Last Word: Three Down, Two To Go

It is understandable that within the government and without, one should take stock of what has been achieved in the three years between 2014 and 2017, and hence speculate about what will be attempted in the remaining two, between 2017 and 2019. But there is an inherent danger in doing that. There isn’t going to be a structural break simply because three years are over.

Much of what this government has done is institutional in nature, with a longer-term view. Indeed, the time-frame is more than five years. Having said this, the focus on physical infrastructure (national highways, major ports, civil aviation, railways, telecom, electricity) will clearly continue, the proposition being that physical infrastructure has been inadequate in many geographical parts of India and that is the reason for poverty and backwardness.

A similar argument can be advanced for social infrastructure, but there, many items are on the State List, not even on the Concurrent List. Hence, it is more a question of incentivising reforms in states and monitoring tangible improvements. Much the same can be said of factor markets like land and labour. One of the problems plaguing policy has been lack of satisfactory data, especially for the unorganised sector and sub-national and sub-state levels. It’s not that the system will become perfect in the next two years, but we should be better informed.

Some of the institutional changes are about the end of the Plan versus non-Plan distinction, restructuring public expenditure schemes, changing Budgetary reporting to a revenue/capital format and a possible change in the financial year. These are significant changes, more “big bang” than they are given credit for and these will begin to manifest themselves in 2017-18.

This is the right place to mention the Goods and Services Tax (GST) too, not only in terms of indirect tax reform, but also as partial triggering of an unorganised to organised transition. The Benami Transaction, the Real Estate and Bankruptcy legislation also have that kind of effect. Since one has mentioned indirect taxes, what about direct taxes?

As with indirect taxes, direct tax reform is about elimination of exemptions, both for personal income taxation and corporate taxes. Unfortunately, there doesn’t seem to be much consensus on this and it’s best to be a trifle pessimistic. However, one should be optimistic about privatisation/disinvestment of Central PSEs, if not in 2017-18, certainly in 2018-19. And in 2017-18, one will see the beginnings of some kind of resolution of the stressed assets problem of banks.

Quite often, an argument is advanced that in the last year before the general elections, a government turns “populist” and doesn’t undertake reforms, whatever be the definition of reforms. Even if that proposition is true, it is probably irrelevant in the present case. Barring what happened on 8 November, 2016, there has been nothing that is particularly disruptive and nothing that is particularly unpopular, not even the demonetisation.

Hence, there is no case for this government to turn “populist” and abandon fiscal prudence. It is a different matter that several initiatives undertaken will show results after the general elections of 2019 — better cities (those under the Smart City mission), better railway stations, better airports, even some elements of agricultural reform. Better roads is perhaps the only exception, where one can see visible improvements already.

The time-line for the PM, if not the entire government, was always ten years, not five. Thus, there is talk of benchmarking in 2022. The year 2019 is part of the natural electoral cycle, but one should not read too much into it. With that perspective, the next two years will be a continuation of the last three.