A deal for now: US-Iran Nuclear Deal

Iran and the United States sign an interim accord with a June 30 deadline for a final agreement, but the U.S. keeps “all options open” if any aspect of the deal is ignored. By JOHN CHERIAN

IT was evident for some time now that a “nuclear deal” between the United States and Iran was imminent. Reports based on official briefings from both Washington and Tehran in the last couple of months had suggested that only a few differences remained to be ironed out. Finally, after hard bargaining over details in the eleventh hour, an interim deal was announced in the Swiss city of Lausanne on April 2. The deadline for the final agreement has been set for June 30. Neither the reelection of Benjamin Netanyahu as the Prime Minister of Israel in March nor the threat of Republicans in the U.S. Congress had any negative impact on the outcome of the nuclear talks.

The talks held by P5+1 (the five permanent members of the United Nations and Germany) with Iran were also in favour of a quick nuclear deal. Although the P5+1 is formally part of the negotiations, it is U.S. Secretary of State John Kerry and Iranian Foreign Minster Mohammad Javad Zarif who did most of the talking for more than two years. The technical aspects were dealt with by the U.S. Energy Secretary Ernest Moniz and Iran’s energy chief Ali Akbar Salehi. Both of them are trained nuclear physicists.

Under the draft nuclear accord, Iran has agreed to reduce by around 40 per cent of the centrifuges that it can operate to produce enriched uranium and to substantially cut its stockpile of low-enriched uranium. The U.S. claims that Iran has agreed to reduce the stockpile from 10,000 kilograms to 300 kg for the next 10 years. Iran has not yet confirmed that it has made such a commitment.

The duration of the nuclear deal will be for 15 years. The Barack Obama administration was pressing for a 20-year deal. Under the interim deal, Iran will not have to dismantle any of its existing nuclear facilities. The Obama administration had initially demanded the dismantling of a few. After 15 years, Iran will be allowed to produce as much enriched uranium as it wants to. Under the terms of the agreement, Iran will be allowed to conduct research and development on advanced centrifuges. Iran, being a signatory to the nuclear non-proliferation treaty (NPT), has the “inalienable right of all the parties to the treaty to develop, research, produce, and use of nuclear energy for peaceful purposes without discrimination”.

On March 20, Obama took the unprecedented step of issuing a video appeal to the Iranian people on the occasion of Navroz, the Iranian new year. He said a nuclear deal would open up a brighter future for the people of Iran. At the same time, he warned that Iranians would face more sanctions and isolation if their government did not agree to a deal. A “reasonable deal”, he promised, would open up hitherto closed vistas for Iranians in various fields. Obama once again cited the “fatwa against the development of nuclear weapons” issued by Iran’s Supreme Leader Ayatollah Ali Khamenei. After the signing of the nuclear deal, Zarif reiterated that the country’s nuclear programme “has always been and always will remain exclusively peaceful”.

When Hassan Rouhani assumed office as President of Iran in 2013, he pledged to “reconcile with the world”. The backing of Ayatollah Khamenei has been crucial to the success of the Iran-U.S. nuclear talks so far. As otherwise, hardliners in Iran would not have agreed to some of the conditions put forth in the preliminary deal. The Obama administration wanted Iran to curtail its missile programme. Iran, it seems, has stood its ground on this issue. In the face of emerging threats in the region, missile defence is crucial for Iran’s security.

The U.S. has promised to lift most of the draconian sanctions it has imposed on Iran after the framework agreement comes into force. Obama has the authority to lift some of the sanctions with immediate effect. The sanctions had a serious impact on Iran’s economy, affecting almost all the key sectors.

Zarif described the agreement as a victory and said it demonstrated that Iran “will never bow to pressure”. There were celebrations on the streets of Tehran when the agreement was announced. From the details emerging out of the U.S. interpretation of the interim agreement, it is possible that Iran has made quite a few concessions but as the U.S.-Iranian commentator Trita Parsi observed: “Small minds will obsess over what has been given. Great minds will celebrate over what has been gained. We are steering a clear path to a peaceful resolution to the nuclear dispute.” Before the final deal is clinched, Washington may try to squeeze Tehran even further. The “fact sheet” released by Washington states that “important implementation details are still subject to negotiations, and nothing is agreed upon until everything is agreed upon”.

Iran has already agreed to be subjected to intrusive International Atomic Energy Agency (IAEA) inspections. The “core” of Iran’s heavy water reactor in Arak will be removed and the facility will be redesigned so that it can produce only non-weapons- grade plutonium. The Fordow nuclear plant will be turned into a nuclear research centre without fissile material.

In 2010, Iran agreed to a proposal by Presidents Lula da Silva of Brazil and Recep Erdogan of Turkey for the despatch of 50 per cent of its low-enriched uranium to Turkey in exchange for higher enriched uranium for medical use and research. The Obama administration rejected that proposal out of hand and instead imposed additional sanctions on Iran.

Although the joint statement released at Lausanne by Zarif and the European Union (E.U.) foreign policy chief Federica Mogherini talks about the lifting of all sanctions, including those imposed by the U.N. Security Council and the E.U., following the implementation of the Joint Comprehensive Plan of Action, there is no guarantee that the sanctions will be lifted in the immediate future. According to the fact sheet released by the U.S., the sanctions will only be “suspended” and if the U.S. and its allies conclude at any time that Iran has violated the terms of the deal, then the “sanctions will immediately snap into place”. Obama had earlier specified that the aim of the agreement was “to cut off every pathway that Iran could take to develop a nuclear weapon”. Any agreement with Iran, he said, “would not be based on trust” but instead on “unprecedented verification”.

At a conference in the White House soon after the deal was announced, Obama gloated that the deal was the result of “the toughest sanctions in history”. He issued a warning that if Iran failed to implement any aspect of the deal, then “all options” were on the table for him and future Presidents. “All options open” has been a favourite term for U.S. Presidents and politicians. It means the option to resort to war mainly against oil-rich countries in West Asia. Zarif has restated his government’s demand for immediate relief from U.N. sanctions and the urgent need to “terminate” and not just suspend E.U. sanctions. The P5+1 wants the IAEA to first certify that Iran’s nuclear programme is for peaceful purposes and does not have “possible military dimensions” . There is optimism in Iran that the bulk of the sanctions will be lifted within a year.

Obama was quick to telephone Netanyahu to assure him that Israel’s security will never be compromised and that he was still concerned about Iran’s “destabilising policies”. He also talked to Iran’s other rivals in the region, notably the rulers of the Gulf kingdoms, and assured them of the U.S.’ abiding security relations with them. Obama will be hosting a summit of all the Gulf Cooperation Council (GCC) leaders at the White House soon. Saudi Arabia, like Israel, is vehemently opposed to Iran. The Saudis have made veiled threats about seeking a nuclear deterrent of their own if the U.S. cosied up to Iran. Obama had no words of criticism for Israel’s growing nuclear arsenal and its aggressive

policies.

