The Manifesto Game : Tweedledum & Tweedledee



Tweedledum & Tweedledee
 

 

In the land of Tweedledum and Tweedledee, what can you expect but election manifestos by ( who else? ) Tweedledee and Tweedledum, which read quite alike !

 

The Narendra Modi-led Bharatiya Janata Party, today came out with an economic manifesto seeking an India-wide Goods & Services Tax, which the Congress has been pushing for since when President Pranab Mukherjee was finance minister in the UPA Government.

 

Modi as chief minister of Gujarat had led a cabal of BJP-run state chiefs which had thwarted repeated attempts by Mukherjee, then finance minister and his successor in North Block, P Chidambaram who both sought to introduce the simple single point tax which would replace a plethora of central and state taxes and duties on manufactures, turning India into a single common market.

 

An attempt by Mukherjee, some five years back, to break the deadlock by jetting into Ahmedabad to hold direct talks with Modi did not succeed as the chief minister, while not objecting to the measure being brought in, brought in procedural objections.  Later on, attempts by Chidambaram to reach out to BJP leaders ahead of  Parliament sessions, met with similar objections. 

 

Narendra Modi with his Manifesto

The implementation of the new tax which will snuff out central excise taxes, additional customs duties, surcharges and state taxes such as VAT, entertainment and luxury taxes, lottery and gambling taxes etc., could well add 1-2 per cent to India’s growth rate, according to economists. Hence, the rush to be the author of scheme, and the desire to deny the other side the benefit of having launched it.

 

The on-going General Elections are widely expected by pollsters to yield a hung house, with BJP as the single largest party and Congress as the second largest. Regardless of which party is able to cobble together an alliance capable of forming a ruling coalition, this Government will depend on  other major parties for support in passing important legislation and hence a  consensus on GST is essential as the measure has to be passed by a two third majority in both houses of Parliament.

The original deadline for rolling out the nation-wide tax, of April 1, 2010 as well as several later deadlines have already been missed because of this crazy bit of opportunism and this may not be the end of the story if the Congress decides to do a BJP in case it sits in opposition ! 

The only major issue on which the two manifestos differed was on foreign investment in India’s $ 400 billion retail market. “Barring multi-brand retail, FDI will be allowed in sectors wherever needed for job  and asset creation, infrastructure and acquisition of niche technology and specialised expertise,” the BJP manifesto said.  Congress has already decreed it open, in the teeth of opposition from the BJP, the Communist parties and Trinamool Congress. While the Communists and Trinamool feel opening up retail to foreign investors like Wal-Mart, means selling out the country to global multinationals, BJP has more hard boiled electoral reasons for objecting to it.

 

Analysts pointed out that the 25-million strong small retail community in the country has traditionally been voting BJP and its earlier avatar Jana Sangh, hence it made sense for the party to oppose foreign investment into hyper-markets which challenge their businesses. Local big retailers like Reliance, Godrej and Big Bazaar have however not been opposed by the BJP, though business lobbies were quick to react to BJP’s opposition to FDI in retail terming it as “disappointing.” Said FICCI chairman Sidharth Birla “we feel disappointment on the stand on FDI in Multi-Brand Retail, we hold out hope for a possible review in the future.”

 

The BJP manifesto also blamed UPA for “tax terrorism” and uncertainty for denting the country’s image and creating anxiety among businesses, and promised a “non-adversarial tax environment”. The UPA government had brought in a retrospective tax law amendment after it lost a Supreme Court case against British telecom giant Vodafone from whom it had sought tax deductible at source for contracting purchase of Hutch Whampoa’s stake in its Indian arm at a tax haven. A case, which may have prompted Birla to describe the BJP manifesto as “investment friendly”.

 

The right-wing party’s manifesto also called for rationalising India’s tax system without going into any specifics. This is in sharp contrast to its 2009 manifesto where it sought raising tax free income to Rs 3 lakh a year, a demand which was echoed in a report on a Direct tax Code by a Parliamentary Committee chaired by Yashwant Sinha, former finance minister in the BJP led NDA government of 2001-2004.

 

The Congress-led UPA had  proposed the Direct Tax Code. However, it was unwilling to accept the Committee’s report in full, leading to a parliamentary deadlock on the passage of that vital legislation too. North Block had dismissed the demand for raising the tax ceiling and other sops sought by the committee, stating this could lead to an annual revenue loss of Rs 60,000 crore to the exchequer, which the Government could ill-afford. Some feel that with chances of being able to cobble a ruling coalition becoming brighter, the right-wing party now feels it is best not to make promises which may be difficult to keep.

 

However, this was not the only subtle indication that if voted to power, BJP’s economic agenda would be no different from that of the Congress. Both parties promised in their manifestos to boost India’s manufacturing sector, with BJP calling for turning India into a “Global Manufacturing Hub” and Congress calling for “building India as the world leader in manufacturing ... ensure(ing) 10 per cent growth”.



