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An open letter to the finance minister - The Economic Times

Surjit S Bhalla ()
31 January 1997

Title : An open letter to the finance minister
Author : Surjit S Bhalla
Publication : The Economic Times
Date : January 31, 1997

Dear Sir, you are about to proceed to the World Economic Forum in
Davos and meet like-minded reformers there. The greeting is
inevitably going to be: What have you done for reforms lately? To
which your reply will be: "Not much,' but then I had to make the
budget within days of assuming office". So far so good the
question then is: what kind of reforms can be expected in the next
budget, a few weeks hence.

You are in a most enviable position as you embark on what can be a
historic budget. In financial market jargon (given that you
keenly, perhaps too keenly, follow the stock market) it is a
"no-brainer". You cannot lose. If you come out with a bold budget
(defined below), and constituents of the nebulous Front do not
support you, your budget will not get passed. However, you will
have made a historic budget and when this government falls, you
would be in the driver's seat for reinstating your bold ideas. And
if the Front does support you, well, you win again.

As you are well aware, perhaps the most important part of the
budget is a statement of your vision. The second most important
part of the budget is its contents what it does, and does not,

Vision more economic freedom for citizens of India. Translation
citizens of India go about their daily economic lives without the
heavy hand (and foot) of the government. Translated further less
jobs for the bureaucrats, more jobs for mere mortals. This is not
merely a matter of vision research suggests that decreases in rules
and regulations increase the growth rate by 13 per cent per year,
or that per capita income will double in 10 rather than 16 years
(assuming potential GDP and population growth of 6 per cent and 2
per cent per year).

Once a vision is defined, the policies follow. First, what the
vision suggests you should avoid: eschew any suggestions for
decreasing the fiscal deficit, or increasing savings or increasing
investment. These are, quite frankly, outdated suggestions which
never worked in the first place. To prove the point, just look at
everybody's favourite region East Asia. Over the last two decades,
Singapore, Malaysia and Thailand each grew above 8 per cent per
annum. Their (average) saving rates; 41 per cent, 31 per cent and
27 per cent; fiscal deficits; 4.4 per cent, -1 per cent and -1.5
per cent. Home and close to home (Pakistan): average growth rates:
5 per cent and 5.7 per cent; saving rates: 22 per cent and 11 per
cent; fiscal deficits: -6.5 per cent and -7.4 per cent. Most
plausible explanation for Pakistan's higher growth rate more
efficient corruption.

Policy recommendations like "increase savings", "decrease fiscal
deficit", etc., are at best, tautological. Obviously, all other
things being equal, an increase in investments will increase the
growth rate. What is the policy there? Similarly, nobody is
stating that government expenditure be reduced to zero. Nor is
anybody stating that a high fiscal deficit is good. But a lower
fiscal deficit can be obtained through an increase in taxes or a
decline in expenditures ( not so popular with most Indian
(corrupt?) politicians). What matters is productivity growth, not
aggregate growth. So ask your advisers(and yourself) what are you
doing for productivity growth?

While not worrying about the fiscal deficit, the vision thing
dictates that you do worry about bad government expenditure (is
there an oxymoron there somewhere?). As you must have observed from
the various scandals, there is a lot of corruption associated with
government regulation and government expenditure. It is a simple
equation: more bureaucratic discretion means more corruption; more
government expenditure means more money for the governors of
governance. Now for some policies you should announce.

Tax rates and government expenditure: Lower both. The best way to
increase tax collection is to lower tax rates, not increase them.
Development means that more people are brought under the net
without any increase in effort by the finance ministry. Rationalise
tax collection, and make it simple for the tax payer. Cut out
exemptions they serve corruption purpose only, and lower taxes on
savings acts as a subsidy for inefficient money managers. Keep
MAT, and decrease corporate tax rates and eliminate surcharge.

Uniformity in import taxes: There are more import tax rates than
there are finished goods. For example, with computers, floppy
disks, keyboards, screens, memory, etc., all have a different
tariff. If you have a defence for this madness, then please
enlighten the country, and the world. Why not announce a uniform
tariff? Losers bureaucrats in the customs department. Gainers
exporters, importers, the common man. Bottom line no banning of any
imports (except items of destruction), a uniform rate today, and
that rate to decline steadily over time to WTO and ASEAN
requirements by 2002.

Uniformity in excise taxes: Similar logic to above. Neither any
officer in your ministry, or any computer, can correctly figure out
what items should be taxed at a higher rate, and what at a lower
rate. Have two tax rates: zero and x per cent. Losers bureaucrats
across the board, politicians of all hues, and rich (corrupt)
industrialists who get exemptions.

Capital account convertibility: There is widespread agreement that
the stupidest law on the books Foreign Exchange Regulation Act
(FERA) should go. However, two groups of people have come out in
its defence. The party in search of a cause (how best to better
Hindu chauvinism than a policy Hitler initiated) the BJP feels it
can gain some votes by espousing FERA arguably the "best" policy
the Congress party ever initiated to fill its coffers. The second
group, by revealing its staunch support by FERA, says it all. The
Reserve Bank of India Employees Association is quite honest in
stating that their extra-curricular income is best served by
keeping FERA on the books. Has any finance minister ever needed
more assurance on what is the popular, and right, thing to do?

There are more patriotic versions of support for FERA. People
might argue about lack of confidence in the Indian rupee, capital
flight and how the rupee might go towards 50. It is interesting to
note that the people who most support government intervention in
dictating economic activity (somewhat surprisingly, both the
Communists and the BJP are in this same common cause camp) are the
ones with the least amount of respect and confidence in the ability
of Indian people. Is there much difference between this patriotism
and reactionary feudalism?

Corporate Disinvestment: You could set the record straight by
talking of privatisation rather than obfuscation. And instead of
having volumes of research, and multiples of commissions, why not
announce the following: Over the next thirty three months, the
government plans to sell three per cent of its ownership each
month. This way, you do not attempt to "market time", you announce
your vision ( government out of the money losing business), and you
gain money for things the government should do, e.g. provide
electricity, clean water, roads, and income support for families
who send their daughters to school and college.

A common feature of all the recommended policies outlined above is
that they decrease government discretion and government corruption,
increase GDP growth, reduce poverty and are costless to implement.
The only thing you will have less of is corruption. Popular
support for corruption reducing policies cannot be overestimated.

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