Even as the U.S. and Iran were finalising the draft agreement, Saudi Arabia launched an unprovoked aggression against Yemen citing Iran’s involvement in that country. Israel will be working overtime to stymie the nuclear deal with the help of its influential friends in the U.S. Congress and media. Netanyahu said the U.S.-Iran nuclear deal posed an “existential threat” to Israel’s security.

It may take some time for Iran to reap the economic benefits from the nuclear deal. But businessmen are already making a beeline to Tehran. Iran is already being viewed as the hottest emerging market. The country, besides having vast hydrocarbon resources, is also rich in human capital. Western Europe is looking for alternative gas supplies to lessen its dependence on Russia. Iran, already a key player in the region, is likely to emerge even stronger. Iran and the U.S. may even be getting ready to do a political tango. They are already fighting against the Islamic State (IS) in Iraq.
(Published in Frontline.in)

Agriculture in Crisis (Part-2)

Inadequate institutional credit

Meanwhile, the difficulties farmers face in accessing credit at reasonable rates to finance agricultural production have become more intense in the recent past. Institutional credit to agriculture did increase under the United Progressive Alliance (UPA) government even though the increase was not as much as expected or as would be necessary, and small cultivators still found it difficult, if not impossible, to get loans. Recently, things got worse in this regard, despite all the grand talk of financial inclusion under the Jan Dhan scheme, as small farmers have once again been forced to take recourse to local moneylenders and input dealers who charge exorbitant interest. The rigidity of the institutional loan structure, as also the public humiliation of defaulters by many commercial and cooperative banks, makes it difficult to deal with even for farmers who can access such loans.

Meanwhile, the crisis in agriculture has been sharpened by the lack of productive non-agricultural activities, including livestock rearing and off-farm employment. The inadequate generation of properly remunerative employment in the economy, which has been a shameful feature of the recent growth process, has meant that farmers do not have the real choice of engaging in other work even as cultivation becomes less profitable. This has added to the insecurity created by the threat of involuntary displacement because of the requirements of so-called “development”, and at least partly explains the animosity among farmers to the Narendra Modi government’s Land Acquisition Bill.

‘Shining India’ syndrome

All in all, suddenly the current conditions in rural areas are harking back to the conditions that prevailed in the early 2000s, and especially in 2004, when the devastation of agriculture and rural livelihoods proved both economically painful and politically disastrous for the then-ruling National Democratic Alliance (NDA) government. The similarities are both remarkable and perplexing: the NDA government then chose to believe in its own propaganda of “India Shining” and was punished in the elections for what seemed to be an almost insulting denial of reality. Today, as farmers reel under a combination of naturally caused problems and policy-driven adversities, the Narendra Modi government is apparently planning a major publicity campaign to persuade the people that the promised “achhe din” have already arrived for all Indians, including farmers! During that period of what can only be considered extremely depressed conditions in the rural economy, there was a growing recognition that this reflected not only structural conditions but also, and especially, the collapse of public institutions that affect farmers and farming.

UPA policy measures

The Congress-led UPA government promised to revive agriculture, and several commissions, including the National Commission on Farmers, provided detailed suggestions on how this could be done. It was evident that to put agriculture on a more viable and sustainable footing, some policy measures were urgently required in several interlinked areas. These included the correction of spatial inequities in access to irrigation and working towards sustainable water management; bringing all cultivators, including tenant farmers, into the ambit of institutional credit; shifting policies to focus on dryland farming through technology, extension, price and other incentives; encouraging cheaper and more sustainable input use, with greater public provision and regulation of private input supply and strong research and extension support; protecting farmers from high volatility in output prices; and placing emphasis on rural economic diversification to more value-added activities and non-agricultural activities.

Of course, not all of these were even sought to be implemented, and the same analysis of what needs to be done could be just as relevant today. But the UPA government was elected on promises of reversing the material decline in the countryside, and in its first five-year tenure it did undertake a number of measures that were designed to improve things at least partially. As it happens, most of the years of the UPA government turned out to be “achhe” for farmers or, in any case, certainly better than the ravages of the early 2000s. Credit to agriculture increased manifold; public investment directed to the rural areas also increased; agricultural research and extension services (critical to ensure farmers’ access to current and relevant knowledge for production) were given significant boosts through more public spending and reorganisation; and, most of all, the rural employment guarantee Act (MGNREGA) provided the rural poor a secure base of income that helped to revive the rural economy through enhanced demand and entailed some activities that could improve agricultural supply through the public works that were put in place. At the same time, movements in world trade prices were also beneficial to farmers, and so terms of trade shifts also assisted the relative improvement in farm incomes. These measures did bear fruit by the end of the decade, with significant increases in the volume of production of both food grains and non-food crops. The value-added in agriculture also improved substantially, especially between 2009-10 and 2011-12, driven by both higher output and favourable relative price changes. In consequence, investment in agriculture also increased, both in real terms and as a share of agricultural income. But thereafter there was already some indication of a tapering off of both production and value-added in agriculture. Capital formation in agriculture increased substantially under the UPA-1 regime and in the early years of UPA-2, driven in the later part of the decade by private investment that responded to higher crop prices and more opportunities for crop diversification as well as improved extension services. 

Most recent period has witnessed a sharp fall in capital investment in agriculture, according to the New Series of National Accounts Statistics that has just been released. The decline was especially sharp in the last two years of the UPA government. So, in a sense, the rot, in terms of deceleration of agricultural performance, had set in by then. Indeed, for many small and marginal farmers, especially in dryland areas, even the “good years” of supposed agricultural boom did not really translate into better material conditions.

It was this gap that Modi, as the prime ministerial candidate of the NDA, exploited during the course of the 2014 general election. In his campaign speeches, he promised to ensure that farmers would get a 50 per cent return on their input costs; that agricultural prices would be stabilised and kept on a higher trajectory for cultivators even as urban consumers would pay lower prices because of improved distribution; that rural people would be able to access affordable and good quality health services; and many other things besides. After having their hopes raised sky-high by such promises, it is not surprising that farmers feel betrayed by this government. Even the Land Bill, unpopular as it is, is only one of many grievances that cultivators now nurse against official policies because of many acts of commission and omission that have led to dramatically deteriorating conditions of cultivation.

