WHAT JAITLEY SHOULD HAVE SAID IN HIS BUDGET SPEECH

Madam Speaker:

 

For almost 70 years, Finance Ministers have come to this august body and said: “ the government will do this, and the government will do that.” As a result of this ever-increasing involvement, the government has gotten bigger and more expensive to maintain. Running the government machinery today consumes about 20% of the annual budget leaving very little money for things that our citizens need like safety, education, healthcare, sanitation, infrastructure, and justice.

The economy is a complex, dynamic and fast evolving ecosystem. It evolves, adapts, and self-corrects when left to the forces of a free market. For too long the government and its bureaucratic machinery have tried to plan and control the economy with fiscal gimmickry, but the results have been disastrous. So, today I want to take a different tack. I am going to focus instead on what the government is NOT going to do and go back to our campaign promise of “ less government and more governance.”

1) The government will not engage in any economic activity or area of commerce. Free, unencumbered markets are the engine of economic growth and wealth creation. The government’s role is not of a player but an umpire. Presently, the government is a major shareholder in about 230 public sector undertakings, and it is time for the government to divest its share in these companies and let private players run them. We have appointed a 10-member team of reputed investment banking firms to liquidate the government’s positions in a systematic manner. We expect this to generate about Rs. 13 lakh crores. This money belongs to the people, so the entire amount will be invested in a Bharat Sovereign Fund which will co-invest with private companies in PPP projects related to infrastructure, education, and health. This will provide much-needed financing for infrastructure projects and kick-start hundreds of projects currently lying dormant. A team of investment professionals from the private sector will manage this fund.

2) The only way to remove poverty in India is through economic growth. Since capital is the lifeblood of an economy, it is vital that we allow unrestricted flow of capital to attract global business and investment and maximize our growth potential.
So in this budget, I am announcing the removal of all barriers and regulatory constraints to foreign direct investment and the full and free convertibility of the Rupee. We now have stable and mature financial markets, and so the risk of capital flight and related disruptions is small in relation to the potential benefits.

3) Madam Speaker, the role of fiscal policy is to shape a landscape that encourages Indian companies to build and grow. Focusing all our attention on unearthing black money at the expense of promoting growth is counterproductive. It is now clear to us that the main reason for black money is a broken tax code. A good tax policy must meet the following objectives:
(a) maximize revenue collection at the lowest possible disruption to the economy
(b) broaden the tax base to avoid the free-rider problem
(c) make tax compliance and administration simple and predictable
(d) make tax policy proportional, so the rich pay more
(e) make it is easy to implement, so compliance costs are minimized
(f) does not unfairly advantage one sector or group over another

The current tax code with over 53 different taxes is a hodgepodge of conflicting rules and regulations and does not meet any of the requirements of a good tax system. It is not broad based –less than 2% percent of Indians pay income tax. It is not proportional–the tax burden is borne disproportionately by the middle class. It is not simple–the tax code has thousands of complex and often conflicting regulations. It is not easy to monitor since black money is rampant in the country. Tax collection is not equitable among sectors–agriculture, for example, does not pay any taxes, and hundreds of other distortionary subsidies and exemptions create tax advantages for various industry groups. And it is not easy to implement –the average business spends almost 250 hours a year on filing tax returns, and another 400 hours a year on compliance and audits.

India ranks at the very bottom –172 among 190 countries in the World Bank’s ranking on ‘ease of paying taxes’. And, coincidentally, among the major economies, India has the lowest percentage of voters that pay a tax–less than 7%. This clearly suggests that in order to increase compliance we need to simplify tax policy.

Here are some facts about the Indian economy that are unlikely to change anytime soon. A large percentage, about 83%, of the Indian economy is in the informal sector, and much of it runs on cash. As a result, the payment of taxes remains a voluntary activity. The generation of black money is largely an unavoidable consequence of a complicated tax code juxtaposed on an informal economic structure. Any attempt to change this by coercion, or other methods is an exercise in futility. The cost of trying to collect every rupee of tax will far exceed the revenue collected.

So a new tax system has to be developed that mitigates tax evasion and black money structurally, rather than administratively.

