Memo To PM, FM: There’s A Downside To Delivering Economic Policy In Weekly Instalments

It cannot have been a coincidence that just a few days after Finance Minister Nirmala Sitharaman announced a whole lot of pick-me-ups for the economy, including a Rs 70,000 crore front-loading of bank capitalisation, the central board of the Reserve Bank of India (RBI) said that it would be handing over Rs 1.76 lakh crore of its “excess capital reserves” back to the government in 2019-20.

Once this bonanza lands in the Centre’s kitty, not only will the fiscal math look healthier, but suddenly the government has leeway to do many of the things it had no money for earlier, including giving cash-starved micro, small and medium enterprises an early refund of goods and services tax (GST) payments.

Sitharaman’s presser last Friday, which included some indirect sops for the auto sector, and withdrawal of the surcharge on foreign portfolio investors and long-term and short-term capital gains, got India Inc doing a jig, and the market celebrated yesterday (26 August) by pushing the indices up by more than 2 per cent, the Sensex by 793 points and the Nifty by 85.

The rollback of some negative budget proposals and promises of more to come, possibly funded by the RBI’s new large-heartedness in handing over its excess reserves, is a sign that the government is open to feedback and take corrective action. But it also is worrisome. There is a downside to moulding policies through trial and error as some wrong signals may get sent.

One, there will be an assumption that if you create enough of a ruckus or tell stories of doom and gloom in specific sectors, government will roll back its measures. And, two, when policies are going to come in instalments – Nirmala Sitharaman has already promised more steps to revive animal spirits in the coming weeks – it actually creates uncertainty. Business will wait and watch to see if something better is going to come a bit later. It will delay investments to tomorrow what it could have done today.

This is particularly relevant for the Narendra Modi government, where policy is often driven by the Prime Minister’s Office (PMO), but the office simply lacks economic heft. Strong prime ministers tend to have a voice in many ministries, but four in particular are relevant in the case of the Modi government: finance, home, defence and external affairs. This means apart from policies that emerge from below, the PMO must additionally have the capability to sift and sieve through ideas through its own expertise.

In the areas of internal and external security, the PM has a separate National Security Adviser he can rely on. In the case of foreign affairs, he can rely on a strong policy establishment in the Ministry of External Affairs (MEA). But when it comes to finance and economic affairs, Modi has almost no guiding force.

To be sure, he has the Economic Advisory Council (EAC) headed by Bibek Debroy; he also has experts in NITI Aayog. And then there is the Chief Economic Adviser (CEA) attached to the finance ministry. The EAC’s term ends next month, and NITI Aayog is used by the Prime Minister to suggest ideas in sectors of relevance (electric vehicles, digital economy, etc) and to defend the government when it is politically under attack for economic underperformance.

But, given the managerial and administrative style of Modi, where he has clear ideas on what he wants done from a political perspective, neither the EAC nor NITI Aayog serve much of a purpose. His economic ideas, or proposals he gives his nod to, need to be vetted in the PMO itself to be effective. It will also help filter out bad ideas that may come from people who have the ear of the Prime Minister.

An idea like demonetisation, for example, could either have been abandoned or modified substantially to cause less economic disruption if the PM had had some economist he trusted personally to use as a sounding board and sieve. Relying on the RBI Governor, who anyway had a predetermined institutional view on demonetisation, was not an option at that time. Discussion with other economists was ruled out for reasons of secrecy.

The EAC, despite being occasionally useful to rebut those who critique Modi’s economic performance (as was the case with former CEA Arvind Subramanian’s formulation that India’s growth rate may have been over-estimated by nearly 2.5 per cent in recent years), is not a very relevant institution in the era of strong stewardship from the PMO. Producing erudite studies on the macro-economy or other broad themes is not something that seems to interest Modi terribly, as he is focused more on his socio-political agenda, in which macroeconomics plays only a cameo role. He needs a personal economic adviser he can trust, someone who can marry his political goals with sound economics.

If one were to look at the history of the six Modi budgets so far – seven if you include the interim budget presented by Piyush Goyal last February – barring two all were of no consequence. The two of consequence were the budget of 2015-16, which promised a cut in corporate tax rates to 25 per cent in stages, and the interim budget, which managed to swing the political mood in Modi’s favour ahead of the general elections. The rest of the budgets, including the latest one presented by Sitharaman, were eminently forgettable. Or worth remembering for the wrong reasons like higher surcharges on the rich.

On the other hand, you will find that the biggest changes relating to budgets were procedural – all prompted and backed by Modi directly. In the last five years, the railway budget got merged into the general budget, the old plan and non-plan segregation of budget numbers got abolished; and the budget date itself got moved to early February so that spending can begin from the very first month of the next financial year.

The biggest changes which impacted the budget indirectly related to the goods and services tax, the insolvency and bankruptcy code (IBC), and the Aadhaar (Targeted Delivery of Financial and other Subsidies, Benefits and Services) Act of 2016, the last of which was passed off as a money bill. All these initiatives had Modi’s complete political backing.

Changes to all these bills are now coming in bits and pieces, with GST rates being periodically revised by the GST Council, the IBC being amended periodically, and the Aadhaar Act being modified in the light of the Supreme Court judgement last year that banned the use of Aadhaar for private use. Besides, there were several amnesty schemes, and the Fugitive Economic Offenders Act of 2018 to deal with black money connoisseurs and tax evaders.

While no government can anticipate everything when it brings forward an economic legislation, one wonders why laws and budgets have to be so frequently changed in order to improve them further. Could not the limitations of various legislation not have been substantially understood and remedied in advance?

Even in the case of the GST, which continues to be a work in progress more than two years after introduction, one has to ask whether quarterly tinkering with rates is doing more harm than good. If cement, for example, is finally going to be moved from the top rate to the middle rate, is this going to make realtors more likely to delay projects or hasten them, given that delay can save them cement costs?

If realtors have two GST choices – a 5 per cent rate without input tax credit (ITC) and a 12 per cent rate with ITC for under-construction projects – does this not create a needless duality and confusion among both builders and buyers? Will there not be a presumption that ultimately both rates will converge into one? Who will rush to start a project whose ultimate tax status may change by the time the project is completed three years later?

Given the working style of the Prime Minister, he would benefit more from having policies vetted inside the PMO itself rather than having elaborate outfits like the EAC to advise him on an occasional basis. At the very least, the need to have policy in instalments will reduce if ideas are scrutinised in advance by an able mind.

Translated, that means the following: if you want to fix the economy, get fiscal and monetary policy aligned in one shot. If you want to fix GST, do it at one go even if it takes three months to get the complete package ready. Policy in monthly or weekly instalments adds to the unease of doing business.