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Contrary to popular wisdom

For the Prime Minister, reforms are about changing the template of government and governance.

Published: 31st December 2016 10:00 PM  |   Last Updated: 31st December 2016 02:22 PM   |  A+A-

For the Prime Minister, reforms are about changing the template of government and governance. Hence, an institutional change is being attempted, picking up strands pending for years. Demonetisation is part of that jigsaw. 

Institution means some kind of established practice. Those who are from within the system rarely change institutions. If not captive to vested interests, they are certainly captive to some variety of the Stockholm syndrome. Narendra Modi has often been demonised (the word has a phonetic resemblance to demonetised) and vilified, even before he became PM.

At least in part, that’s because he is an outsider, and perceived to be one by people who inhabit the so-called Lutyens Zone. He isn’t from the PLU (people like us) set. It is always difficult to understand an outsider and anticipate what an outsider is likely to do. An outsider doesn’t believe in shibboleths. To use the clichéd expression, he/she doesn’t think out of the box. He/she doesn’t believe in boxes.


I will use the economic domain to make my case. First, in December 2014, we had recommendations of the 14th Finance Commission, seeking an unprecedented increase to 42 per cent (from base of 32 per cent) in State share, as untied funds, from divisible pool of taxes. Given the 7th Pay Commission, other expenditure commitments and deficit reduction compulsions, it would have been tempting to stagger this, first increase to 37 per cent, 42 per cent later.

Or even postpone implementation of the Finance Commission recommendations. Neither was done. Second, Planning Commission was replaced by Niti Aayog.

I will not get into the mandate of either. When was Niti Aayog’s formation announced? PM announced it on August 15, 2014, in his Independence Day speech. When was Niti Aayog actually constituted? January 1, 2015. A lot of work had already gone into revamping the Planning Commission, documented in Arun Maira’s book (An Upstart in Government). If all that work had been done, but not implemented, why did it take five months, from August 1, 2014 to January 1, 2015? Because there were further consultations on the shape of Niti Aayog, including on the name, through my.gov.in. Also, think of something I will not spell out. How many Members did Planning Commission originally have? How many did it have when it was wound up in 2014?

How was their composition determined? How many does Niti have? Working around entitlements was part of the reason for the five-month delay.  

Third, overall, beyond the 42 per cent share, States used to get additional money as Central Sector and Centrally sponsored schemes. Adding these, the aggregate is 62-63 per cent. There were a plethora of these and in the new post-14th Finance Commission scenario, Niti Aayog could have determined their nature and template. Instead, three sub-Groups of Chief Ministers were set up to decide what they should be. Fourth, not only has the Plan versus non-Plan distinction gone, the Railway Budget, as we have known it, has also been scrapped. As a specific proposal, the idea of abolishing the Railway Budget had been pending since at least 2001.

Fifth, in 1984, there was a LK Jha Committee to recommend a change in the financial year. I will not get into the merits/demerits. In 1993, the then Deputy Chairman of the Planning Commission wrote to the then Finance Minister, wanting to know when the recommendations would be implemented. Dr Manmohan Singh wrote back saying the country was in the midst of introducing reforms and it wasn’t the right time. That’s been resurrected.

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Technically, a committee, chaired by Shankar Acharya, has been set up to examine the proposed change. But, in the interim, the Union Budget has been brought forward to 1st February. Sixth, in 1998, a government-appointed committee identified 1,700 old statutes for repeal.

Barring around 200 repealed in 2000/2001, nothing happened to the rest. In 2014, we had a Ramanujam Committee, set up by the PMO. To cut a long story short, through four Acts in 2014 and 2015, around 1,200 old statutes have been repealed. Sure, repealing is the easier part of reforming statutes and rationalisation/harmonisation of remaining ones needs to follow.

But a beginning has been made. Seventh, tribunals and autonomous institutions are being reviewed. Eighth, there is no satisfactory bankruptcy legislation for unincorporated enterprise, assets/liabilities for the enterprise equated with that of the entrepreneur.

The 2016 Bankruptcy Code addresses this, but the issue has been pending since 1998. I can keep adding to the list, but my purpose is not to list out everything the new government has done since May 2014. I think each of these examples illustrates a simple point. It is not business as usual and incremental. An institutional change is being attempted, picking up strands pending for years.

Demonetisation is part of that jigsaw. It is singularly inappropriate to understand it only in terms of what happened on November 8, 2016. On narrow economic grounds, shorn of other measures, most economists will describe it as not worth the effort, as indeed several of them have. Consider a base figure of `16 lakh crores of high denomination notes in the system on November 8, perhaps `15.5 lakh crores of that in the hands of the public proper. Let’s assume by the end of December 2016, `14 lakh crores of that come into the banking system; 90 per cent of “black” has been “legitimised”. For the sake of a measly 10 per cent, what was the point of putting everyone through the inconvenience? As someone said, this was a “mammoth tragedy”.

Why just economists? Most social scientists and commentators have also condemned it. That’s understandable. PLUs and insiders are risk-averse. Why take a risk and rock the boat? The gains, including electoral ones, are uncertain. I think commentators haven’t appreciated the examples I gave and the contemplated institutional change. “Reforms” aren’t about tinkering with Chapter V-B of the Industrial Disputes Act and GST, as most people have interpreted reforms. For the PM, reforms are about changing the template of government and governance.

In the November 8 instance, I think people have appreciated this big picture better than commentators. That’s the reason, regardless of which survey, majority have supported the move, notwithstanding the inconvenience.

Let me give you a quote from the finance ministry’s press release on November 8. “In the last two years, the Government has taken a number of steps to curb the menace of black money in the economy including setting up of a Special Investigation Team (SIT); enacting a law regarding undisclosed foreign income and assets; amending the Double Taxation Avoidance Agreement between India and Mauritius and India and Cyprus; reaching an understanding with Switzerland for getting information on Bank accounts held by Indians with HSBC; encouraging the use of non-cash and digital payments; amending the Benami Transactions Act; and implementing the Income Declaration Scheme 2016.”  

This, and other straws in the wind, imply the following. (a) There are other measures to prevent creation of new black income. (b) Non-cash forms of existing black wealth are being targeted. (c) Just because “black” has been brought into the banking system, it hasn’t been “legitimised”. That’s subject to further scrutiny, taxes, penalties. (d) Those straws in the wind suggest more action on gold (not jewellery), real estate and capital markets and even on political funding and electoral reform.


Here is a Sir Humphrey Appleby quote. “‘Controversial’ only means ‘this will lose you votes’. ‘Courageous’ means ‘this will lose you the election’!” Those captive to the Stockholm syndrome avoid either type of decision. An outsider challenges popular wisdom.
    The author is a member of the Niti Aayog

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