cancelled by the negative impact of loss of jobs by entry of FDI in retail, by equal rates of taxes on goods consumed by rich and poor under GST and by increasing inequality. In the end there is nothing for the common man in the present demand for more reforms. Requirement is to solve the many problems outlined above that prevent the common man from growing.