Column: A New Year wishlist

Jan 01 2014, 20:27 IST
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SummaryA deal between the Centre and the states to implement GST could help increase tax revenue

It is always good to start out a new year on an optimistic note. Optimism leads people to make New Year’s resolutions, which occasionally do get carried out. I have some resolutions as well, but they are resolutions for others, so they are really wishes. The others I am thinking of are important groups of people in India, people who can really make a difference to the lives of 1.2 billion of their fellow citizens. These are powerful, intelligent people, so they can actually be game-changers. Of course there are so many things in India that can be improved, and so many obvious benefits to strive for, especially in health, education and job creation. But many of those changes require large-scale efforts over several years. To some extent, that is true of any change that truly makes a difference in a country as large as India. But for the things I have in mind, change can truly start at the top. Here are my four wishes.

First, I wish that the 14th Finance Commission challenges the status quo of the system of intergovernmental transfers. Recently, a committee chaired by Raghuram Rajan, chief economic adviser at the time, offered an alternative methodology for measuring underdevelopment, on which to base these transfers. This was more in the context of Planning Commission transfers and questions about the validity of the “special category” for some states, rather than Finance Commission tax-sharing recommendations. But the committee’s suggestions were all in the wrong direction, in my view. India needs a simpler, more transparent, more unified, and more limited system of intergovernmental transfers, with the last goal being achieved by giving state and local governments greater tax authority. I wish that the Finance Commission proposes specific changes along these lines, to create foundations for better incentives for sub-national governments to manage their finances and their performance.

Second, I wish that the union finance minister and the Empowered Committee of State Finance Ministers quickly come up with a deal to implement the Goods and Services Tax (GST). The GST seems to have become an odd political football. The introduction of the Value Added Tax (VAT), which also took time but was accomplished smoothly, was much more of an innovation than the GST, which extends the VAT concept, but also broadens the tax base and the scope of centre-state coordination. India is under-taxed for its income level, and with import duties

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