Commitment phobia

Appointing committees to chalk out roadmap for reforms
is meaningless unless the proposals are implemented

By Mohan Sule

The withdrawal of the Tatas from the race to start a bank has triggered a debate on the state of banking in India and the norms for new entrants. Earlier, the manufacturing sector was not entertained based on the historical baggage of the pre-nationalization days. Even as a three-member team headed by Bimal Jalan is sifting through the applications, there is a realization that the attractiveness of founding a bank as a vehicle to raise cheap money comes at a heavy cost of restrictive compliances. The Reserve Bank of India governor’s indication that issuance of bank licenses could be a periodic exercise rather than a one-off affair (10 new banks were set up in 1993 and just two in 2001) not surprisingly failed to generate the euphoria in the stock market triggered by the 2010-11 budget announcement. A perusal of the guidelines reveals that the government basically wants the private sector to replicate PSU banks, which are no great role models. This is typical of India’s liberalization process: erring on the side of the caution. Most often a panel is assembled as a short-term answer to douse a controversy. Resolution of water sharing between states, communal harmony, and disputes over shrines have been assigned to commissions. By the time the report comes out, the issue has lost its potency to cause trouble.

Committees are formed to spell out norms that the policy makers desire but are under pressure not to act due to the sensitivity of the issue: taxation of investment coming from Mauritius puts off a friendly country as well as foreign investors. Issues confounding policy makers, too, are parceled out: eminent members have been empanelled to decide the difference between foreign institutional investment and foreign direct investment. Hindsight wisdom of experts is an expedient answer to plug unexpected loopholes. Taxation of capital gain on transfer of Indian property owned by foreign owners cropped up only after Hutchison Whampoa of Hongkong sold its stake in Indian telecom services provider Hutchison-Essar to Vodafone of the UK. Some issues explode without warning. Differences over microfinance institutions making profit snowballed after Andhra Pradesh banned them. Some issues are ever-evolving, throwing up new challenges. A takeover regulation that is fair to the promoters as well as the minority shareholders is a simmering topic that occupied the minds of many corporate honchos invited by Sebi to participate in solution-finding sessions. With the increase in cross-border deals, the domestic framework has to keep pace with international practices. Another buzz word is corporate governance. Sometimes the aim is to find a middle path. The Nandan Nilelkani committee on cash transfer of subsidies on kerosene, LPG and fertilizer was born out of the government’s desire to continue support the weaker section and at the same time reduce the fiscal deficit. Often the textbook prescriptions spewed out are hard to implement. In such cases, the bitter medicine is put off for another day. For instance, the Kirit Parikh committee on fuel subsidies in 2010 had suggested full deregulation of diesel prices and periodic increase in LPG and PDS kerosene prices.

Another standing committee on finance, headed by former finance minister Yashwant Sinha, ahead of the 2012-13 budget had submitted sensible direct tax proposals that would enlarge the slabs for lower personal tax rates. But these were watered down by then finance minister Pranab Mukherjee. The Goods and Service Tax reform, initiated in 2000 to substitute Central excise duty and state sales tax, is still on paper as there is no consensus on revenue sharing between the states and the Center. The Tarapore committee’s criteria for capital account convertibility in 1997 are yet to be met. Similarly, the Telecom Regulatory Authority of India mooted a 60% cut in the base price of the November 2012 and March 2013 spectrum auctions, which had flopped. Instead it was hiked up to 25%, reflecting the short-term focus of the government on bringing down fiscal deficit. The Bimal Jalan committee in November 2010 did not favour listing of exchanges and wanted a cap on their profit. Sebi rejected the proposal and so also the suggestion that each promoter should hold only 5% equity right at the start instead of over three years. The report of the Vijay Kelkar committee on fiscal consolidation in September 2012 recommended bringing down fiscal deficit to less than 5% of GDP in FY 2014 by a combination of share-sale of state-owned companies, pruning petro-product subsidies and raising prices of diesel and LPG or cooking gas, and execution of GST. The outcome of the failure to do so is amply visible: one of the worst slowdowns in India’s history.