Arthakranti is an interesting take on the Indian economy. However, informed discussions and revision are required to take India forward

Innovation is the key to development. A country with 67 years of democratic rule, experimented with several economic policies with not much success. The proposals of Arthakranti awaken fresh thinking but many proposals need informed discussion and revision.
 

Empowering Democracy
 

Monthly allowance to politicians in the place of already ill-spent annual grant of Rs2 crore for each Member of Parliament (MP) and all the legislators. There is no social audit for such expenditures. In fact, there is a case for removal of this extravaganza that is hurting the poor by depriving them of the subsidy or insurance.
 

Instead, I would prefer tax-exempt donation from all corporate, annually, to an electoral fund to be maintained by the Election Commission. Election expenditure can be given out of this pool three months prior to the tentative period of elections. The release should be related to the size of the electorate and the geographical space to be covered, with the type of terrain to be factored into it.
 

'Irrespective of the party to which one belongs, every person who stands for elections could be given this, with a cap on the number of candidates applying for the release. The Election Commission can disqualify candidates with criminal record, apart from those who are mentally retarded and other existing disqualifying criteria on record.
 

This would help some of the intellectuals joining the Electoral College to establish cleaner political system. Any corporate entity representative in the upper house should be able to fund for himself/ herself and not depend upon the fund. The criteria for release should be transparent and can even be legalised through a constitutional amendment.
 

Developed India
 

Rather than seeking urbanisation as this (urbanisation) is a continuing process and is happening all through at an accelerated pace, we should provide amenities to rural areas. We would have achieved urbanisation—good schools; good hospitals, good roads, safe drinking water, drainage and sewerage system and private latrines, and so on. The resources should be drawn preferably from sub-regional fiscal allocations – i.e. the panchayats and blocks/mandals. For the assessment of needs, it can best happen at the village level and not at the district and State levels. Therefore, there is need for insisting on a transparent mechanism of sub-regional allocations and releases of the resources.
 

The ability of the villages to levy taxes and cess just does not exist; and even if it existed, it has to be integrated with the regional resource pool. For example, property taxes, drinking water cess or drainage cess can be collected at the village level and their deployment for effective maintenance can be ensured through a decentralized monitoring mechanism that should include professional surveillance and social audit. The Fifteenth Finance Commission could be working a way out on this front.
 

Fiscal deficit is bound to exist to some degree or the other as the State has a constitutional responsibility to ensure welfare, safety and security of all the citizens. National calamities, defense, and high quality research shall be the domain of Central government.
 

Black Money and Parallel Economy
 

As Anil Bokil rightly investigates, we have excess money in circulation than the goods and services produced – the raison d’etre for persisting inflation and deceleration in growth. The window is higher denominations, especially Rs500 and Rs1,000. All the currency seizures by the Anti-Corruption Bureau (ACB) and Central Bureau of Investigation (CBI) raids were precisely in these currencies. All the money stashed in foreign accounts of Indians through hawala deal is hidden.
 

While the monetarists and currency managers argue over the rising costs of commodities, the average monthly consumption goes only in multiples of these higher denomination currencies. Second, ATM usage also demands feeds in higher denomination.
 

Despite protection, plastic money is likely to be pushed fast by the Reserve Bank of India (RBI) to increase penetration. If a merchant refuses to accept the debit or credit card and demands additional 3%-5% for its acceptance, there is no law to penalize such merchandise establishments. Likewise, if somebody does not accept the legal tender like a Rs5 denomination note, there is no law by which you can punish them. The latest move of the RBI to siphon out pre-2005 currency would significantly snuff out black money and should be considered the best move in currency management the central bank ever thought of.
 

There are other areas that get missed out from calculating the gross domestic product (GDP). All the wealth generated by the garbage pickers, waste dealers, scrap dealers, timber transactions and retail jewelers are cash-based transactions. They may or may not have even individual bank accounts. It is unlikely that they will accept cheques. They do not pay any income tax or value added tax (VAT) or service tax. This area generates lot of black money that the country failed to curb for decades.
 

If the financial inclusion efforts with technology infusion bear fruit and all the villagers are banked, currency management by the central bank and fiscal management by the Central and State governments has tremendous scope to improve.
 

Incentives for investments
 

Incentives should come from the growth rather than through the exemptions and fiscal management. There are certain conceptual aspects that need to be kept in mind while discussing tax reforms—incidence and impact of taxes, constitutional obligations; Center-State and State--Sub-State relations vis-a-vis the obligations to citizens towards development and welfare. The other important areas are equity and justice.
 

One of the fundamental principles of taxation is that it should be progressive at higher income levels and regressive at lower levels. The Direct Tax Code (DTC) takes cognizance of this. It is not unlikely that as the system matures and cash economy gets smaller, the tax rates would be further rationalized from the existing three slabs of 10%, 20% and 30% of the taxable income. All exemptions shall be withdrawn.
 

Some of the limitations imposed by the Indian Constitution would need to be kept in mind for any tax reforms:

1. It must not contravene Article 13;
2. It must not deny equal protection of the laws, must not be discriminatory or arbitrary (Article 14);
3. It must not constitute an unreasonable restriction upon the right to business (Article 19 (1) (g));
4. No tax shall be levied on the proceeds of which are specially appropriated in payment of expenses for the promotion or maintenance of any particular religion or religious denominations (Article 27);
5. A State Legislature or any authority within the State cannot tax the property of the Union (Article 285);
6. The Union cannot tax the property and income of a State (Article 289)
7. The power of a State to levy tax on sale or purchase of goods is subject to Article 286;
8. Save in so far as Parliament may, by law, otherwise provide a State shall not tax the consumption or sale of electricity in the case specified in Art 287;

Payments and settlements
 

Annual Report 2011-12 of the RBI has this interesting data:
 

Systemically Important Payment Systems (SIPS) that include Real-time Gross Settlements (RTGS) increased in volumes from 33.2 million in 2009-10 to 55 million in 2011-12—with corresponding value of Rs322.8 lakh crore on and Rs484.9 lakh crore, respectively.
 

Cheque clearing transactions covered 1400 million in 2009-10 with a value of Rs114 lakh crore and these has remained almost stable in 2011-12.
 

Electronic clearing significantly moved up between 2009-10 and 2011-12: from 313.7 million to 512.3 million with corresponding values of Rs6 lakh crore and Rs20.6 lakh crore, respectively.
 

These figures no doubt reveal that the role of technology in circulating high volumes of transactions.
 

There is enough evidence today that growth led to reduction in poverty. Prof SS Bhalla has proved, in a piece in Inclusion, that during the 21-year period (1984-2005) growth was around 55% and poverty decline was about 2% per annum (in log terms). In the five year period since 2004-05, as the growth increased the pace of poverty decline also more than doubled to 4.7% per annum.
 

In fact, I would venture to suggest that the best way to reduce imbalance and ensure growth is through increasing share transaction tax from 0.15% to 1% at both the ends. There will be a hue and cry immediately after such increase but the dust would settle down eventually. The philosophy behind is that the buyer sells for a future gain and the seller sells for avoiding immediate loss (a loss of expected surplus). In a way, both are gainers. The tax is paid out of only the surplus. The tax is not going to be regressive just because it is done at both ends of the transaction. It has least administrative and surveillance costs and, on top of it, the tax is collected instantly and made available to the Government for investment in either social expenditure or for addressing the natural calamities concerns. Actually, to this extent even the corporate tax structure can be rationalised in subsequent years. This would help the Fiscal Responsibility Budget Management significantly.
 

(B Yerram Raju (is an economist and risk management professional)