With the announcement of the Union Budget approaching fast, speculation is rife that the measures that will be taken in the Finance Bill 2020 would be “populist”.
What is “populist” can however depend on who considers it populist — it would typically mean being supportive of “the other”. When headlines in English media use the term, “populist” would mean the measures would provide benefits to farmers and the salaried class. For example, hike in standard deduction; greater farm subsidies; taxing the use of robots in factories. Seen from the prism of the farmers and the salaried, “the other” would be industry and the rich — further reduction in direct tax rates; investing more in the idea of “growth” eventually leading to a trickle down to the poor.
Two key challenges stare us in the face this time. First, the steadily growing inequality and inequitable tax policy. Indirect taxes, paid at the same rate by the rich and the poor alike, still contribute a high share of tax revenues while direct taxes, linked directly to the ability to pay and in proportion to what is earned, is invariably used as the tool for giving relief and placing more funds in the hands of society. Substantial relief has been given already on direct taxes, particularly to corporates, creating an incentive to use the corporate form for most economic activity, and there is not much left to give. India continues to generate dollar billionaires even while large sections of the populace continue below poverty line. In fact, thanks to the proliferation of billionaires (even subject matter of widely popular books now), institutional funding for India’s social sector is drying up.
We are simply unable to recognise and identify that wealth disparity and the consequent inequity is having extraordinary social consequences. The answer lies in hard-core fiscal reform. Merely instilling the fear of the taxman, to ensure compliance with tax law is not enough. What is vital is to reform tax policy. The more perverse and stringent enforcement of bad fiscal policy cannot achieve what prudent fiscal policy alone can achieve. Today, the discourse on this front is polarised — the mere mention of inequality is met with a dismissive “communism” charge from one end of the spectrum while any discussion on reform in enforcement is met with a dismissive “cronyism” charge from the other end.
Second, the government is staring at a gaping hole in the balance sheets of state-owned banks, which would obviously need to be recapitalised. This is the part that is not considered “populist” although essentially it involves funding the banks that have lost money lending to industry — in much the same way farm loan waivers are financed. Besides, multiple non-banking financial institutions, particularly “systemically important” ones, are failing. The lessons from these clearly point to how governance failures have grown like a cancer, hollowing the institutional core, leading to their being run like mom-and-pop shops with overarching control being wielded by individuals, at times, those not even holding office. At the end of the day, someone will have to foot the bill, and the temptation to expend taxpayers’ money will be high.
However, the need for reform is way beyond finding the money to support institutions — without deep reforms in corporate governance for the banks and institutions, capitalising them with more money will simply pour more down the drain. There is no bigger opportunity cost suffered by the government than ignoring the need to corporatise the government’s holdings across banks and to bring corporate governance norms for banks on par with company law that has taken long strides ahead since the 2013 law. In fact, governance of state-owned banks, codified in the bank nationalisation law and other legislative charters of specific banks, is rooted in an anachronistic and outmoded framework.
Finally, this time, the government would do well to use the Finance Act to purely focus on fiscal reform and shun the use of multiple schedules to rewrite multiple other laws passed by both Houses of Parliament. Quite apart from such an approach being abusive of provisions governing money bills, giving the Lok Sabha the right to negate various legal provisions that are on the statute book with the approval of Rajya Sabha, it diffuses focus from the key objectives of the Union Budget exercise. Recent experience suggests that this can only be a hope in vain, but it would be a pleasant surprise for this expectation to be belied.
The author is an advocate and independent counsel. Tweets @SomasekharS