GST, DBT, JAM, UPI, Et Al: We’re Heading For A Grand Unified Theory Of Reform

by R Jagannathan - Oct 18, 2016 12:00 PM +05:30 IST
GST, DBT, JAM, UPI, Et Al: We’re Heading For  A Grand Unified Theory Of ReformArun Jaitley
  • The basic premise of GUTER is that various parts of economic reform are already being put in place, and inter-linking them into a larger whole will yield greater economic benefits to the country over time.

    As long as we allow the separate parts to work even without the whole, the downside risks of imagining and working towards achieving the whole are low.

India, the land of jugaad and sub-optimal solutions, has, by accident or design, come close to what one can call the Grand Unified Theory of Economic Reform (GUTER, for a shorter acronym). One could have added an additional ‘T’ to the acronym, by adding Total before Economic Reform, resulting in GUTTER, but one can leave that to the critics of the idea.

The basic premise of this Grand Unified Theory (or GUTER) is that various parts of economic reform are already being put in place, and inter-linking them into a larger whole will yield greater economic benefits to the country over time. As long as we allow the separate parts to work even without the whole, the downside risks of imagining and working towards achieving the whole are low.

Consider the various reforms and initiatives already underway: we are implementing the greatest of tax reforms ever, the goods and services tax (GST), which will become a reality by next year and gradually expand the revenue pie for centre and states; we have JAM – the Jan Dhan, Aadhaar and mobile payments trio – that is attempting to move everyone towards the money economy through financial inclusion; the Bharat Bill Payments System and the mobile-based UPI (unified payments interface), and differentiated banking, are further pieces of reform intended to reduce the use of physical cash in our economy; we are simultaneously attempting subsidy reforms through the direct benefits transfer (DBT) scheme; we are trying to create a national market for agriculture; market reform is proceeding in fits and starts in many parts of the system (including labour reform); then we have laws to reduce black money in the economy, both through tougher penalties and voluntary disclosures; we will probably be writing a simple direct taxes code that will reform this side of the tax system and enhance voluntary compliance; and then we have the global debate on a universal basic income (UBI), echoes of which are being heard even in India.

Each economic initiative (or reform) can be seen as a separate one or part of the whole – which is where the Grand Unified Theory (or GUTER) comes in. GUTER will work as long as the success of any moving part is not held hostage to the need to make the whole thing work together. In other words, GUTER should be the goal, and not the starting point. The moving pieces of reform can be tied together over a period of time, once they work well separately, or with one of two parts of the whole.

Let’s start with the GST. The GST Council, which meets from today (18 October) will start discussing the various rates to be made applicable for various goods and services. Even assuming consensus is reached, our GST will be sub-optimal for many reasons, including this one: some 54 per cent of items in the Consumer Prices Index (CPI) will be outside GST, presumably because these are items of mass consumption that will impact inflation directly. But creating so many exclusions will be a nightmare for effective implementation of GST. Is there a way to make the GST better? Surely. The simplest way is to tax all goods, even the 54 per cent considered untaxable, at a low rate of, say, 1 per cent, and refund this to citizens in some way.

This actually ties in well with the idea of the UBI, which, in a first basic step, should be called the universal basic subsidy (UBS). Here is how it should work. The 1 per cent (or whatever) tax is collected on essentials should be put into escrow and channelled back to all Jan Dhan accounts, the no-frills basic bank account that has now reached nearly 25 crore households (which means it is near universal). Some 24 per cent of these accounts are non-operational, with zero balances. Even assuming the actual non-operative accounts at closer to 50 per cent, the point is to make people use them. The payment of cash – universal basic subsidy – into all accounts will automatically encourage this. Thus a GST design improvement measure can improve financial inclusion and real usage of Jan Dhan accounts.

However, the UBI idea will not stop with merely crediting the universal GST on items of mass consumption to such accounts; ultimately, all subsidies need to go towards cash reimbursements, and this will enhance the amounts available as UBS – the universal basic subsidy.

A UBS is opposed by some libertarians and economic conservatives as reward for laziness and essentially destructive of the work ethic, but has big side-benefits. When subsidies are paid in kind, they encourage corruption and market price distortions. But when paid in cash, they enable the market to work better. The shift of all consumers to DBT in cooking gas ensures that everyone pays the market price. When you have to pay money from your pocket, even assuming your pocket has been topped with cash from DBT subsidies, you will economise on LPG use. You benefit if you don’t waste gas, as you can use the savings elsewhere. This logic applies even more to subsidies on fertiliser and food, where excessive use of urea is damaging agricultural land, and where the need to transport foodgrain from Food Corporation of India godowns to fair-price shops leads to further losses in transit and consumption by rats. The purpose of food subsidy should be to keep humans healthy, not rats.

A UBS, thus, is a market-friendly move, a move that can bring price realities to people. As long as it is not too liberal, it will be less damaging to the work ethic, and, in fact, could create further disincentives to remaining idle. Reason: everything will have to be bought at (higher) market prices.

Since mobile payments will be key to implementing the UBS, it will need a large effort to improve financial literacy, especially in the rural areas. But even if one were to spend a few thousand crore to do this, it would have a quick payoff as cash usage will suddenly fall dramatically. In urban areas, mobiles will reduce the need for credit and debit cards and ATMs, and in rural areas, the need for bank branches and business correspondents will come down. The Reserve Bank of India will save multiple thousand crores in reduced printing of currency notes. Another side benefit: the menace of counterfeit currency will be reduced, though one would have to up efforts to prevent cyber-stealing of digital cash. The rupee hawala market will collapse. It is the Pakistanis who should be worried. Nobody will be able to carry crores of counterfeit cash when few people have a use for them.

When cash is reduced, it means every payment leaves a trail for the taxman to follow. By using big data software and other methods of tracking large cash payments, the taxman will soon be able to dramatically reduce tax evasion. Just as GST will reduce indirect tax evasion, following the payments trail will force tax evaders to stick to the straight and narrow. As the tax base widens, tax rates can actually be lowered, giving growth a huge fillip. This will enhance the government’s ability to convert the UBS into UBI – into basic income, if it wants to.

The Grand Unified Theory of Economic Reform will still leave out some important reforms, like reform of factors markets, especially land and labour, and the regulatory architecture. While we have to up the game in transparent regulation, the other reforms have become less important as services become the driving force of the economy and automation converts most manufacturing jobs into non-permanent ones, thus rendering large parts of our labour laws, created for a manufacturing-based economy, redundant. Farm mechanisation will free more people to leave rural areas and their underemployed status; they will move to cities in search of better employment. The availability of first, universal basic subsidies, and later, a universal basic income, will make labour law changes less important; and migration to urban areas will allow richer farmers and contract farming corporations to up farm productivity, adding huge value in the countryside.

Land itself will drop value in real terms, except when bought to extend urban areas and for building infrastructure. But even here vertical growth will actually cut land prices. Factories and farms of the future could well be built vertically, reducing demand for large acreages. If rural landlords and the urban land mafia are holding on to excess land in the hope of making a killing by manipulating prices through non-transparent regulation, they are living in a fool’s paradise. Moderating demand will ultimately affect land prices too. High land prices result in the poor occupying prime land (a.k.a slums) which can be used for better purposes. It will not benefit politicians and the land mafia to keep land prices high when purchasing power is low and demand for exorbitantly priced property is falling.

The Grand Unified Theory of Economic Reform seems to address many issues, and it can be built brick by brick. It is not all or nothing.

Jagannathan is Editorial Director, Swarajya. He tweets at @TheJaggi.
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