In the first year of the Modi government, the Central Statistics Office’s (CSO) advance estimates of national income suggest that growth of value-added in agriculture will be only 1 per cent compared with 3.7 per cent in the previous year. But even this may well be an overestimate given the damage to the rabi crop because of freak weather conditions. Instead of higher crop prices, farmers had to face declining global trade prices of most cash crops and a near-stagnant minimum support price (MSP) for important foodgrains and sugarcane. In addition, the Central government has now declared that it will procure crops only from farmers in deficit States, a peculiar strategy that will defeat the original purpose of moving grains from surplus to deficit areas and will expose farmers in all other places to the vagaries of market price fluctuations and declines. It has told State governments that wish to top up the MSP on offer to their own farmers that they will then have to foot the entire bill for such purchase rather than only the difference between their own price and the Centre’s price.

With falling oil prices, domestic oil and diesel prices should have come down sharply, thus benefiting farmers, but this has barely occurred because the benefits were mostly garnered by the government instead, which took advantage of the global price fall to raise its own excise duties and sales taxes. Fertilizer subsidies are planned to be cut, and the policy-created imbalance between use of nitrogenous and phosphatic fertilizers will worsen, with associated terrible effects on future soil quality and yield.

To add injury to all this insult, the past year has experienced sweeping cuts in some essential items of Central government expenditure that impact farmers directly. Public spending on agricultural development and on research and extension has already fallen in real terms and is set to decline even further in the coming year. The money for irrigation has been cut. Central government spending on health and other services which would reduce the financial burden on farmers is also being cut severely. The employment guarantee scheme has been squeezed so much that it is no longer any kind of guarantee at all, and the programme will struggle simply to survive. Those who feel that this will not affect farmers because they employ workers rather than the other way around miss the point that around 40 per cent of cultivators joined the programme as wage labour to supplement their meagre and uncertain farm incomes. So, reducing or killing this programme will also affect them very badly, and that too at a time when other sources of rural income are drying up. This is the context in which the unseasonal rain and other weather changes have had such a devastating impact on so many farmers. Even in this punishing context, government responses have been at best tardy and at worst downright offensive.

The Central government is effectively treating this as the responsibility of State governments, passing the buck on this critical area of public intervention to States that are already hugely financially stretched because of the reduction of so much other Central social spending. It is hard to understand why the Modi government is persisting with such blatantly anti-farmer policies. It is even harder to understand how it can presume that periodic radio broadcasts by the Prime Minister and optimistic media blitzes can somehow change public and farmer perceptions when the experienced reality is so very different from both the promises

END.(Published in Frontline.in)

Agriculture in crisis(Part-1)

The Narendra Modi government is pushing ahead with policies that disadvantage farmers at a time when Indian agriculture is already in deep crisis. By JAYATI GHOSH

ONCE AGAIN, the spectre of agrarian distress, which is unfortunately never far from the surface in much of India, is rearing its ugly head. Across the country, farmers, especially small cultivators, are facing severe problems with already dire outcomes. There has been a spike in farmers’ suicides in several States. Among several other signs of acute hardship are reports that once again more people are migrating from the countryside in search of work to cope with collapsing livelihoods at home. This is occurring even in places where such outcomes have not been so common in the past few years and at a time of the year (just before the rabi harvest) when they are less expected.

In Maharashtra, it is estimated that there has been a 40 per cent increase in farmers’ suicides in the past seven months compared with the corresponding previous seven-month period. In West Bengal, the State government appears to be in denial mode even though the number of farmers who have committed suicide this year in Bardhaman district alone is 106. Reports from Rajasthan, Punjab and elsewhere also point to more suicides by those from the farming community.

Of course, it is shocking that it takes something as drastic and final as a suicide to generate public acknowledgement of severe economic distress. It is even more shocking that the tendency among officialdom is to downplay the increase by changing the classification of some of these deaths into suicides by “non-farmers” (if they do not have land titles, for instance, or are women) or attributing them to “personal reasons” rather than severe economic adversity.

Indeed, the Central government recently told the Supreme Court that the number of farmers who committed suicide had decreased since 2009 and that factors other than agrarian and financial distress also led the farmers to take their own lives. Such arguments suggest a cynically callous attitude to farmers and their families, and they are also an attempt to deny the basic problems that farmers face and the extreme difficulties of their situation whether or not they take the drastic step of killing themselves. Agriculturalists in different parts of India are feeling the pressure for different specific reasons. In much of northern and western India, unseasonal rain and hailstorms have battered standing crops of pulses and vegetables, and lower harvests are the primary source of concern here. It is estimated that nearly one-third of the acreage under the rabicrop has been affected. In West Bengal, potato farmers are struggling because of too much output; post-harvest potato prices have collapsed and the appalling but continued lack of adequate storage facilities means that farmers are forced to simply let their crops go to waste. In Maharashtra, farmers face a double whammy: cotton and sugar prices are down even as bad weather has meant lower output. In southern India, agriculturalists are suffering the impact of the global decline in prices of cash crops, accentuated by the adverse effects of the various trade agreements signed by the Central government.

Yet, despite the variations, there are some underlying similarities. In all parts of rural India, farmers are facing what has been called a “scissors crisis”, which is driven by the rising cost of inputs without a commensurate increase in output price. This puts them on an uncertain trajectory where their reliance on (typically very expensive) debt to finance their operations tends to grow over time and any unexpected movement can have extreme consequences. An adverse weather change, for example, can lead to a drastic decline in economic capacities such as the ability to recoup input costs, leave alone the ability to repay loans. So, the greater underlying fragility of the process of cultivation makes farmers even more vulnerable to what may not otherwise be such a major change in the weather pattern. The inadequacy of institutional mechanisms to deal with the risks associated with farming (such as crop insurance and functioning price stabilisation schemes) means that cultivators are forced to deal with these almost entirely on their own.

The rising cost of inputs reflects more than just input price changes, and indeed, the price of one of the most important elements of cost of cultivation, that of fuel, has actually been low or stable in the recent past because of low world oil prices (even though these price declines have not been transmitted fully to Indian consumers). Instead, rising input costs are part of a process of the declining technological viability of cultivation. Soil quality has worsened because of excessive use of chemicals over long periods as well as erosion and waterlogging in some areas. Irrigation is both scarce and ever more expensive as declining water tables make the use of groundwater the privilege of those who are rich enough to keep digging deeper and deeper to extract it. The emergence of new pests resistant to chemical pesticides and the uneven performance of genetically modified seeds that are supposed to reduce reliance on chemicals have complicated the possibilities of pest control and thereby affected crops. And so on.