Madam Speaker, I wish to propose a transformational tax policy that will reduce the generation of black money, and more importantly, create powerful incentives that will unleash unprecedented economic productivity and growth. I am proposing that all existing taxes–income tax, corporate tax, capital gains tax, wealth tax, excise tax–every single existing tax be scrapped and replaced by a 10% value added tax (VAT) which is automatically imputed into the price of all goods and services we consume. In its most basic form, a business pays the VAT tax on its purchase of inputs and collect it on its sales, whether those sales are to another business or a final consumer. The company itself will pay no taxes: It acts solely as a collection agent for the government, remitting to the state the difference between the VAT it collects from sales and the VAT it pays on inputs. The tax burden on the value added moves up each stage of the production chain to the final consumer. This chain cannot easily be broken without detection so tax avoidance becomes difficult.

The price of all goods and services thus includes a tax. Anytime a purchase is made tax gets paid automatically, so there is no tax evasion or black money. And since everyone in the country must consume goods and services, everyone will pay some tax. This will broaden the tax base and increase revenue collection. Our estimates show that if we eliminate all current taxes and replace it with a simple consumption tax, GDP would increase by at least 3% within two years, and government tax collection by almost 30 percent. Additionally, over 5 million new jobs will be created, and interest rates would drop below 5 percent.

The simplest most efficient way to structure this VAT tax is to have a single rate across all products, with no exemptions. To mitigate the tax burden on low-income families, the government will provide a transfer of 10 % of a base income, currently chosen to be Rs. 25,000 annually, directly into their accounts as a rebate against taxes paid on the consumption of food and other essential items. In other words, every family classified as below-poverty-line will get a direct transfer of Rs.2,500 annually into their bank accounts to compensate for taxes imputed into their consumption. This tax rebate will cost about Rs.80,000 crores.

Based on the 2016 Gross value Added (GVA) of about Rs. 170 lakh crores, a 10% VAT will bring Rs.17 lakh crores in tax revenue in the coming fiscal year, which makes it revenue-neutral with current tax collection. In the out years, we expect a sharp increase in tax revenues from a rise in consumption in response to increased economic activity and higher disposable income for consumers and businesses.

4) Madam Speaker, the right of a government to collect tax is conditional on its ability to deliver essential public services. Citizens will be more willing to pay taxes if they feel that the government is adhering to its side of the contract with efficient delivery of essential services.

The government is primarily a service provider, but often the private sector does a better job of providing some services. Going forward we will ask the following questions: (1) must the government provide these services? and (2) must these services be paid through taxes? If the answer to either question is “No,” then the government will let the private sector provide that service. Exiting many such areas will allow us to focus on those services that protect life, property, liberty and rights.

A)Protecting the lives and freedom of our citizens from external aggression is the primary role of a government. This requires a trained and well equipped armed forces. For this purpose, I have allocated Rs. 3 lakh crores which is 22% more than last year. Currently, 71% of our defense budget goes towards salaries, pensions, and medical care which leaves less than 30% to modernize the army. Modern warfare is more about weaponry and less about warriors, so it is vital that we channel additional resources towards weaponry. Our aim is to cut down the size of the army to half by the year 2030 and build a smaller, more lethal, deployable and agile force using sophisticated weaponry and intelligent systems like drones and robots to replace personnel where feasible.

B) We also need to protect our citizens from the internal threats of crime, rape, embezzlement, fraud, harassment, and violation of basic rights. This will require massive investment in (a) a well trained and modern police force and (b) an independent, effective, and just legal system.

Madam Speaker, I have allocated Rs. 1 lakh crores to attract the best and brightest of our youth and to build the world’s best trained and most sophisticated police force. I am also allocating 1 lakh crores to build a vast network of District, Circuit, Consumer, and High courts, and for the training and hiring of judges. It is imperative that we create a legal system that treats everyone equally and hands out fair and speedy justice.

C) The government is in much better position to marshal resources that provide essential services that all citizens consume, like, public infrastructure, uninterrupted electric and water supply, a clean environment which includes clean air and water, sanitation, and cultural and sports facilities to augment the quality of life. This year’s allocation to this, apart from any benefit that may accrue from the sale of public companies, will be Rs. 2 lakh crores.

D) The government’s role is to promote the general welfare of our citizens and not to have a welfare state. We intend to do this by creating equal justice for all, protecting life and property, increasing quality of life, reducing air and water pollution, providing efficient and reliable public services, etc.

However, we can all also agree that all our citizens should be guaranteed some basic level of subsistence. That is the right to citizenship, and our government understands that. We also understand that to alleviate poverty; we require programs directed specifically at helping the poor. In other words, we need to help a poor man who also happens to be a Dalit or a farmer, not because he is a Dalit or a farmer but because he is poor. All poverty alleviation programs should be designed to help people as people not as members of particular occupational groups or castes.

