The do-no-harm principle

All policies drafted by any department of the government should be subject to passing the test of principles laid down by the PM

The government’s decision to change its mind on what were quite apparently counter-productive economic policy measures — such as the surcharge on FPIs and the criminalisation of CSR commitment violations — shows that it is willing to listen. One cannot be sure what triggered the change, whether it was the falling stock market, acute discomfort of industry and even pro-government commentators, or the Prime Minister’s Independence Day speech in which he batted for wealth creators by calling wealth creation a national service. If India is to indeed make the “big leap” that PM Modi promised on August 15, one should hope that the government was reacting to its leader.

Prime Minister Narendra Modi has the right instincts on economic policy. Often, he has spoken on the need for the government to get out of business, ease red tape and respect entrepreneurship. At the same time, he has argued in favour of a bigger and more effective role of government in ensuring that basic goods and services reach the poor. Unfortunately, the machinery of government does not always follow these principles. The fact is that the Government of India is a large beast with several layers of bureaucracy which is minded to do its own thing, ministries batting for their own interests and battling to retain their turfs, powerful interest groups influencing (mostly legitimately, occasionally illegitimately) the making of policy. Sure, the prime minister presides, but not everyone in the system is either philosophically or practically aligned. Bad policies can slip through the cracks.

It would, therefore, be very useful and productive if all policies drafted by any department of the government are automatically subject to passing the test of the principles laid down by the prime minister. Call these the do-no-harm principles. There are three which the PM has stressed: A. Wealth creation is a national service; B. The government has no business to be in business; C. The government should ensure ease of doing business and ease of living of citizens. Every cabinet note that is drafted seeks various justifications for a policy being proposed. It should have one section on how the proposed policy fares on these three principles. If it violates any of these principles, it should be reviewed to see if it can be improved or it should be junked. Even Budget proposals should be tested on these principles. Decisions like the surcharge on the super-rich, or indeed on FPIs can be pre-empted at an early stage. 

If the government is feeling bold about a “big leap”, it should review all the major economic/socio-economic policies made in the last decade and see whether they pass the do-no-harm principles. Those which do not should be revised or removed. After all, the challenge in India isn’t just making new policies but also ensuring that deadweight baggage from the past is jettisoned.

There is an additional principle, which has not been on Prime Minister Modi’s list of mantras but which would be a welcome inclusion. The government should not focus on revenue generation and gathering; it should focus only on growth. If the Ministry of Finance is driven by the Department of Revenue and its annual tax (and non-tax) collection targets, there will be serious negative side effects. The most obvious one is tinkering with tax rates, usually upwards, using surcharges and cesses. The second is harassment of taxpayers as taxmen try to squeeze the last paisa out of the minority who comply with the law. The third is perverse non tax revenue measures like forcing one public sector company to buy another, which is faux strategic disinvestment because it brings none of the efficiency gains from the transfer of management control to a private party or independent board. If anything, it adds to inefficiency by burdening better public sector companies with less efficient ones. All of this may help the government meet its current fiscal target but it comes at the cost of growth. Would it not be so much better to abandon revenue collection fundamentalism and focus on growth? The revenue that will accrue on account of higher growth will far exceed any temporary squeezing exercise.  

A country which has made very effective use of an overarching, no-harm-principle in recent times is Bangladesh. The country, which was once considered a basket case, has now emerged as a mighty player in the global textiles market (apart from seriously improving its human development). The textiles sector is the major source of growth, jobs and exports for the country. Conscious of this, the government tests every economic policy against its potential impact on the textiles sector. Any policy that would negatively affect textiles is discouraged.  

Of course, India can never be a one-sector economy. But if it does make some high principles non-negotiable, it would be much better placed to make a big leap than it is today.
 

The author is chief economist, Vedanta