The fundamentals of reform

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One of the surest ways of slowing down reform is to identify it wholly or substantially with a specific course of action. Reform is actually about changing things for the better.

The dictionary defines 'reform' as an effort "to improve or remove faults." Why should anyone object to that? However, if selling off public sector assets is touted as reform, it can easily be stalled because one can always marshall arguments against it in a politically-surcharged atmosphere.

The fact is reform can "" and should "" mean different things at different points of time. In the fifties, when capital was scarce, setting up a big industry in the public sector constituted reform. The country couldn't have developed without that.

Today, the opposite may look more like reform. What constitutes reform may, therefore, depend on when and, in what context, we are discussing it.

This means one must define the issue that needs solving clearly before we talk about reform. It's easy to say reform means removing subsidies. But it's a lazy way of making the argument. When millions of people can't afford basic things in life, how can the removal of subsidies be called reform?

Real reforms may involve looking at inefficiencies in the delivery of subsidies, cutting off subsidies to people who don't deserve them, or even increasing subsidies to those who desperately need it. True reform-minded people should never talk about removing subsidies in the abstract. They should first define the core of the issue, and then seek a consensus on ways to achieve it.

Ram Naik would like to continue subsidies on kerosene and LPG because they will affect the 'common man.' The business press thinks this is retrograde. However, who can deny he will find a lot of political support for subsidies.

If, on the other hand, we take his observations at face value and accept that subsidies are necessary for some people, the question will then turn to who these people should be, and how the subsidy can be delivered at the lowest possible cost.

Are ration shops and public sector companies best suited to deliver this subsidy? When I see poor people queuing up for hours to collect a few litres of kerosene, I cannot but feel that the system has been hijacked by middlemen.

One way to mitigate this would be to pay the subsidy for existing kerosene drawers in cash "" through direct credits to bank or post office savings accounts. Anyone can then buy kerosene from any vendor without losing the subsidy. The experiment could be tried out in the big metros first before extending it to rural areas.

Another way would be to fix the level of subsidy per litre of kerosene or a cylinder of LPG and then ask private or international marketing companies to create the infrastructure to deliver the products. This way, the inefficiencies in the public distribution system need not add to the subsidy burden.

Or take tax reform. It is assumed that the tax net must be cast wide, so that average tax rates can be kept low. But a lot depends on the objective of tax reform. If the idea is to collect increase tax revenue, it may be far better to focus efforts on getting high income earners to pay up than to widen the tax net to all and sundry.

Remember the 80:20 rule? If 20 per cent of taxpayers account for 80 per cent of revenues (or something like that), reforms aimed at increasing revenues from this 20 per cent should make it easier for the big fish to pay up.

How much sense then does it make to force every person who has a telephone line to files tax returns? It may also be far more cost-efficient to simply deduct tax at source on all incomes. This may inconvenience a few people who may not fall within the tax bracket, but that's a small price to pay for compliance as long as refunds are orderly and timely.

Or let's look at the public sector. The idea is to make them competitive "" who owns them hardly matters if they are profitable and run well. The question then is how can they be run well? The answer need not always be that they must be privatised. If the finance minister makes it clear how he will judge the performance of a public sector company, and define the limits of budgetary support, it is then upto the management and unions to find ways to make it profitable. That would be a neater way of side-stepping arguments about national interest "" if the question of privatisation comes up.

We know from experience that ministers are more interested in feathering their nests than in serving the nation. But the best way to call their bluff is to take them on their own ground and ask them to deliver. Reforms will move forward once we are clear on fundamentals.

rjagann@business-standard.com