Fiscal reforms during the Vajpayee era

In part 2 of the series, the author speaks of the steps taken by the Vajpayee government towards simplification of a very complex excise tax structure

The establishment of the Tariff Authority for Major Ports, which set the stage for private investment in major ports, was another infrastructure initiative of the Vajpayee government. The tariffs levied by the port authorities had earlier been decided on by the central ministry of ports and shipping, and all investment in major ports was in the public sector. This initiative shifted the responsibility for setting tariffs to an independent authority, which was essential to attract private investment in major ports. Private investment has flourished since then. I was privileged to be a part-time member of the new authority. The 2001 Budget speech announced the corporatisation of major ports, but this reform remains to be implemented by successor governments, and the archaic port trust structure persists.

All these infrastructure initiatives were examples of far-sighted moves to make the Indian infrastructure sector more efficient, attractive to private investment and more independent from the government decision-making activities, particularly tariffs setting. It is notable that few such major game changing reforms have been carried out in subsequent years. The most significant case in point is that of the Indian Railways. The Expert Group on Railways Reforms (which I had chaired) submitted comprehensive proposals to the Vajpayee government in 2001 for modernisation and expansion of the Indian Railways, including corporatisation. He was not able to muster up enough political consensus to even make a beginning. Despite at least three more major reports and many announcements, reforms remain to be carried out in the Indian Railways, including even the setting up of a tariff authority to free up rail tariff from political influence.

Tried and Tested: The excise tax reform begun after 1991 was taken forward through the establishment of CENVAT by the Vajpayee government

Fiscal reforms

The Vajpayee government was also very active in advancing the macro-economic reforms initiated by former Prime Minister Narasimha Rao and Finance Minister Manmohan Singh. The Fiscal Responsibility and Budget Management (FRBM) Act was enacted during this period. The original aim was to reduce the fiscal deficit to only 2 per cent and the revenue deficit to zero within five years. However, the final Act did not have these provisions and we have not yet come anywhere near such objectives. The continuity exhibited in the Indian economic reform process is signified by the fact that the FRBM Act was embraced by Finance Minister Chidambaram soon after the Manmohan Singh government came into power in 2004, and almost achieved the 3 per cent fiscal deficit objective in 2007-08. The FRBM Act has, however, been very useful in providing a standard for identifying fiscal profligacy; even though it proved to be ineffective in preventing the fiscal excesses of 2009-13. A noteworthy feature of the FRBM Act promoting independence of the Reserve Bank of India (RBI), is its prohibition of the central bank subscribing directly to government securities, which brings it in line with legal provisions governing most other central banks. In the absence of this provision the central government had resorted to automatic monetisation of its deficits almost continuously until the early 1990s.

The then ongoing excise tax reform begun after 1991 was taken forward through the establishment of CENVAT by the Vajpayee government which instituted a central rate of 16 per cent which covered almost 90 per cent of excise revenue. A t the completion of this exercise in 2002 there were only a few items remaining at the 8 per cent slab and some in 24 per cent slab. This was a bold rationalisation that achieved tremendous simplification of a very complex excise tax structure. As a consequence, much of the annual lobbying for specific excise rates was eliminated over the following 15 years or so. The boldness of this reform can be appreciated from the use of multiple Goods & Services Tax (GST) rates to achieve political consensus. Not surprisingly, the multiplicity of rates has renewed frantic lobbying once again for changing GST rates for very specific items. 

Having achieved this CENVAT regime at the central excise level the Vajpayee government, under finance minister Yashwant Sinha, embarked on a long drawn out process to carry out a similar simplification of state-level sales taxes. The inspired innovation was formation of the Empowered Committee of State Finance Ministers set up under the chairmanship of an opposition party finance minister from the then CPM-governed state of West Bengal, Asim Dasgupta. This resulted in the announcement of the state VAT system finally implemented by the successor UPA I government under the stewardship of Finance Minister Chidambaram. And it is this process which has enabled the current GST tax regime to achieve an Indian common market. The GST Council is a direct descendent of the empowered committee of state finance ministers originally reconstituted by the Vajpayee government. But the GST rate regime, unfortunately, failed to overcome the political pressures and abandoned the simplicity of the CENVAT rate structure. 

(To be concluded tomorrow)

The author is senior fellow, Jackson Institute for Global Affairs, Yale University; and distinguished fellow, Brookings India