Set your clocks - It' election time!

The first reaction of most, if not all, observers is to dismiss the recent reforms announced by the Finance Minister, Mr Jaswant Singh, as election propaganda.

An editorial in this newspaper entitled 'Ad hoc, improper' went several steps further and felt that the action was 'unprecedented', that the content, context and timing of the so-called reforms left a lot to be desired and concluded in an apocalyptic fashion "the government has opened up the economy to the dangers of a possible fiscal crisis".

The policy measures, mostly of a tax reducing variety, and mostly related to indirect taxes (direct tax changes require parliamentary approval) deserve to be viewed with suspicion -- after all, elections are just a few months away.

At the same time, the pre-poll measures should be evaluated in an absolute sense i.e. would one recommend their implementation if elections were not to be held anytime soon? The answer seems to be a resounding yes. Let me elaborate.

The most important policy measure announced is the reduction of the peak customs tariff rate from 25 to 20 per cent. In addition, there is the important elimination of special additional duty (SAD, truly) of 4 per cent.

So there is a huge reduction in peak tariff levels. There have been plenty of people who have been advocating that in order for India to achieve its potential of 8 per cent GDP growth, it has to reduce its tariff rates to Chinese levels, i.e. below 10 per cent.

Further, every time the BJP presented a bad budget and increased customs duties (as in it's first stone age Budget of 1998) there was loud criticism and justified concern about the BJP being unduly influenced by the industrialists lobby.

So now this very same party reverses its 1998 follies (the SAD duty was initiated then), brings India closer to its potential, presents a long overdue policy, and it is opposed on the grounds that the actions are fiscally irresponsible!

So let me see -- if the customs duty is raised, it is bad because it lowers output, increases distortion, increases corruption, and perhaps decreases total revenue collection. If duties are lowered, corruption decreases, output increases, and perhaps revenue collection goes up as well -- and the policy is criticised for being election gimmickry and populist. Give me many such gimmicks any day.

Another angle to view the mini-reforms is via the presumed tax loss. Various estimates suggest that the worst case scenario is of a loss of Rs 10,000 crore (Rs 100 billion) or about 0.4 per cent of GDP. Surely an increase of 0.4 per cent in the already high central fiscal deficit of 5 per cent is a terrible, terrible thing to happen -- so terrible that we might be approaching a crisis. So the mini-reforms should, must, be opposed.

But before committing oneself to the opposition, one should do a little bit of homework. The direct tax collections to date are running at close to a 25 per cent growth rate, and they account for about 40 per cent of all tax revenues.

In other words, almost the entire targeted 12 per cent increase in taxes may be mostly met by the growth in direct tax collections alone! In addition, nominal GDP is running about 3 to 4 percentage points above target.

The two influences together are likely to lead to a decline in the fiscal deficit ratio of around 1 per cent -- or more than twice the projected loss due to the mini-reforms. So at the end of the year, India is likely to have the 'populist' but most welcome mini-reforms, and a lower fiscal deficit. So what's the problem?

In addition to cuts in the peak rate and the abolition of SAD, there are tax cuts in areas related to telecommunication, computerisation and infrastructure development. Duties on medical equipment are also reduced.

Which one of these cuts should be refused in the name of the fiscal deficit? None -- all are welcome, and one should want, and expect, policies, which bring down import taxes even further. If viewed without ideological lenses and electoral biases, the newly announced policy measures are way overdue, and necessary. That they might also play to electoral galleries is irrelevant.

There is an additional reason why the new 'populist' measures should be applauded by all liberal reform oriented citizens. This pre-poll announcement is very likely a preview of policies to come, post election.

In many ways, the logic behind tax-reform policies were spelt out in the Kelkar 2003 report on taxation. Some of that logic is being accepted today, and may one dare wish that the supplier of mega-corruption and low tax revenues -- the multitude of exemptions in direct taxes -- will be reduced, if not removed, post-election?

And that we can dare to go even further than the Kelkar report and opt for a flat income tax in the range of 15 to 20 per cent? And corporate taxes reduced to no more than 25 per cent?

The mini-reform electoral salvo should also be welcomed for the good fight it promises for the national election. The opposition, and especially the Congress, needs to take seriously the challenge. The poor party has been battered and bruised, but it is still standing under the leadership of Ms Sonia Gandhi.

It will stand even firmer if in it's own interests, and that of Indian democracy, the Congress recalls the Family daughter, Ms Priyanka Gandhi. Without this recall, the word Congress may become synonymous with demise as it hurtles to a seat total of less than a 100.

Some people claim that a foreigner should not be the Prime Minister. Such an illiberal attitude should be defeated. Hence, the need for the Family daughter. She has several assets -- she is young, and in a nation where the median age is close to 30, the youth represent lots of potential votes.

She has the Nehru-Gandhi genes, the heritage of a family that has dominated Indian politics for nearly a century. She is the answer to the question of 'foreign origin'. With both the Gandhis in the battleground, it will be a fair fight and the people can decide on the important question of whether, in the age of globalisation, India wants to continue with feudal, dynastic rule.

Think of the possible election slogans, the battle cries: Old vs. young, Upstarts vs. the Establishment, Vajpayee vs. the family. An election worth watching and waiting for.

Powered by