Rahul Gandhi with the Congress Manifesto
 

 

Both said they want to create a “single-window system” both at the Centre and States to expedite land, environmental, power and other approvals for investors. Both backed food subsidies, despite also calling for fiscal discipline in the same breath.

 

Not surprisingly, both BJP and Congress also promised to build high-speed rail, a project which was first thought of during the Manmohan Singh government’s as India's response to China's high speed tracks. The Government identified some six routes for taking up the high speed project. Said a Railway Board member “like everything else both parties want to take credit for whatever the system throws up which may prove popular and disavow hard decisions like raising fares and cutting subsidies, which prudent economics demand.”

Manmohanics is Back

Manmohan Singh is back as `Salman Khan' aka `Tiger' !*

 

Manmohanics is finally back. On Friday night, a cabinet headed by prime minister Manmohan Singh, the original reforms man, decided to allow foreign direct investment into India's $ 600 billion retail market, albeit with riders and limited to willing states,.

It also agreed to let power exchanges sell stake to foreign owners, allow foreign airlines to buy into Indian carriers, hike FDI levels in non-news broadcast services and disinvest in 4 blue-chip public sector firms which could rake in about $ 2.5 billion.

Hit by charges of sleeping on the job and of ushering in an era of policy paralysis, Singh’s cabinet, which earlier this week cut subsidy on diesel, by hiking price of the auto-fuel and reduced supply of subsidised coking gas, decided to gamble that a wave of reforms would be too many for recalcitrant allies to take on.

The prime minster, who is credited with having introduced the first big burst of economic reforms in the early 1990s ( an early burst of import-export reforms in the early 1980s by then finance minister Pranab Mukherjee is believed to have helped build the stage for his big leap), is believed to have been keen these decisions should be passed and passed in one shot to dispel notions that his government did not have the belly to take hard-nosed decisions and to kick-in an economic climate where Indian and foreign investors would be enticed to invest.

Especially as India’s GDP growth had slowed down from over 9 per cent a few years ago to just over 5 per cent in the last quarter and a threat from global rating agencies of marking India out by giving it the dubious distinction of having its credit rating downgraded to that of junk bonds.

While the Trinamool Congress which boycotted the reform agenda cabinet meet, was busy sending a 72 hour ultimatum for a roll back of diesel prices, the Congress led coalition decided to risk her and another key ally Samajwadi party’s ire by going ahead with FDI in retail.

The idea seems to be that the government will bow down later to Mamata and roll back diesel price hike by 20-25 per cent or increase the number of subsidised cooking gas cylinders allowed per family, letting her claim victory, while going ahead with the bouquet of reforms. ** 

Friday, September 14’s decision will allow foreign retailers like Walmart, Carrefour and Tesco to take up to 51 per cent stake in large format departmental stores, which Indian officials have dubbed multi-brand retail, but will be limited to states which have agreed to allow them. As yet some 11 states and union territories including Delhi, Maharashtra, Assam, Haryana, Andhra Pradesh, Uttarakhand, Rajasthan, Manipur and Jammu and Kashmir.

"The series of policy decisions announced by the Government today signal that India is on the move (and) they send out a clear message to the global investor community that the Government is committed to taking forward next generation economic reforms,”  said an exuberant Sunil Bharti Mittal, who has a tie-up with US giant retailer Wal-Mart.

However, the reform burst did not come just because of a desire to attract investments and check a slowdown in the economy. Many analysts saw this as an attempt to cash in on a period when elections were not on the anvil. The next round of state elections are in Gujarat in November-December. Nearer to that date, the Congress led government will have to go back to being populist and not reformist.

Earlier suggested rules of limiting foreign owned retailers to cities with 1 million plus population have been junked, allowing state governments to decide which cities to allow retailers entry into. However, new terms which ask retailers to invest 50 per cent of funds in back-end infrastructure such as cold chains and processing plants in rural areas have been brought in, making the retail proposition attractive to any state with large agricultural production.

West Bengal does happen to be the largest producer of rice, vegetables, fish and pineapples and second largest producer of potatoes in the country and accounts for about 10 per cent of edible oil produced in the country. However, potatoes often sell at as low as Rs 2 a kg at farm market in the state, while they retail at over Rs 20 a kg in most metropolitan cities and at Rs 10 a kg in Calcutta.

Farmers in West Bengal as in other parts of the country rarely benefit from their huge surpluses the way they would have if middlemen could be eliminated from the supply chain and retailers buy directly from farmers. Commerce Ministry officials hope that big states like West Bengal, Tamil Nadu and Uttar Pradesh will be forced to change tack on foreign retailers once they see the direct benefit to their large farmer communities. 

