Arvind Panagariya underlines the reforms that India needs most urgently
Recent expansion and reconfiguration of the council of ministers offers a fresh opportunity to accelerate and deepen structural reforms. The government must seize this opportunity.
Among the bills being tabled in the monsoon session, two hold great promise: Electricity (Amendment) Bill, 2021 and Deposit Insurance and Credit Guarantee Corporation (Amendment) Bill, 2021. The former would make electricity distribution markets competitive and the latter financial markets. They require speedy passage. But a lot more needs to be done outside the current legislative agenda
India needs a new legislation in place of the archaic University Grants Commission (UGC) Act of 1956. FM Nirmala Sitharaman had promised this reform as far back as July 5, 2019. In her budget speech on the day, she had stated, “The regulatory systems of higher education would be reformed comprehensively to promote greater autonomy and focus on better academic outcomes. A draft legislation for setting up Higher Education Commission of India (HECI), would be presented in the year ahead.” Two years later, we have seen no progress on this front.
Dharmendra Pradhan, who had navigated numerous important reforms as the minister of petroleum and natural gas and is now the minister of education, must take up the task on a priority basis. A modern-day economy cannot be built on a higher education system governed by a 65-year-old legislation. The UK, after which we had modelled our higher education system, got rid of its own University Grants Committee as far back as 1983. Since then, it has fully transformed its regulatory regime, giving full academic and administrative autonomy to its institutions of higher education.
India similarly needs to give full autonomy to at least its leading colleges and universities so that they may appoint boards that are fully empowered to oversee their academic and administrative affairs. Colleges such as Hindu and St Stephen’s in Delhi and Elphinstone in Mumbai, which are capable of building their own brand names, should have the option to award their own degrees.
The door must be opened to foreign universities to establish campuses in India and to domestic institutions to do the same abroad. The current system of establishing new universities by state or central government legislation must be replaced by one that allows entry based on pre-specified norms and criteria that the HECI would set.
Urgent progress is required towards privatisation of central public-sector enterprises (CPSEs). It is highly disconcerting that despite approval by the Cabinet since 2016, we have not seen a single CPSE privatised. Possibly, this was because the Department of Public Enterprises (DPE), which formulates policy for CPSEs, and the Department of Investment and Public Asset Management, which is responsible for their privatisation, were housed in different ministries.
But now that DPE has been moved to the finance ministry, the two departments are under the same ministry. With a major roadblock thus removed, FM must see to it that at least a few CPSEs get transferred to private hands within the current fiscal year.
A specific CPSE whose privatisation carries great significance is Air India. Its current debt exceeds $10 billion, of which $3.5 billion has been added in the last three years alone. Jyotiraditya Scindia, who has now taken charge of the civil aviation ministry, must see to it that the carrier is either privatised within the next 6-12 months or closed down. It is unconscionable to place the vast financial burden on the taxpayer in perpetuity without commensurate social benefit.
The government must also deliver on the privatisation of banks. The Insolvency and Bankruptcy Code has at long last genuinely empowered creditors and begun to yield speedy resolution of large, complex cases of bankruptcy. But poorly-run public-sector banks remain a weak link in the process, resulting in low recoveries in many instances. FM must make a beginning in this area by delivering on the promise to privatise two of the nationalised banks on an expedited basis.
Finally, simplification, rationalisation and an end to exemption raj applied to corporate profit tax system must now be extended to personal income taxation. Revenue considerations, combined with a lack of will to end the exemption raj, have led personal income tax rates at the higher end to return to levels reminiscent of their pre-reform levels. The idea should not be to extract maximum revenue from those who pay and let evaders get away. A good tax system is one with a broad base and moderate tax rates so as not to disincentivise work effort and incentivise tax evasion.
Likewise, it is necessary to eliminate the differences in tax rates on incomes derived from sales of assets depending on the type of asset and period for which it is held. Today, profits on shares in listed companies held for one year or longer are classified as long-term capital gains (LTCG) and taxed at the rate of 11.5%. But profits on shares in unlisted companies and real estate are classified as LTCG only if held for two or more years and are taxed at rates of 20% or more. Such differences distort investment incentives across different classes of assets and lack a clear economic rationale.
The writer is Professor of Economics at Columbia University.