Continued in Part-2... (Published in Frontline.in)

Failing the farmer

Outcomes of the patterns of growth induced by neoliberal economic reforms have increased the

disproportionality between agricultural and non-agricultural growth, and with costs rising and prices not keeping pace, agriculture is becoming increasingly unviable. By C.P. CHANDRASEKHAR

FARMERS across northern and central India—in Maharashtra, Madhya Pradesh, Rajasthan, Haryana and elsewhere—are distressed. Unseasonal rains have damaged their standing crop and help from the government has been meagre and slow in coming. This, however, is only the most recent cause for resentment among small peasants and rich farmers alike. Sugarcane farmers have routinely protested against the fair and remunerative floor prices set by the Union government and the State-advised prices recommended by some State governments, arguing that they are unreasonably low. For some crops, market-driven or administered prices (linked to international prices) have been falling, worsening the problem. Overall, across many crops, the sense is that prices are not keeping pace with increases in cost of production. With indebted farmers not being able to service their loans, suicides have grown in number.

Underlying these short-run sources of discontent are two larger problems. The first is the increasing non-viability of agriculture, with costs rising and prices not keeping pace. A number of factors are responsible for this. One is the increase in input prices, resulting partly from the government’s effort to reduce the subsidies provided on a number of inputs varying from fertilizer and diesel to irrigation. Another is the unwillingness of the government to offer significant increases in the official “support prices” for a number of commodities which often serve as the floor for market prices. And finally, in many areas trade liberalisation is having a dampening effect on prices.

These challenges to economic viability combined with other forms of neglect, varying from reduced public capital formation in agriculture to curtailed spending on extension services, account for the second of the sector’s problems: the low rate of growth of production both in absolute terms and relative to the other sectors of the economy. For the past three years, for example, while evidence points to another round of acceleration in gross domestic product (GDP) growth in India, aided by the revision in the base year used for constructing the estimates, this revival, even dynamism, seems missing when it comes to agriculture. According to new official figures, GDP growth will average 6.5 per cent over the three-year period from 2012- 13 to 2014-15 and is likely to be in the 7 to 8 per cent range in 2015-16. Since this acceleration has occurred in a context of limited inflation, the government is now targeting a further rise in growth rate to two-digit levels.

Structural shift

However, agriculture is still languishing. As against the growth of gross value added at basic prices in manufacturing of 6.23 per cent and 5.32 per cent in 2012-13 and 2013-14 respectively, and in services of 6.16 per cent and 7.64 per cent, the figures for agriculture were only 1.19 per cent and 3.66 per cent. In fact, other than during short periods since the 1980s, the disproportionality between agricultural and non-agricultural growth has been growing. The disparity in the rate of growth of agricultural and non-agricultural GDP increased significantly after the 1970s, with the process being particularly marked after the mid-1990s. What is particularly remarkable is that the acceleration of non-agricultural growth during the 1990s was accompanied by a decline in the rate of agricultural growth. In the period from 1999-2000 to 2004-05, while agricultural GDP grew at 1.7 per cent, the trend rate of growth of non-agricultural GDP exceeded 7 per cent.

One implication of these trends is that domestic agricultural growth has for some time now not been a constraint on the growth of the non-agricultural sector. This does mark a structural shift in the pattern of growth when compared with the first three decades of post-Independence development, when the agricultural bottleneck was seen as an important constraint on development. A common view was that the government had underestimated the agricultural constraint and treated agriculture as a bargain sector in which output growth could be accelerated without much investment, by making suitable institutional  adjustments.

There were four ways in which the inter-sectoral growth linkages between the agricultural and non-agricultural sectors were manifested. First, since agriculture accounted for a high share of the nation’s GDP (61 per cent of non-residential GDP in 1950-51 at constant 1993-94 prices) and employment (76.2 per cent), demand from the agricultural sector was seen as crucial for growth in the non-agricultural sector, especially manufacturing. Second, since agricultural commodities constituted a significant share of input costs in some industries and of the basket of commodities on which wages were spent, increases in agricultural prices were bound to affect industrial costs and performance. When costs rise in agro-based industries or industrial money wages had to be raised to take account of food price increases, manufacturers experienced an increase in costs that was not always neutralised by an increase in final product prices.

The resulting profits squeeze affected manufacturing investment adversely. Thirdly, increases in agricultural prices constrained the growth of demand for the manufacturing sector since consumers allocated a larger share of their incomes to food consumption and a smaller share to manufactures demand. Finally, in response to the inflation in agricultural prices, the government is often forced to cut back on public expenditures to moderate the price increase, undermining an important source of demand for the non-agricultural sector.

Given these effects of an agrarian constraint on non-agricultural growth, any excessive dis-proportionality in growth tended to be self-correcting. Faced with the decline in economy-wide performance, the government soon sought to improve agricultural performance in order to revive non-agricultural and overall growth. In fact, the adoption of the Green Revolution strategy was a response to the overall impasse in development resulting from poor agricultural growth.

It needs to be noted that these mechanisms are operative only if there are limits on altering domestic supply with imports. If foreign exchange can be accessed easily to finance such imports, commodities for which domestic demand exceeds domestic production can be imported to hold down the price level. During the 1950s and early 1960s, India recorded rapid noninflationary growth in manufacturing even when agricultural growth was moderate because of access to food imports through the P.L. 480 route, which enhanced supplies and helped dampen price increases. It was when access to such imports was closed for political reasons that the agricultural constraint proved binding, leading to the deceleration of manufacturing growth in the late 1960s and the 1970s.

Reforms and the growing hiatus

It is against this background that we need to assess the changed circumstances since the 1990s, when the dis-proportionality in non-agricultural and agricultural growth seems to have widened considerably without triggering alarming rates of inflation that limited non-agricultural growth. Changes in the environment and pattern of growth seem to have changed the nature of inter-sectoral relations. One element of change in the environment of obvious relevance was the transformation of the world of international finance that, for the first time, provided “emerging markets” like India access to private international finance. The Indian government exploited that opportunity during the 1980s to overcome the development impasse of the 1970s. Deficit-financed expenditure was used to accelerate non-agricultural growth, and the resulting disproportionality between non-agricultural and agricultural growth was managed by using imports financed largely with external debt to change the structure of domestic supplies and dampen inflation. This was truer in the 1990s than in the 1980s.

However, this alone does not constitute the full explanation. Rather, changes in the economic policy regime, especially since 1991, have changed the pattern of growth in ways that have transformed the nature of inter-sectoral linkages. The use of more capital-intensive techniques, greater reliance on imported inputs and synthetic substitutes, and changes in the pattern of demand (with shifts in favour of metal- and chemical-based industries) have meant that the derived demand for agricultural products (as wage goods or inputs) from a unit rise in industrial output has declined over time. This reduction in the dependence of the non-agricultural sector on agriculture has been intensified by the high rate and peculiar nature of growth of services in India.

