Much is expected from the Union Budget to be presented at the end of this month. Many hope that it will lay the foundation for second-generation reforms, and a sustainable push towards making it easier to do business in India - the price of success for the prime minister's "Make in India" campaign. There are some disquieting indicators, however. Recent newspaper reports have suggested that the government is seriously considering various tweaks to the tax system in order to achieve its policy ends - in spite of the fact that such tweaks are often anti-reform, backward-looking and have been shown by India's history to be overall counter-productive.
This newspaper reported on Monday, for example, that the minimum alternate tax, or MAT - which is meant to provide a floor for tax demands on companies, as an important component of a simple tax code - might be needlessly complicated. According to the report, a differential MAT structure might be introduced for regular companies, small and medium enterprises, and infrastructure companies. This would be yet another distortion in an administrative structure that already incentivises companies to stay small - the very opposite of what a genuine manufacturing revolution would require. Indirect taxes are also apparently being re-examined from the perspective of "Make in India".
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It is not just the internal tax system the government appears willing to tinker with. There are also reports that the tariff structure will be rejigged to enable greater competitiveness for Indian goods, particularly those from the electronics sector. Certainly, inverted tariff structures - where imported inputs are over-tariffed as compared with final products - need attention. But the answer is to lower tariffs across the board, so as to allow Indian manufacturers to slot themselves into global supply chains, and not to raise tariffs arbitrarily to protect their pricing power, in response to lobbying from industry. Such import substitution is always tempting, but India has had a long history of experimenting with such tariffs and, regardless of how virtuous the cause, the outcome has always been the same: less, not more, competitiveness. Greater arbitrariness over taxes helps nobody except bureaucrats and well-connected but uncompetitive firms. It does not help investors, consumers, or job-seekers - and it is these, surely, who are the new government's primary constituency.
The run-up to every Union Budget is accompanied by many demands from industry, and the government has to give them a patient hearing. But the time has passed for sector-specific concessions. If the Narendra Modi-led government is serious about making India a better and more transparent place to do business, it should refrain from making minor changes in the tax system to suit the narrow interests of certain sections of the economy. Instead, it would ensure that there are fewer distortions, fewer differential slabs and less arbitrariness. Reducing the scope for lobbying, evasion, rent-seeking and protectionism is precisely what India needs from second-generation reforms. If the Union Budget fails to move significantly in that direction - and worse, if it slides back towards pre-1991 thinking - then investors and genuine entrepreneurs will be sorely disappointed.