The reforms burst, is expected to be followed by a cut in interest policy rates or a cut in the cash reserve ratio, the amount banks have to keep with the Reserve Bank, despite inflation still ranging at over 7.5 per cent. The RBI it is believed will be told that the government is making sincere efforts to cut subsidies and hence borrowings and this should give the central banker room to manoeuvre on interest rates. ^

But in all this flurry of grand reforms – one little economic logic does not seem to be working out. New jobs and thence fresh demand needs to be generated to make the old economy to jump to new rates of growth.

* The picture taken from The Telegraph newspaper, is a spoof based on the Bollywood Movie `Ek tha Tiger' (Once there was a tiger) where actor Salman Khan plays the role of a Bond-style super-agent, nicknamed `Tiger'. Here Dr Singh is shown as the new `Tiger'.
** At the end of a week after this was written, a `deal' on partial roll-back did not happen after both sides hardened stands and Mamata hit out accusing the Congress of trying to cover up scams such as Coalgate and of tapping her cell-phone. This seemed to be proverbial Rubicon and the Congress decided to call her bluff and let go of her and her party from the coalition in favour of more pliable allies such as Mayawati's BSP.
^ Three days after the article was written - The RBI stuck to its stand on not lowering interest rates, but it did cut the CRR, pumping in some Rs 170 billion or $ 320 billion into the marketplace, thereby encouraging banks to lower lending rates. 

To Do List for the Indian Economy

New Delhi's Corridors of Power

As finance minister Pranab Mukherjee gets ready to leave the North Block later this week, his successor will be confronted with five critical tasks initiated by him — cut Subsidies to reduce expenditure; fast-track FDI reform to bring in hard currencies; insurance and pension reforms; get infrastructure spending to deliver the goods; and kickstart tax reforms through goods and service tax (GST) and the direct taxes code (DTC). Regardless of whether the job is taken up by Prime Minister Manmohan Singh, aided by his two trusted lieutenants — C. Rangarajan, the former RBI governor, and Montek Singh Ahluwalia, plan panel deputy chairman — or by a politician such as home minister P. Chidambaram or commerce minister Anand Sharma, these five jobs are crucial to India’s future economic course. 1.    Subsidies: Mukherjee has been working with states to make them give tax concessions on petrol and diesel and match the reliefs with similar cuts in central taxes, thereby reducing the government’s fuel subsidy burden. State levies on petrol and diesel range from 15 per cent in Puducherry to 33 per cent in Andhra Pradesh. Karnataka, Maharashtra, Tamil Nadu and Bengal also have high fuel taxes. Besides, the taxes are ad valorem, meaning the amount goes up with the prices. Mukherjee wanted states to cut taxes by up to 25 per cent. The bold measure obviously requires adroit political manoeuvring to get off the ground. Urea subsidy is another area the new Czar at North Block will have to train his guns on. Increasing urea prices every year for the next three years and eventually introducing free pricing in fertilisers will help the government to check its huge subsidy bill and also save farms from being turned into wastelands by the overuse of heavily-subsidised urea. 2.    FDI Reforms : The depreciation of the rupee, which has lost around 24 per cent of its value in a year, is snowballing into a major area of concern. Though India has one of the largest forex reserves, it needs to shore up its investment as a large part of the foreign exchange is in the form of debt.  To bring in a fresh wave of investment, the government wants to not only open up FDI in retail, defence and aviation but also revive stalled insurance sector reforms. 3.    Pension and Insurance reforms : Even if the FDI cap on insurance can’t be raised because of political compulsions, Mukherjee’s other proposals reforming the insurance sector, can lift market sentiments and rake in hard currency. Chief among the reforms is to allow Lloyd’s to open a trading floor in Mumbai, permit foreign reinsurance firms such as Swiss Re and Munich Re to enter India and give a green signal to public non-life insurance companies to raise capital by selling minority stakes. 4.    Spending : Earlier this month, the Prime Minister had held a meeting of infrastructure ministries to try and push them into meeting their spending commitments. But in truth, this job is done best by two people – the finance minister, who holds the purse strings and sits in on all meetings on permission for projects, and by the Planning Commission deputy chairman, who appraises the projects. To rev up growth it is just as important to spend money on infrastructure projects which can pep up the economy as it is to stop spending on wasteful subsidies. 5. Tax Reforms: Implementation of the goods and services tax will be on the top of any finance minister’s priorities. This tax reform measure, which will help to unify India’s markets and increase its GDP by 1-1.5 per cent, has been held up because of opposition from BJP-ruled states and to an extent by Bengal. The direct taxes code, will, however, be a simpler task as most of the hard work has already been put in by Mukherjee’s team and now just requires some fine tuning.