While services accounted for 43 and 48 per cent respectively of the increment of the GDP at current prices in the 1970s and 1980s, the figure rose to 60 per cent and more during the 1990s and 2000s. Given the much lower agricultural input dependence of services, this would have strengthened the tendency noted above. Moreover, the expansion of the service sector has been accompanied by the growth of services (such as business and financial services) where revenue growth is far ahead of employment growth and the share of higher-paid employees is larger. As a result, even the derived demand for agricultural wage goods would grow at a much lower rate than output partly because of the slower growth in employment and partly because increases in per capita incomes accrue to those whose demand for food is satiated.

Finally, there is evidence that even among the relatively poor the share of income allotted to food consumption is being squeezed by the growing requirements set by expenditures on health, fuel, transportation and education. The reform-driven collapse of public provision in some of these areas, requiring purchases from private suppliers, and the increase in prices in others, are responsible for the enforced shift away from food consumption in the household budget.

The net result of all this is that agriculture is increasingly faced with a growing demand constraint at a time when input costs are rising. This worsens the margin squeeze. While the global commodities boom provided some relief in terms of increased relative prices favouring agriculture during the 2006-10 period, that was just about adequate to reverse the decline in the period after the 1997 South-East Asian financial crisis. These medium-term outcomes of the patterns of growth induced by neoliberal economic reform underlie the agricultural crisis and agrarian distress being reported from different parts of the country, at a time when the non-agricultural economy is on a roll and the GDP is rising rapidly. What is disconcerting is that, as a consequence, the pressures to redress the neglect of agriculture and adopt policies that restore a semblance of balance between agricultural and non-agricultural growth are now much weaker.

(Published in Frontline.in)

Small and ignored – Credit Facility for Micro Finance Institutions and MUDRA

The myopic proposal to create a dedicated bank for MFIs does not address the systemic problems in the banking sector that work against the interests of small enterprises. By 

IN 2010, a report prepared by the then Prime Minister Manmohan Singh’s task force on micro, small and medium enterprises (MSMEs) flagged a number of impediments to the growth of these industries. The Narendra Modi-led National Democratic Alliance (NDA) government’s Budget this year has envisaged the creation of a dedicated bank for refinancing microfinance institutions (MFI) that will lend money to these industries. However, the government is yet to take concrete measures to resolve a number of concerns that have continued to thwart the growth of small and medium enterprises (SMEs) over the years.

The large number of SMEs in India (about 5.77 crore, according to a National Sample Survey Office survey of 2013), which generate considerable job opportunities, continue to find it difficult to gain access to finance. A number of recommendations of the 2010 report are yet to be implemented. Also, the model of the proposed bank based on MFIs has come under scrutiny, given the record of these institutions in charging exorbitant interest rates and employing coercive tactics of recovery. According to the announcement in Union Budget 2015, the Micro Units Development and Refinance Agency (MUDRA) Bank is expected to partner with coordinators at the State level to provide finance to SMEs. A corpus of Rs.20,000 crore has been allocated to the bank. The Ministry of Finance said in an official statement on March 1 that the bank would lay down guidelines for micro and small enterprise financing; business, registration, regulation and accreditation of MFI entities; promoting right technology solutions; and formulating a credit guarantee scheme for loans given out to micro enterprises.

The government has also announced that loans to SMEs by public sector banks are to be brought under priority sector lending. A separate sub-limit of 7.5 per cent has been created within the priority sector lending norms for micro enterprises. The Union Budget further proposed the setting up of a Trade Receivables Discounting System (TreDs), an electronic platform that will facilitate financing of trade receivables from corporates and other buyers through multiple financiers.

Concerns of SMEs

The 2010 report had pointed out several institutional problems. It observed that the high cost of credit, requirements of collateral, limited access to equity capital, lack of access to global markets, and the absence of a mechanism for the revival of sick enterprises were some of the major concerns of SMEs. The report had also recommended a series of measures to address these concerns. The task force had recommended a target of 20 per cent year-on-year growth for micro and small enterprises lending by commercial banks. It had also advocated a public procurement policy for MSMEs that would mandate a goal for government departments and public sector undertakings (PSUs) to reach a target of at least 20 per cent of their annual purchases from SMEs and report the same in their annual reports.

It had proposed that the government should earmark an additional public spending of Rs.5,000-5,500 crore over the next three to five years to deal with deficiencies in the existing infrastructure and institutional set-up of SMEs. Five years after the report was published, many of these recommendations remain on paper. The problems of SMEs getting easy access to credit from public sector banks remain. The myopic proposal of creating a dedicated bank for MFIs does not address the systemic problems in the banking sector that work against the interests of small enterprises. Speaking to Frontline, Jayant Davar, chairman of the northern regional committee of MSMEs of the Confederation of Indian Industry (CII), said: “The fundamental problem in the approach to the issue of making available credit for SMEs is that there is no concept of development banking with the intent of nation building and a separate corpus of funds is still not set aside for the banks to be able to give out as loans to these industries. The banks are still averse to taking on the risk of giving out loans to SMEs. Over the last three months, the CII has been running a credit facilitation centre which brings together banks, MSMEs and credit-rating agencies across the country to make credit easily available to SMEs. About Rs.100 crore has been disbursed to SMEs across the country as a result of this initiative. There is an attempt to bring the banks on board through seminars, road shows and interactive sessions. This initiative has led to some positive results. But a lot more remains to be

done by the government to increase these industries’ access to banks.”

Another informed industry source, who has worked closely with a number of SMEs, pointed out some of the common problems that persisted. “The creation of a Credit Guarantee Fund Trust by the Ministry of MSME and the Small Industries Development Bank of India [SIDBI] last year was meant to facilitate the flow of credit to the sector without the need for collateral or third-party guarantees. This scheme was meant to provide a cover for a credit facility up to Rs.1 crore for an annual service charge and a guarantee fee to be paid by the borrower. However, across the northern States, banks continue to insist on a collateral for loans below Rs.1 crore. The insistence on collateral creates obstacles for the small players, who have no financial security. It also creates impediments in the process of expansion of business for small players who cannot avail themselves of a second loan. 

Another issue that a lot of these units face is the delay in payment by big corporations by about 30 to 60 days and sometimes more, which affects their working capital cycle. Also, the debt to equity ratio [a measure of a company’s financial leverage, which shows what portion of debt and equity the company is using to finance its assets] of most SMEs hovers around 4:1. In the 2014-15 Union Budget, Finance Minister Arun Jaitley had announced the setting up of a Rs.10,000 crore equity fund to boost capital flow to SMEs. This fund is still lying unutilised. The SME-specific branches of banks are also not proactive in disbursing loans to the SMEs,” the source said.

