As part of our EcoManifesto series we bring you the second edition: How should the government earn money?

We’ve already said that we should cut tax rates and reduce exemptions. Yet, that won’t give us enough – we already spend about 40% more than we earn, and with lower taxes we’ll earn even lesser. Where’s the money going to come from? (Assuming we keep low deficits)

Get Out of Banking!

The government is our biggest banker. More than 60% of the banking system deposits and loans are with the public sector banks. Why? This makes no sense whatsoever.

Banks should be privately held but publicly accountable. However for that we have a regulator in SEBI and the stakes of public sector banks can be sold over time:

  • Reduce all such bank holdings to 51% even if it means fire sales at rock bottom prices in auctions.
  • Identify banks that can go fully private and take those holdings down to zero in bulk sales.
  • Tighten rules that ensure bankers, public or private, will be held accountable for fraudulent loans or not following RBI rules on NPA recognition. (This should include jail terms)

We need to let banks remain private. There should be no “nationalization” – even when a bank is facing a rough time. In such a case, banks could be taken over temporarily (basically throwing out all existing shareholders but protecting deposits to a certain extent) and then within 24 months the bank should be sold or shut down.

Selling public sector bank stakes can raise over Rs. 40,000 cr. just to bring the stake levels down to 51%, even at a 25% discount.

Get Out of Business, Curb Monopolies

The Government owns three oil refiners. THREE. And then, ONGC which explores for gas, Oil India which does the same thing

It owns companies that make fertilizers. It owns NTPC and a slew of other power producers. It owns power equipment producers like BHEL. The largest life insurer LIC has a huge asset base, and dwarfs every other insurer – this is not good, and the monopoly requires redoing. There’s Coal India too which is a monopoly on coal.

The new political goal should be to reduce the influence of the government as a player in industry. We need to plan and:

  • Sell stake in PSUs immediately, even if it means selling at low prices. Piggy back sales in profitable PSUs with those that aren’t doing so well, so that you can get rid of the shareholding.
  • The inevitable strikes and union action that will follow needs to be worked through, but the current approach of making them uncompetitive is an unsatisfactory solution. We may have to pay employees large amounts upfront to get them to agree.
  • Monopolies should be cut up. LIC should become 5 different companies, each with a CEO. Two of them should be sold within 3 years, and another two within 5 years.

Stake sales will earn the government more money but in the long run it will reduce the cost of running unprofitable and dead-ended companies. There are way too many of these to list, but here’s about 240 of them.

Tax Deduction Removals

We’ve argued that taxes need to be cut and all exemptions removed. As of last year, according to the Statement of Revenue Foregone:

  • Corporate tax deductions from SEZs, Accelerated Depreciation, and other such areas resulted in revenues of over Rs. 89,000 cr. that were lost to the government. Some of this is valid – such as accelerated depreciation for infrastructure. We could collect about 30,000 cr. rupees more will be collected just from the loss of deductions.
  • Removing 80C deductions alone will give us additional revenue of over Rs. 30,000 cr. a year. However with lower tax rates, it’s likely the impact is only half – so about 15,000 cr. per year.

Lower tax rates will increase transactions (since companies have more money to spend). The lack of exemptions make tax filing simpler. This will expand the tax base, and offset the loss in taxes that we would have made with today’s rates.

Reduce Subsidies and Cut Some Indirect Taxes

We complain of the oil subsidy but at the same time tax oil by about 100%. If the center were to just remove its taxes on fuel to zero, and remove fuel subsidies altogether, we would be even.

This is tough politically, but it makes complete sense for people to pay market prices on fuels. It avoids our paying for the inefficiency of the public sector refiners, and allows more efficient private party competition.

If we did this for one year, we’d all adjust our usage accordingly.

Create Open Auction Mechanisms for All Licenses

The success of open auctions of the 3G and the recent 2G licences should teach us that this should be applicable to all licences where the resource is scarce.

Transparency will increase prices, and collusion and cartelization are the enemy, but these can be tackled through enforcement.

Do Not Pay Infra Companies Loans

Many infrastructure companies have borrowed money with the governments backing, and now when they can’t pay up, the government need to pony up the cash. Such contracts should simply not be allowed; unless there is a private insurer for the risk.

Conclusions

The government’s job is not to make money. It is to simply provide the infrastructure so we can run our lives better, make our profits and not harm other people. It collects money because it has to run those services, but if it were to only restrict itself to those services, like defence, police, roads, water and regulation, we might not even need excess revenue.

And that’s the point. We can only sell assets today, and tomorrow those assets won’t be ours. So the one time revenue we make should be used to actively cut departments, divisions and ministries which were created to handle that which we have now sold.

I hope political parties will look into this as their way forward. When I was younger, I used to believe that politicians don’t really care about the rest of us. Now, I believe some of them do listen, and I’m reasonably sure they are aware that the larger the government, the greater the corruption in it and the more inefficient our economy is. To fix this is not about appointing another investigative authority but to reduce the influence of the government on our economy.

Also Read: Remove Exemptions, Reduce Tax Rates

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