by Arvind Subramanian, Peterson Institute for International Economics
Op-ed in the Business Standard, New Delhi
September 27, 2012
© Business Standard
Dear Mr. Yashwant Sinha (and other like-minded members in the Bharatiya Janata Party),
May I have the temerity to suggest that you call a press conference (perhaps even jointly with Mr. Chidambaram) to announce the following: The Bharatiya Janata Party (BJP) will, in the non-partisan and patriotic spirit that Mr. Vajpayee embodies, work with this United Progressive Alliance (UPA) government to ensure that the bill paving the way for implementing the goods and services tax (GST) is passed immediately.
As you well know, passage of the GST requires amending the Constitution, which cannot happen without the support of the BJP at the center and of BJP-governed states. Why should you and your party step up to the plate? Let me elaborate some non-political reasons for doing so and then assess the political costs and benefits.
On economic policy, heaps of opprobrium have been hurled at this UPA government. And deservedly so. You and Messrs Jaswant Singh and Arun Shourie, during the period 1998–2004, were probably much better stewards of the economy than this government has been. But in the last few weeks, with the economy teetering at the edge of permanently slower growth, this government has re-invigorated the reform process. The BJP has an opportunity to push this forward in one key area, which could be a game-changer for India, its finances, and even its long-run national security: passage of the GST.
First and foremost, the importance of the GST cannot be overstated. Vijay Kelkar, who you will recall was part of your government, has persuasively made the case for the GST. It will create a buoyant source of revenue and place the fiscal position on a permanently solid footing. It will help tax administration and reduce corruption in indirect tax collection. And it will serve to make India more of a common market.
Second, you are in many ways one of the fathers of modernizing the indirect tax system. In 2001, it was your master stroke of creating the Empowered Committee of Finance Ministers (ECOM) and choosing a political rival (Asim Dasgupta of the CPM) to head it that allowed the political consensus to be forged that then facilitated the implementation of the state-level value-added tax (VAT). Now the shoe is on the other foot: You head the parliamentary committee on the GST and your BJP colleague is head of the ECOM. Why not in opposition help complete the task you started while in power?
Of course, you are a politician looking to maximize political gain. So, your calculation for being obstructionist is understandable: You do not want to hand over any gains that this government might reap from successfully implementing the GST. But here's the thing. The BJP is unlikely to suffer any political costs in terms of reducing your electoral fortunes and boosting those of the Congress. In fact, you may even benefit from acting in a non-partisan fashion.
Start with the possible costs. The GST will create winners and losers, but not in a way that is systematically worse for you or the Congress. True, depending on where tax rates are set, there will be some states that will face revenue shortfalls in the short run—but there is no reason why these states cannot be compensated along the lines suggested by the 13th Finance Commission.
It used to be said that indirect taxes would hurt a key constituency of the BJP: namely the small trader, because he would have to keep better accounts and would find tax evasion more difficult. But in implementing the state VAT a decade ago, you discovered that the costs on small traders were not significant. The GST experience is unlikely to be dissimilar. Mr Sinha, you will not lose one vote in Hazaribagh because of supporting the GST.
Your justifiable political worry may be that implementing the GST would be so good for the economy that this government would stand to benefit in the next elections. But you don't have to worry because the timing works against that argument. In the best of worlds, the GST will begin to be implemented probably in late 2013 or even early 2014. Its positive economic impacts, which will undoubtedly be considerable, will only start being felt well after the next election not least because of the considerable glitches that will have to be overcome. So, the indirect political costs to you (and benefits to this government) will be negligible if at all.
You may also worry that mere passage of the GST bill will redeem this government's reputation in the eyes of domestic and foreign investors. True, the near-irretrievably tarnished image of this government will begin to look up. But you should not overstate the impact of the GST's passage on investor confidence. Investors, especially foreign ones, are less focused on the GST. They are too short-sighted to really understand the impact of structural and long-term reforms such as the GST. They care more about foreign direct investment, reforms in the financial sector, and the further opening up of other capital flows. So, by all means go ahead and stymie those legislative efforts that investors care more about. But the GST can be spared your opposition without any such fear.
In sum, Mr Sinha, it is the nature of this GST beast that its benefits are huge but, importantly from your political perspective, long-term and non-obvious. Neither the typical voter in India nor the fund manager in New York and London is likely to be swayed by passage of the GST. Therefore, there is little risk that you will be handing discernible political benefits to this government.
Perhaps that political calculation alone, rather than any lofty sense of doing what is good for the country, can persuade you to help pass the GST. But you might even be surprised. The middle class, whose opinion can be quite influential, has noticed that the BJP has behaved as if being in opposition has relieved the party altogether of obligations towards the country. In the case of the GST, they also see double standards at work because they know that in power you would have pushed for the GST as strongly as you are now resisting it out of power. A demarche of Vajpayee-esque non-partisanship to rid the odor of obstructionism and hypocrisy surrounding the BJP may well earn you some goodwill from this middle class. Lord knows the BJP needs it.
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