It is learnt that before the Union Budget was finalised this year, the CII had submitted a set of recommendations to the government to address the concerns of SMEs. The industry body had recommended, among other things, compulsory procurement of materials by public sector units from SMEs, the setting up of common research and development facilitation centres by the government, and statutory guidelines to stipulate penalties or interest for big corporations which delay payments to SMEs. These recommendations were not reflected in the Union Budget.

Also, it is important to note that some of the recommendations of the 2010 report on SMEs are yet to translate into concrete action. The most important among these are the proposed public procurement policy mandated for PSUs to buy materials from SMEs and the mandated 20 per cent year-on-year growth in lending to SMEs by commercial banks.

Problems with the MFI model

The proposal to run the MUDRA Bank on the MFI model has also come in for criticism. Sudha Sundararaman, national vice president of the All India Democratic Women’s Association, highlighted some of the existing problems with the MFI model of financial inclusion. “The proposal to route the funding for the new bank through MFIs is a move towards increasing the profits of these institutions and encouraging the private sector instead of strengthening public sector banks. Our women’s groups working in the States of Odisha, Karnataka and Andhra Pradesh continue to report large numbers of women falling into the debt trap because of the exorbitant interest charged by MFIs. MFIs continue to function largely as exploitative institutions and not as arbiters of financial inclusion. About three months ago, women in Odisha united in an effort to refuse to pay the exorbitant interest rates charged by MFIs. There is an ongoing movement in Andhra Pradesh by women to strengthen the linkages between banks and self-help groups [SHGs] and avoid dependence on MFIs,” she said. “The

government has to reach out to SMEs with substantial allocation of funds. These are labour-intensive industries which generate considerable employment. They continue to have problems with credit availability. In a situation where the government clearly sides with large corporations, small industries are facing challenges of survival.”

(Published in Frontline.in) 

India and The Global Environment Facility (GEF)

The Global Environment Facility (GEF) is a financial mechanism that provides grants to developing countries for projects that benefit the global environment and promote sustainable livelihoods in local communities. GEF projects address six designated focal areas: Biodiversity, Climate Change, International Waters, Ozone Depletion, Land Degradation and Persistent Organic Pollutants.

India has formed a permanent Constituency in the Executive Council of the GEF together with Bangladesh, Sri Lanka, Bhutan, Nepal and Maldives. The Council Meetings are held semi-annually or as frequently necessary. At each meeting, the Council elects a Chairperson from among its members for the duration of that meeting. India's Executive Director in the World Bank represents the GEF Council from our Constituency.

India is both a donor and a recipient of GEF. It has been a leading developing country participant in the GEF since its inception in 1991 and has played a major role in shaping the restructuring of the GEF. It had contributed US $ 6.0 million to the core fund in the GEF Pilot Phase. India has pledged an amount of US $ 9.0 million towards the resources of each of the Five GEF replenishments. The total funds pledged so far amounts to US$ 51 million and an amount of US$ 48.75 million has been paid by December 2012 towards GEF replenishments.

Ministry of Finance is the political focal point while Ministry of Environment & Forests is the Operational Focal Point for the GEF Projects.

‘Building ties for the 21st century’

Interview with Le Yucheng, Chinese Ambassador to India

On the eve of the 65th anniversary of the establishment of diplomatic relations between China and India on April 1, 1950, the Chinese Ambassador to India, Le Yucheng, in written answers provided to a set of questions posed by Srinivasan Ramani, emphasised the need for a renewal of China-India ties in tune with the realities of the 21st century. Excerpts follow. Later, in an interaction in Chennai, the Ambassador identified several areas, which he suggested present new avenues for cooperation between India and China. These include infrastructure development and regional security apart from already expanding ties

At what stage are the two countries after the 18th round of talks on boundary negotiations

held recently? Can we expect a substantive breakthrough since the start of fresh talks?

On March 23, 2015, the 18th Meeting of the Special Representatives on the China-India boundary question was held in New Delhi. Yang Jiechi, State Councilor and Special Representative on the Chinese side, and Ajit Doval, National Security Advisor and the Special Representative on the Indian side, exchanged in-depth views on the boundary question and had strategic communications on bilateral relations and international and regional issues of common concern. This is the first boundary question talk since the new Indian government took office, and after the appointment of the new Indian Special Representative. The meeting was in a friendly and candid atmosphere. The two sides reviewed the positive progress achieved at the previous Special Representatives Meetings over the past years, and stressed the progress of the framework negotiation along the right track on the basis of the realised results and consensus, while taking the big picture of bilateral relations and the long-term interests of the two peoples into consideration. Both sides reaffirmed the need to properly manage and control conflicts and join efforts to maintain peace and tranquility in the boundary area before the boundary question is finally settled.

As Chinese Foreign Minister Wang Yi said in the press conference held by the Third Session of the Twelfth National People’s Congress recently, the China-India boundary question is a legacy of history. At the moment, the boundary negotiation is in the process of building up small positive developments. It is like climbing a mountain. The going is tough and that is only because we are on the way up. This is all the more reason that we should do more to strengthen China-India cooperation, so that we can facilitate the settlement of the boundary question.

The Chinese government has announced the Maritime Silk Route and Silk Road initiatives (also called ‘Belt and Road’) recently. Can you explain these initiatives and how they pertain to China-India relations?

The ‘Belt and Road’ initiatives put forward by China aims at achieving development and prosperity for the various countries along the ‘Silk Road Economic Belt’ and the ‘21^st Century Maritime Silk Road’ by linking the past with the present, landmass with seas, and development strategies of various countries. The Vision and Action plans of the initiative have just been issued by the Chinese government. The initiative will forge four billion people from more than 60 countries in Asia, Europe and Africa into a community of common destiny and interests. If I may use a musical metaphor, it is not China’s solo, but a symphony performed by all these countries. The ‘Belt and Road’ initiatives will observe the principles of discussing, building and sharing together, through policy coordination, road connectivity, unimpeded trade, monetary circulation, and mutual understanding. These initiatives have been put forward to promote economic cooperation, and are not driven by geopolitics, or an attempt to seek spheres of influence.

Since the launch of these initiatives, significant headway has been made in building new mechanisms and laying down new policy frameworks. More than 50 countries along the ‘Belt and Road’ have expressed support; China has either already signed or is in the process of signing agreements with several countries. A set of programmes involving building infrastructure, setting up of industries and boosting people-to-people contacts have already been started. The first Central Asia International Freight Train from Lianyungang (Jiangsu Province), China to Almaty, Kazakhstan, began operation on February 25. The construction of Line D of the China-Central Asia natural gas pipeline project has already begun. The eastern route of the China-Russia natural gas pipeline project will be constructed very soon and the agreement on the western route will be signed shortly.