Unfortunately, welfare spending in India suffers from significant inefficiencies: exclusion of the poor, leakages from the system, misallocation of resources across districts and benefits to non-poor. Estimates by the Ministry of Finance show that in just the two large subsidy programs, PDS and MNREGA, as much as 40% and 65% of the funds respectively did not get to the people who most needed it. There are currently about 950 centrally sponsored schemes in India accounting for about 5.2 percent of the GDP by budget allocation. If the average misallocation is even 30%, then the waste amounts to almost Rs. 2.1 lakh crores.

Madam Speaker, this path is unsustainable. It’s time to change the current welfare and subsidy system to allow people to choose and be responsible for the execution and consequences of those choices. I am recommending that an expert committee be appointed to study and recommend one of two options: (1) A Universal Basic Income (UBI) scheme under which every low-income person in India is guaranteed a minimum subsistence income deposited directly in their accounts, or (2) a negative tax rate in which people earning below a threshold amount receive a rebate from the government calculated on the basis of a table of negative tax return.

This will replace all existing welfare and subsidy schemes and the money saved by eliminating waste and leakages from the system will be used to train the poor for jobs in the new economy, and to provide high-quality education and improved health benefits.

5) Madam Speaker, India is at a critical juncture. Our demographic dividend will peak out in the next eight years. So we need to move urgently to capitalize on this opportunity. We have a young, dynamic entrepreneurial workforce that can be unleashed to create wealth for all citizens. But they have been held back by an ocean of regulations that stifle development, competition, and risk taking. This regulatory capture of business and citizen lives needs to change. As the old saying goes, “ The greater the number of laws and regulations the more thieves and robbers there will be.”

I am, therefore, asking all government agencies to reduce regulations in their respective departments by at least 50 percent by next year. In a free market economy with voluntary exchange, the primary role of the government is to set the rules of the game in a manner that does not advantage one group over another. The government can and must ensure equality of opportunity–it cannot and should not guarantee equality of outcome. So all regulations must focus on meeting the twin objectives of citizen protection, and ensure equality of rights and opportunity. We have to get out of the habit of trying to control the behavior of a few by imposing meaningless regulations on everyone else. Regulations are administratively expensive to enforce, and also a source of restriction for the many people who don’t violate them.

The role of the government is to protect its citizens and not run their lives. We cannot regulate personal morality, but we must demand compliance with laws that respect life, property, and rights. By reducing the role of government in commerce and reducing regulatory burdens, we will significantly reduce the power of government to coerce and with that a significant reduction in corruption. We acknowledge that corruption occurs widely in transactions with the government, and so the only sure way to reduce corruption is to have free, unfettered markets and bare minimum regulations. When the government machinery is reduced in size and stripped of its power to regulate it is also stripped of its power to extract money.

Madam Speaker, this budget will transform India. The government will mutate from running companies to focusing on being an efficient provider of public services. A simple and efficient tax code based on consumption will structurally eliminate tax evasion. By dramatically altering our armed forces, police, and judiciary, we will protect our citizen and their rights. By investing jointly with the private sector in world-class infrastructure and by freeing the movement of capital, we will put India on the path of becoming a global economic power. And by reforming welfare and subsidy delivery and ensuring a minimum wage, we will remove poverty.

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2018-07-27T13:10:27+00:00 February 25th, 2017|

About the Author:

My name is Sanjiv Bhatia. I am an entrepreneur, economist, investment banker, venture capitalist, author, and speaker. I work with governments and corporations on a wide range of environmental and economic issues. And I write and speak on policies related to economics, financial markets, and the environment. As I view the plight of the ordinary Indian, I have become convinced that the solution to many of India’s problems will come from Libertarian ideas of individual rights and responsibilities, free markets and limited government.The country’s biggest problem is the ever expanding reach and authority of the government, and the corruption that results from this power.The country is weighed down by excessive laws and regulations that are randomly enforced, almost always favoring those who can work the system.The injustice against the poor is pervasive, and little is ever done about it. The corruption and injustice are destroying the very fabric of this nation.My school teacher once told me: If you don’t write, nothing will change. So in these blogs, I will challenge the conventional wisdom that has prevented India from achieving its potential.I hope to convince my readers that the government is not the solution but the problem and that free market solutions offer the best hope for India to reach its growth potential and get millions out of poverty.

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