By Pradeep S Mehta
Unfortunately, successive governments have chosen the easy option of sops in the budget instead, throwing good money after bad in the hope of miracles
Every year, in the months preceding the Union budget, the finance minister conducts a customary consultation exercise with relevant stakeholders to seek their “suggestions” for the budget. All stakeholders of similar categories are grouped together and different groups are met separately, disregarding any possibility of discussion on diverging interests and the need to achieve a balance.
Typically, each group presents its peculiar set of demands to suit its interests. Taking into account political expediency, the government tries to do its best in keeping different quarters happy. It announces incentives to benefit different stakeholder groups, with the expectation that stakeholders’ growth will have a positive impact on overall growth. Such incentives are a cost to the exchequer and their impact on government revenue is duly disclosed in the Statement of Revenue Impact of Tax Incentives under the Central Tax System (hitherto known as Statement of Revenue Foregone). For instance, the total impact on government revenue on account of major tax incentives for corporate tax payers in 2017-18 was projected to be more than Rs1.25 trillion, a tidy sum.
Such estimates of revenue losses are necessary, but present an incomplete picture. It is necessary to analyse if such incentives are benefitting relevant stakeholder groups and consequently contributing to growth. It should be of utmost concern to the government if this is not the case; it must identify and address the disincentives to development that remain. Unfortunately, no such urgency has been showcased by successive governments at the Centre, which continue to throw good money after bad in the hope of miracles.
However, such is not the case in other jurisdictions. In the US, the office of management and budget (OMB) provides support to the US government in budget development and execution. A blueprint of the 2018 budget was recently released in the public domain. It has a section dedicated to cutting burdensome regulation and promoting growth. The OMB houses the office of information and regulatory affairs (OIRA), which is tasked with the reviewing all significant federal regulations proposed by regulatory agencies. The OIRA also oversees implementation of executive orders issued by the US president on regulatory reforms. For instance, executive order 13771 (January 2017) requires federal departments and agencies to eliminate, on average, two regulatory actions for each new regulatory action implemented by the end of each fiscal year, and not exceed a regulatory cost allowance, set at zero net costs, for fiscal year 2017.
Similarly, executive order 13777 (February 2017) established within each agency a regulatory reform officer and a regulatory reform task force to carry out the US government’s regulatory reform priorities. The OIRA recently released a status report in relation to executive order 13771 and reported that in the first eight months of the Donald Trump administration, federal agencies issued 67 deregulatory actions and only three regulatory actions. This resulted in savings of $8.1 billion in regulatory costs. The details and methodology are available for public review (www.reginfo.gov) and clarifications can be sought from relevant agencies.
Regulatory reform has also been a consistent feature of Australian budgets in the last few years. It has abolished A$5.8 billion in red tape, saving business owners time and energy that they can focus on growing their business. In budget 2017-18, the Australian government launched the National Partnership on Regulatory Reform to provide up to A$300 million to states and territories that remove unnecessary regulatory barriers and restrictions on competition as recommended in the 2015 Competition Policy Review. Such incentive payments are expected to cut red tape, boost economic growth and help create more and better paying jobs.
It is time the Narendra Modi government gets its priorities right and similarly focuses on dismantling disincentives and barriers to prosperity. It must begin immediately with reviewing the impact of sops provided in previous budgets. Evidence suggests that larger entities, which are better informed and have adequate resources at their disposal, often benefit from such incentives, with smaller entities struggling under a restrictive regulatory environment. The small and medium enterprises endure disproportionately higher regulatory costs. While the government has prided itself in reforms on ease of doing business (EoDB), interactions with stakeholders across states suggest that the picture is far from rosy. India may witness significant decline in recalculated EoDB rankings, expected to be released soon by the World Bank. An independent study by the Center for Global Development says that India’s ranking should be 147 instead of 100.
This situation needs immediate correction, more so in the light of the recently released Inclusive Development Index, which ranked India behind China and Pakistan. The government needs to reduce its reliance on gross domestic product as a measure of economic achievement, which has been fuelling short-termism and inequality. It needs to introduce institutional reforms to dismantle barriers to prosperity. Creation of an OIRA-like body, adoption of cost-benefit analysis and implementation of the National Competition Policy can go a long way towards signalling that the government means business. Nothing being suggested here is new. Here’s hoping that the government pays attention this time.