All the above projects mark the early harvest of the initiatives. The founding of the Asian Infrastructure Investment Bank has not only been welcomed by the Asian countries, but developed countries, including France, Germany, Britain, Canada have also expressed willingness to join it. The bank currently has 41 prospective founding member countries. India enjoys a unique geographical location, was a significant country along the ancient silk roads and spice route, and is situated at the crossing point of the contemporary ‘Belt and Road’. India is China’s natural and significant partner in promoting the ‘Belt and Road’ initiatives. Last year, India became one of the first prospective founding members of the Asian Infrastructure Investment Bank and hosted its second chief negotiators’ meeting in Mumbai in late January this year. In the second half of this year, India will also host the third meeting of BCIM Economic Corridor Joint Working Group. All these reflect the cooperative attitude of India to the ‘Belt and Road’ initiatives. China is willing to strengthen communication and coordination with India, to link the ‘Belt and Road’ initiatives with India’s ‘Spice Route’ and ‘Mausam’ projects, and bring tangible benefits to the peoples in our two countries and throughout the region.

There is a trade imbalance between India and China, with India’s trade deficit being around

$37.8 billion in 2014. At the same time, bilateral trade in 2014 topped $70.6 billion. How do you think the imbalance can be corrected?

The Chinese side does not like trade surplus and prefers balanced trade. China takes the Indian concern of trade imbalance very seriously. Although the main reason for our trade imbalance lies in objective factors such as the differences in industrial structures of our two countries, we are willing to provide opportunities to increase India’s exports to China. Since 2008, the Ministry of Commerce of China has sent six trade delegations to boost imports from India. China warmly welcomes the Indian side to expand trade through various trading platforms, such as China-South Asia Expo and China Import and Export Fair (Canton Fair), and the Import Promotion Centres recently built in Shanghai, Tianjin and other cities.

In order to increase the popularity of Indian products, China also welcomes Indian Chambers of Commerce to conduct promotion events in China. Besides, China hopes that India would ease restrictions on exporting its competitive products such as iron ore, etc. to China, reduce tariffs, and encourage Indian companies to export more agricultural products. To encourage Chinese enterprises to invest in India and participate in the ‘Make in India’ campaign, the key is to reduce restrictions and streamline procedures on business visas. More Chinese businessmen will bring more investment, which will help improve trade balance.

There is a sense among Indian strategic thinkers and in the media that China’s cooperation

with other South Asian countries is part of a policy of encirclement. How would you answer

these concerns?

China adheres to peaceful development. China does not have any tradition of expansion, or any intention to expand. India suffered invasion and occupation by other major powers in history, while China as the largest neighbour always kept friendly relations with India, kept up communication and exchange between civilisations, and has never conspired against India or other neighboring countries. The cooperation between China and other South Asian countries is based on the foundation of common development. South Asian countries are willing to cooperate with China, and ride the Chinese express train of rapid development. China is also willing to share development opportunities with South Asian countries. Cooperation between China and South Asian countries is open, transparent, and beneficial to all the concerned countries. There are no ulterior motives and there is no need for India to worry. China is also willing to work with India to conduct trilateral cooperation and multilateral cooperation in the region, to achieve win-win cooperation and common development.

“The Indian tax system needs a complete overhaul” – S Mahalingam

In India, no impact assessment is carried out before changing tax laws, says S Mahalingam, member of the tax reforms commission Indian taxpayers have a litany of woes to relate about the tax system, ranging from arbitrary tax demands and high-handed behaviour, to complex and vaguely worded tax laws. Firms have also been complaining about rising instances of ‘tax terrorism’ which have rendered the country unfriendly to business. It was in this backdrop that the Tax Administration Reforms Commission (TARC), headed by Parthasarathi Shome, was constituted in August 2013. The committee had suggested far-reaching changes for a customer-focussed tax regime in India. S Mahalingam, a member of the Commission and former CFO of Tata Consultancy Services, spoke at length to Business Line on the impactful report.

Excerpts from the interview:

One of the fundamental changes suggested in the report is the abolition of post of Revenue Secretary. You recommend that the powers be vested with the CBDT and CBEC. Why?

The Revenue Secretary usually comes from the civil services and thus brings with him little experience or familiarity with tax laws and administration, particularly international practices, which are increasingly central to tax policy. Yet he finally signs off on all the key policy decisions of the department. Usually, he tends to focus on the administrative aspects, rather than modernising the tax system. To oversee the tax administration, we have instead suggested a Governing Council to oversee the two Boards, with representatives from the industry as well.

Our interactions showed that there is phenomenal capability within the tax department on policy formulation. Good policy cannot be formulated without analysis and experience. This cannot come about if you rotate officers arbitrarily every three years. Tax officers must be allowed to develop specialisation in their respective fields. There is a need for augmenting their decisions with data. So we are not just against generalists at the Revenue Secretary level, we are against them at all levels.

The report strongly criticises aggressive revenue forecasts made in the annual Budget, which are often missed. It notes it is the unachievable targets set for tax officers that often results in ‘tax terrorism’. How can this be addressed?

When you formulate policies that affect so many taxpayers, they need to be backed by rigorous analysis of data. But such analysis seems to be completely absent in India. No impact assessment is carried out before changing tax laws. Nor is there any assessment of costs or benefits after the change is implemented. This is a key reason why the tax system completely lacks customer focus.

Take the simple case of tax projections which are made each year in the Budget. They are often unrealistic. Yet this becomes the target which percolates down the department. In March, the department holds back refunds due to taxpayers or calls them up asking for higher advance tax payments. This is quite a flawed approach to tax collections. Yes, you may be meeting the number, but at the expense of taxpayer interests. Tax projections need to be backed by analysis. If you are assuming a certain tax buoyancy based on a certain GDP growth, it is necessary to go back into the components of that GDP growth to see if the projections are realistic. If it is agriculture which is contributing to growth in a specific year, that will not lead to tax buoyancy. But today, such projections are made without really using the rich data that is available with the tax department because there is no systematic data warehousing, data mining or people who can ask the right questions. Therefore, tax projections end up looking like simple excel sheet forecasts, backed by no real data.

While India has just 20 people engaged in analytics in the tax department, the UK has 400. There is a great need for capacity building in this area. We have advocated a Tax Council to help in formulation of tax policy and related legislation, to be headed by the government’s Chief Economic Advisor. We have suggested the setting up of a knowledge, analysis and intelligence centre which can help in forecasting, data analytics and research.

TARC has recommended a merger of the CBEC and CBDT functions, especially for large taxpayers. Given that one deals with transactions and another with income, what are the

synergies between the two?

The separation of the CBDT from the CBEC is essentially an artificial distinction. Combining the two can lead to generation of rich sectoral data which can be used to formulate better tax policies. Globally, most countries have unified their direct and indirect tax regimes, so that they can be treated holistically as ‘business’ taxes. Sharing information on businesses can lead to higher tax collections. It will ensure people don’t make arbitrage out of information asymmetry. We found that a GST pilot project in Maharashtra which put together the CBDT and CBEC databases to generate comprehensive profiles, helped collect ₹500 crore of VAT from traders who evaded it.

India’s low tax base has been a long-standing problem. Why is it that initiatives like tracking high-value transactions or insisting on PAN cards for more transactions have not worked?

True. Take direct taxes, for instance. While direct tax collections have increased by over 700 per cent in the last ten years, the number of taxpayers has only increased by 35 per cent. The taxpayers in the lowest income slab of up to ₹5 lakh make up 98.3 per cent of the total taxpayers. They contribute only 10 per cent of the tax revenues. This suggests that the tax base is extremely narrow. This has to do with systematic data capture and monitoring. To give a simplistic example, if I am running an organisation like TCS, which has 3.5 lakh employees, I need to know three things. How many employees have attended office today? How many are productive? And how many are getting billed? If I don’t know these basic things, the organisation cannot function effectively.

The tax department needs a similar framework. If there is a high value transaction taking place that should lead to the right questions on who were the parties involved, what the value was and what were the taxes paid. The TARC did a simplistic analysis to say it is possible to increase the tax base to 6 crore from the present 3.5 crore. But this is not easy. You need a holistic system-driven approach to drive the expansion in tax base.

Why is there a continuing disconnect between what the government says and what the tax department does? For instance, this government did make an assurance that it would not act on retrospective tax amendment. Yet Cairn India has been slapped with a retrospective tax demand.

Retrospective tax demands are undesirable. But this can only be explained by the pressure to generate revenues. There is a genuine need to fund India’s welfare and infrastructure programmes. And if the fiscal deficit targets are not met, and borrowings get out of hand, you are essentially mortgaging the future to fund the present. But to generate revenues, leakages have to be plugged systematically and you need to plan how you will meet your revenue targets. To give a reassurance on ‘no retrospective taxation’ when alternative revenue sources haven’t been found, is not realistic. This is why there is a need to think through revenue targets more carefully. To cite one instance, transfer pricing officers in India are given tax targets! Now, a transfer pricing officer is meant to basically avoid evasion and clarify rules on transfer pricing, by deciding where the value addition in a business is happening. Once you give him a target to meet, he is bound to take the most extreme position. So if you simply take last year’s revenues and increase it by X percentage, it is not an appropriate way to set revenue targets. This leads to unhealthy practices, litigation and when the Court rules against you, you again resort to another spurious amendment.

The report flags the problem of in fructuous tax demands, stating that the Indian tax department has one of the worst recovery records in the world. Why does this happen?

Indian tax laws tend to be loosely drafted and open to interpretation. This is because you don’t have specialists drafting the law. Moreover, tax changes are often done in a hurry with little or no analysis or impact assessment. That is why it is critical that the tax department acquires the specialisation to draft the law. Specialisation will help the department win more cases too. Currently, the tax department also often loses out, not because their case is per se weak, but because the assesses can often hire specialist lawyers who fight the case for years. Whereas, departmental lawyers keep changing and the tax officer who is familiar with the case may be transferred too. The dispute resolution mechanism needs to improve too; the department must engage with the assessee before the issue is taken to the Courts.

Corruption is an often cited complaint with the department. Would curbing the discretionary powers to the assessing officer help?

There is bound to be some discretion. But if your administrative systems are working very well, it is possible to reduce the face-to-face meetings between tax officers and taxpayers. This can reduce corruption. Systematic handling of them through dispute resolution centres can also reduce opportunities for corrupt practices. Ultimately, it is very difficult to discourage a person who wants to be corrupt, but you can reduce the number of avenues and enhance systemic interventions. When talking of corruption, the role of vigilance also has to come under scrutiny. For instance, we met an honest officer whose career was ruined for 15 years, because of charges that were never proved. The investigation just goes on and on and the file never gets closed. Corruption cannot be brought down by vigilance alone, you need analytics too.

Why has the simplification and rationalisation of the tax structure come to a halt in recent years? Instead of fewer slabs and exemptions, we seem to be adding on more slabs, more surcharges, cesses and more complexity.

If we had a large tax base, a simpler system can be administered. But we don’t, so revenue pressures force the government to tap as many sources as possible. What we need is impact analysis. After any new tax is imposed, if we had an evaluation of the impact on revenues vis-à-vis compliance costs to the taxpayer, we would be able to eliminate taxes that don’t work. But because there is no such assessment, taxes that have no business to exist continue for years, even as new taxes get added. This is what the Tax Council can

look at. It can bring in the business perspective that is essential to evaluate such measures.

TARC’s report is an unusually detailed and comprehensive report. But usually there is a tendency to cherry-pick recommendations from such reports and implements them partially. What would be your comment on this?

If you want to get rid of tax terrorism, you have to fundamentally transform India’s tax administration. You cannot do it through incremental changes. To cite an example, to reduce disputes, you cannot simply create more posts of full-time commissioners in the department. You need to analyse why disputes arise, create dispute resolution mechanisms and frame the laws in a more water-tight manner. If you do not approach it in that fashion, you cannot succeed.

The importance of the people aspects, brought out in the report, cannot be over emphasised. Our interactions showed that the tax department has completely lost its spirit. It needs to be restored. As one senior officer told me: “If you are mistreated by your employer, how will you deal fairly with the taxpayer?” To me, that did seem to have the ring of truth. Tax officers need to be better equipped through training, empowered by their boards and given the ability to build expertise and specialisation. Finally, you need to get out of this system of setting unhealthy revenue targets which are not based on reality. To do this, you need effective ICT use and powerful analytics. On collections, you should not be wasting your resources going after people who are already compliant. You need to go after people who are sitting on the fence.

What we have suggested is a complete systemic overhaul of the tax administration. Mere tinkering will not be enough. We have not stopped with recommending changes alone. We have also outlined the manner in which you can bring about the change. We have outlined the need for immediate action and created timelines for achievement of different objectives. We also travelled across India to talk to tax department officials to get their feedback to the report. This is a unique report, in my view, because of the coming together of people with exceptional experience and expertise. Dr Shome has brought in extraordinary perspective in terms of his own rich experience in tax administration and laws, as well the practices around the world that we can adopt in India. The report is also practical because of the active participation of two former chairmen, and two former members of CBEC and CBDT, apart from representatives like me and MR Diwakar from the private sector.

S Mahalingam is an Independent Director on the Board of Kasturi & Sons, the publishers of

BusinessLine